What’s the Impact of Non-payment of Service Charges on Strata Management Firms?

In the last year, there has been a significant decline in the collection of service charges for Strata management companies which have dropped by more than half as collections dropped significantly. This is certainly not good news for OA Management firms as the decline in service charge collection means they will be left with fewer funds to be spent on the maintenance and upkeep of the property.

Why are Homeowners Refusing to pay Service Charges?

The primary reason for the non-payment is rising job losses. Several homeowners have lost their jobs due to the current market slowdown, making it difficult for them to pay their service charges. Furthermore, several homeowners are also taking undue advantage of the situation and avoiding the payments deliberately.

RERA’s Guidelines for the Service Charge Waiver:

According to the Real Estate Regulatory Authority (RERA) – “the waiver only extends to 2019 fines and so far, there has been no extension of this to service charges.”

Considering the situation prevailing at that time, in April 2020 RERA announced exemptions of all fines pertaining to the service charges in 2019. RERA also held discussions with strata management companies (acting on their behalf) which were affected by the non-payment by homeowners. 

RERA’s Suggestions to OA firms on reducing the Service Charges:

Here are the key highlights of RERA’s instructions to OA management companies:

  • RERA suggested OA management firms review and monitor the project operating expenses to reduce service charges. This move is directed towards combating the financial impact of Covid-19 as several homeowners lost their jobs or have experienced salary cuts.
  • RERA has advised OA management firms to reduce their annual budgets which will also curtail these charges. This is undoubtedly glad tidings for the homeowners. Homeowners are looking for some sort of discount; however, they have to pay the charges as approved by RERA.
  • RERA has issued guidelines for OA management firms on the number of notices any homeowner can receive, the penalties for non-compliance, payment timelines, etc. 

The Impact of Non-payment of Service Charges:

Service charges are not a burden or additional expense but the payment towards all good reasons. There is a common belief among many homeowners that these charges are misused for personal gains, however, the truth is completely different. Service charges are spent on maintenance activities and to keep the building operations running smoothly. Their funds have a dedicated government regulatory bank account. The terms of these accounts and industry regulations ensure that they don’t go overdrawn. 

Here are some of the adverse impacts of the Non-payment by homeowners:

  1. Interruption in Maintenance Work: Non-payment of service charges by homeowners leads to lack of funds with strata management firms. This will ultimately pause the ongoing maintenance work and result in the discontinuation of several useful services and maintenance work until funds are available including the disconnection of common area utilities by the utility service providers
  2. Decline in the Value of Property: Home is the biggest asset for everyone. Avoiding the payment puts ongoing maintenance or development work at a temporary halt. This ultimately leads to a decline in the value of property or an asset, which is a far costly affair.
  1. Delays in Essential Services: The non-payment of service charges by the homeowners results in the short-term financial stability of the block. This adversely impacts the homeowners as all essential services (such as – cleanliness, security, MEP maintenance services, maintenance of HVAC system, roof repair, maintenance of gyms, swimming pools, repair work, etc.) will be put on hold due to non-payment.

What can OA Management Firms do to Avoid Non-payment?

As per the process, if the owner does not pay the service charges and ignores three warning notices, the OA will notify RERA and the owner can be declared and registered as a defaulting owner.

In every case, non-payment of annual service charges is unlawful and should not be used as a tool against the OA. The OA must make the payment towards maintenance of the building and that obligation should not be hindered by the owners. RERA approves the annual service charges once the financial statements are completed and filed. 

How to Avoid Non-payment of Service Charges?

  1.  Maintain Transparency:

Most of the challenges in the payment of service charges arise due to a lack of transparency and a communication gap between the OA firms and the homeowners. On a quarterly basis, project updates must be sent with the homeowners informing operational as well as financial matters.

  1. The Significance of Paperwork:

To avoid any confusion as well as for legal purposes, it is important that landlords maintain a comprehensive document that clearly outlines the summary of charges to be paid, the reasons for the increase in charges or difference from the previous year, modes of payment, details on the payment due dates & late payment charges, and the contact details of relevant people or departments owners can speak to clarify their doubts or queries related to service charges.

  1.  Seek Assistance from a Property Management Firm:

Timely payment of service charges is critical for the swift operations of the block. In case landlords struggle to collect rent from the tenant if the property is rented. In that case, they can seek help from a professional property management firm that is backed by a team of dedicated experts to get this all ticking over like clockwork.

Key Trends that Will Drive Real estate Investments in the UAE in 2021

The UAE real-estate sector was attracting significant investments from across the globe until disrupted by Covid-19. The pandemic has negatively impacted the exotic residential properties but had a significantly positive impact on the non-residential and industrial real-estate sector.

As the prices of properties are declining, it is of paramount importance to have an understanding of the recent market trends to make a wise investment decision that fetches better returns. It is also important to make a quick decision as prices won’t be down for long, banking on the list of government initiatives such as FDI Laws, restoration of relations with Qatar, Covid vaccination, technological developments, co-habitation laws, and above all the upcoming Expo 2020 which is expected to attract more than 25 million visitors in late 2021.

Here are the Top Five investment opportunities that can work wonders for the real-estate sector in 2021.

1. Non-residential Sector to Emerge as the Biggest Revenue Generator:

According to MarketLine’s September 2020 report titled – ‘Construction in United Arab Emirates’, the UAE’s construction industry generated a revenue of $84.4bn in 2019. The non-residential segment was the biggest revenue generator, accounting for total revenues of $56.6bn which is around 67% of the industry’s overall value. In the coming years, the share of non-residential segments including mixed-use developments can expand up to 75% in the UAE.

2. The Rise in the Demand for Industrial Real estate:

Going by current demand and ROI, industrial real estate is indeed an apple of an eye for the commercial real estate sector. Post coronavirus, there has been an exponential surge in online shopping across UAE, which has increased the demand for logistics. With rising cases of Coronavirus in the UAE, there has been a continuous increase in online shopping as customers are avoiding physical visits.

As per the study conducted by Mastercard in Nov 2020, 73% of UAE consumers are shopping more online since the start of the Covid 19 pandemic. The study also reveals that 54% of consumers are spending more money on the virtual experience. The increase in online sales is fostering the growth & expansion of the industrial real-estate sector as companies across all sectors are now requiring more cold storage facilities, distribution & data centers, and warehouses to store their products to cope up with the rising demand. Top logistics players such as Al-Futtaim Logistics, Emirates SkyCargo, ATS, CEVA Logistics, Amazon, etc. are investing heavily in building their logistics and supply chain infrastructure to meet the current & future demand of the industry. The future of industrial real estate looks promising in the coming years.

Amazon Supply Chain Model: Case Study

Despite being an e-retailer, Amazon has always found it cheaper to handle logistics itself rather than using third parties. The company’s supply chain network in the Middle East is almost as vast as established players such as FedEx or UPS. Since 2015, Amazon has spent billions of dollars in building its own global end-to-end logistics network which is equipped with the latest vans, and trucks, and aircraft.

In the UAE, Amazon fulfills a large majority of customer orders from DXB3 which is the biggest fulfillment center in the UAE. Announced in 2018, DXB3 is spread over a 23,000 square meter facility located in Dubai South. The center ensures that the demand is met during the busy year-end and festive seasons. To increase its penetration in logistics, Amazon has adopted the approach of delivering the packages through its last-mile team or through local courier companies called the Delivery Service Partner program. The program has allowed Amazon to increase the speed and flexibility of the delivery of its packages which ultimately benefited its customers to get faster orders.

3. Second Home Syndrome:

There is a rising culture among global elites to have a holiday home internationally. In the last few years, Dubai has become one of the most preferred cities in the Middle East for the rich to have a holiday home. This will boost the city’s real potential for rental income in 2021 that can offset ownership expenses.

Secondly, there is also a rise in the culture of the “co-primary residence,” or an apartment near the office in the city. As executives who decamped to luxury suburban villa communities on the outskirts of Dubai ease into one year of work from home, their mindset has changed indefinitely. Many of these executives are interested in exploring a second home that is closer to the office. This will be a big boost for central Dubai’s residential market.

4. Tough time Ahead of Commercial Real-estate sector Due to Remote Working:

According to a 2019 survey by International Workplace Group., the UAE had one of the lowest remote work participation rates before coronavirus. Merely 10% of the UAE workers reported working from home 1-2 days per week, compared to a global average of 62%. However, post coronavirus, almost 40% of the UAEs population is working from home. This has adversely affected the commercial real estate sector as most of the office buildings remain underutilized. This has also raised concerns among real-estate investors about the security of the income.

There has also been a rise in teleworking which has also negatively impacted the demand for secondary offices, with the overall share of the office sector shrinking from 40% to 35% in the first three- quarters of FY 21.

5. Discounts on the Properties Located in the Urban Areas:

2021 will witness an exodus of residents fleeing the expensive, populated, and high-density urban areas into the suburbs for more space and budget-friendly accommodation. This will leave thousands of landlords in the dust, who will be unable to evict non-paying tenants but still responsible for the upkeep of the property and paying all expenses associated with it such as – taxes, insurance, and the mortgage. In 2021, investors will be eyeing these properties to ride out the current wave and buying these rental investments at a much discounted rate.

Conclusion:

These five investment trends hold the drive for real estate investments in 2021. This year is expected to be profitable for the investors targeting the Dubai market. Dubai Expo 2020 will further boost the investment prospects in the real estate market.

The real-estate sector could turn this crisis into an opportunity by focussing on designing people-centric solutions which meet sustainability criteria set out by the UAE Government and becoming increasingly enforced. 2021 will be a year for change like never before and there will be marked uplift across construction as a whole, by Q3 FY 22.