Dan Diehl, Paul O’Malley & Lou Ronsivalli.
All Charged Up31 December 2005 / by FM Magazine (author) / Dubai
From the minute you arrive at Dubai International Airport you’re blitzed with hoards and hoards of Emaar branding. Drive out and you find bridges, lampposts, buildings and outrageously large billboards splattered with the property developer’s various offerings.
With the introduction of ‘freehold’ property (still subject to a federal law change) for expatriates in Dubai several years ago, Emaar Properties was the first company to capitalise on the opportunity and start building an array of communities of both villas and apartment blocks. Up to June 30, 2005, Emaar had delivered more than 10,000 homes to owners and launched more than 50 real estate projects.
It could be argued that Emaar is to the UAE’s property industry what Microsoft is to the IT world. As such, it has its fair share of supporters and critics. One issue that has gained a lot of attention on the rumour mill is that of service charges – a relatively new concept in Dubai, along with expatriate home ownership. For Emaar villa owners, the service charge has been a flat rate of 600 dirhams per villa, per month (Dhs 7,200 per annum). For apartment owners, Emaar initially charged eight dirhams per square foot per annum. So a 1,000-square-foot apartment would have a service fee of 8,000 dirhams a year. Later on, that changed.
To get a clearer picture of what happened and why, FM Magazine spoke to Emaar – represented by David Nicholson, Legal Director and Jeevan J D’Mello, Property Handover Manager – and a number of homeowners from Emaar’s ‘The Greens’ who provided a collective, written response to the questions put to them.
Participating homeowners have chosen to remain anonymous.
There are a number of misconceptions prevailing with regard to how, when and why ‘The Greens Residents’ Association’ came into being and its legal status. Can you shed light on these issues?
Emaar Homeowners: "Under the sales agreement, a homeowner is a person with a registered title at the Dubai Lands Department. Of course, no owner satisfied this criterion and accordingly such persons cannot form a homeowners’ association.
"Following the concern of residents at the proposed ‘doubling’ of service charges for 2005, Emaar agreed to give contractual effect to the terms of the sales and the formation of the Residents’ Association. Our understanding is that, as a matter of UAE law, the Residents’ Association has no separate legal identity. That is to say, it is not a type of company or organisation that is recognised under UAE law. Of course, it is hoped that when a law permitting expatriate ownership is promulgated it will recognise common-hold ownership and owners’ associations."
David Nicholson (Emaar): "Our sales agreement provides for the homeowners’ associations to be formed, but these can’t be formed until such time that the freehold property laws are in place and, in addition to that, the common-hold property laws are in place. We expect these laws to be introduced in the not-too-distant future but until that happens, homeowners’ associations can’t be formed as separate legal entities.
"What’s anticipated is that these associations are formed as separate legal entities and they will take over the management and control and ownership of the common areas. So the vendor steps out of ownership, because the common areas are owned in proportion by all the home owners.
"Now, in order that we foster greater liaison between the owners and also implement that which is set out in the contract – notwithstanding that we can’t have a separate legal entity – we arranged for the nomination or selection of homeowners’ representatives. This was so that we could have representatives of the homeowners of each of the communities to be able to liaise with us with a view to looking at the service charge aspects and seeing how service and maintenance can be better provided to the homeowners. Because, after all, they are the people living there and will know what deficiencies there are or what could be done better. We rely a lot on the feedback from the homeowners as to how things can be done best."
Was introducing homeowners’ associations part of Emaar’s original plan or was it in reaction to a growing number of complaints with regard to higher service charges?
David Nicholson (Emaar): "In each sale agreement for all properties that have common areas, there is provision for a homeowner’s association. The sales agreement also contains the rules of the homeowner’s association, and also the format of the property maintenance agreement. So it’s all there in the contract, nothing to do with service charge rises."
Jeevan D’Mello (Emaar): "Despite what has been written in the press in the past that the association has been formed because of this service fee issue – that’s completely incorrect!"
Was the service charge quantified in the original sales agreements, when people were all buying off-plan?
David Nicholson (Emaar): "No, the contract never stated what the initial service charge would be, but I understand that people were advised what the initial service charge would be."
Jeevan D’Mello (Emaar): "In fact, what people were told at that point in time was that it would be eight dirhams per square foot for maintenance fees. But I think there was a misconception about what maintenance fees are."
Emaar maintain service charges were never set out in your original contracts but were instead explained verbally. What degree of understanding did buyers have about the potential of service charges to add significantly to ownership costs at the time of making their purchases?
Emaar Homeowners: "The service charge levels are not specified in the sales agreement. Any potential buyer who asked Emaar sales staff was informed that initial service charges would be levied at eight dirhams per square foot for apartments. As to what purchasers understood about service charges, that would be different for each individual and would vary depending on their experiences of service charges in their home countries."
In hindsight, might Emaar have been clearer in communicating service charges to would-be home buyers?
David Nicholson (Emaar): "It’s probably a fairly brave person that is able to state two or three years before the buildings are actually completed what the service charge would be. It’s a function of cost. In a very immature market where the facilities management providers didn’t exist, it’s very difficult to be able to say what it’s going to be.
"But in the future, it will be different. For example, for the Burj Tower launch we actually did put the service charge into the contract. Because of our experience, we had a much better idea of what the approximate cost per square foot would be.
"So what was said verbally [for Emaar’s completed developments] is that service charges would commence at a certain figure, notwithstanding the cost, and they did. It just so happens that the actual costs were much greater and Emaar has borne those costs. So Emaar, for the period prior to the first of January this year  has subsidised the difference between the eight dirhams and the actual cost.
"There was a recent article in a magazine that placed Dubai at the lowest end in terms of service charges. Per square foot, London was sixty-seven dirhams, which worked out to be 25 per cent of commercial rent per square foot; Singapore was 26 dirhams, which was 26 per cent of rent; Hong Kong was 34 dirhams, 21 per cent of rent; New Delhi was 18 dirhams, 21 per cent of rent; and Dubai was only 12 dirhams per square foot, which was just 12 per cent of rent per square foot. That puts things into perspective. Obviously service charges will increase as the cost of providing the services increases."
How did Emaar go about introducing a higher service charge to homeowners?
Jeevan D’Mello (Emaar): "We had already been meeting with [homeowner] representatives. The first meeting we had with the Greens representatives was on 11th February 2004. Of course this was an ‘unofficial’ meeting. The people who we now call ‘authorised representatives’ were at that time called ‘volunteer representatives’. It’s the same bunch of people. We’ve had these discussions with them from that time onwards. Not only about service fees, but a lot of other issues relating to the community, security and so on.
"In November last year, there was a presentation given by Patrick Sweeney [Managing Director of Emrill, Emaar’s facilities management company] to the residents breaking down exactly what the costs involved were and what services they included. The presentation stated that the service fees would be at least 14.5 dirhams. We thought it prudent to round the figure to 15 to ensure the sinking fund was well financed. This was only going to benefit the homeowners and not Emaar. This document was given to the volunteer representatives to circulate to the residents.
"The increase of the service fee came in December 2004. People were fully aware of what was going on. We have attendance records of the representatives that attended the meeting. We have copies of the presentation that was given to them. Obviously, the role of the representatives was to cascade this information down to the residents. Now, maybe they didn’t do that – we’re not aware of that. There are a lot of rumours in the market that Emaar suddenly and unilaterally decided these fees, but everyone was very aware."
Were homeowners fully aware that service fees were to be increased in 2005?
Jeevan D’Mello (Emaar): "[At the meeting in November 2004] Emrill did give representatives the projection for 2005 amounting to 14.5 dirhams per square foot based on a number of assumptions. The representatives did not accept the figure and asked Emrill for a number of clarifications and cost-reduction measures. Emaar/Emrill never came back to them and just unilaterally put up a written notice – signed by Ahmed Al Falasi, Property Manager of Emaar – adjacent to the lifts in the Greens on 24 December 2004 increasing the 2005 service fee to 15 dirhams per square foot. The proposed increase was subsequently suspended [as a result of homeowners’ protesting]."
Was Emaar supposed to get back to homeowner representatives in the Greens before implementing the proposed service fee increase?
Jeevan D’Mello (Emaar): "While I do recall the representatives requesting Emrill for cost reduction measures, which is something Emrill has worked on since then, there was, however, no request from the residents to Emrill or to Emaar to come back to them and only then decide on the fees. The audited accounts and the presentation were freely available. It was only after all this that the Greens circular was published.
"Mind you, we haven’t even invoiced people for that so far. We said ‘OK, you don’t have to pay those service fees until and unless we all sit together and we agree together what the service fee is. And we’ve kept that promise. We haven’t taken a single dirham from anyone this year for service fees. It’s only people who are selling their property to someone else who have to pay the service fees to prevent a dispute occurring later on as to who should pay."
David Nicholson (Emaar): "There are two other things that we have offered the representatives: one is to have independent third-party facilities management consultants come in, review, do a full audit and come back with their recommendation on cost, services, the whole lot. We’ve offered that, and they’ve said to us ‘We don’t need that, we are quite competent, we have our own people and we don’t need money to be spent on specialists’. We’re quite open to that. We don’t want there to be a ‘them versus us’ situation. We have a common interest here although, personally, I think an international consultant who is experienced would add a tremendous amount of value. We still think that it would be advantageous to do that. And the offer is still there.
"The other thing that we have offered is that, whilst the associations are going to exist as separate entities, we have said that we will look at setting up a separate legal entity, in current UAE company structure, that could take over the responsibility for management of the communities. Now we, the vendor Emaar, have a responsibility to the purchasers to provide the services. We’re not abdicating that. But what we would say is that we can sub-contract that to this organisation that can be controlled and managed by the homeowners. And they can then subcontract the actual provision of the services to professional management companies, be it Emrill or any of the others."
How competent do you feel residents’ representatives are in assessing what the correct service charge should be?
David Nicholson (Emaar): "We understand that Emaar has agreed to allow Residents’ Association representatives to review the accounts for the various Greens communities. The residents include a substantial number of professionals who are well experienced in areas including accounting, auditing, IT, facilities management, law and technical matters. Accordingly, it is felt that they have the necessary expertise ‘in house’."
Emaar says it has offered the Greens residents’ association the task of actually managing the services itself. How do you feel about that?
Emaar Homeowners: "Of course, the task of facilities management is delegated to a specialist provider of such services, currently Emrill. Principally, therefore, the task of managing the services involves selecting the entity that is to undertake the facilities management role."
Is there consensus among residents as to the best way of tackling this issue?
Emaar Homeowners: "The feedback from residents is that they want a good standard of services, a good community in which to live and are prepared to pay a reasonable level of service charges, commensurate with the service they get."
What has been the reaction of residents regarding the new service charge proposal and the manner in which Emaar has handled the whole matter?
Emaar Homeowners: "Homeowners have been very unhappy both at the size of the proposed increase in service charges and the manner in which they were notified. No proper discussions or explanations were given to the homeowners prior to the proposed increase."
Will homeowners also have to pay Dubai Municipality tax?
David Nicholson (Emaar): Yes, this is something that is out of our control. The five per cent municipality tax or housing fee has been on the books for many years. And it has been collected in certain circumstances but it hasn't been a mass collection. It’s often collected when companies renew their trade licences and things like that.
Now, the municipality has made arrangements with DEWA to put the housing fee in the DEWA bill. For tenants, the fee is based on the rent that they pay – so it’s five per cent of your annual rent. For owner-occupied properties, the municipality will also impose a housing fee and they have informed us that it’s five per cent of 10 per cent of the property value. So if you buy your property for two million dirhams, 10 per cent of that is 200,000 dirhams. Five per cent of that is 10,000 dirhams. That’s the housing figure you’re going to pay.
Even for property owners within gated communities that are paying service fees?
David Nicholson (Emaar): "Well we went to the municipality for clarification on what, if any, services that are provided within the housing fee might be duplicated. We’ve been told by the municipality that there is no duplication; they do not provide any services within our communities. It’s not security, it’s not landscaping within the communities, it’s not the roads within the communities, it’s whatever is outside the communities.
"The five per cent housing fee is for the services that they provide in general to the whole of Dubai outside of our properties. So the answer is that there are no services that they are going to pick up. We have informed the homeowners representatives accordingly. Now, if homeowners wish to take that matter up with the municipality, that’s for them."
How do homeowners feel about the recent inclusion of a five per cent Dubai Municipality tax in your DEWA bills?
David Nicholson (Emaar): "This is of concern to residents, especially as Dubai Municipality does not provide services to the Greens. The Greens homeowners, through the service charges, already pay for the road system in the Greens, landscaping, street lighting, cleaning, garbage collection and so on. No doubt, residents would be happier to pay the new ‘housing fee’ if such services were provided by the municipality, as in the rest of Dubai, with the actual cost equivalent of the ‘housing fee’ deducted from Emaar’s annual service fee. This way, residents can avoid paying twice for the same service."
At the time of going to press, the service charge issue was still ongoing. It is expected that at some point in September, the Greens’ representatives will come back to Emaar with their recommendations. Emaar will then assess these with a view to finding common ground between vendor and owners in delivering the highest quality services at the most reasonable cost. The intention of the above dialogue is not to portray either party negatively but rather foster greater understanding of the issues at hand for the wider UAE property and facilities management market. And, more specifically, for each party to appreciate better the concerns and misperceptions that the
other may have.
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