property

The challenge of the housing service charge

Can service fees affect the sale and rent potential of a property?

By Neha Kaul, Special to PW
00:00 March 15, 2017

Do service charges impact the marketability and rentability of a property? Most people seem to believe that if the services provided for the charges being levied appear justified, those communities and properties will continue to thrive and remain popular. However, unscrupulous practices have at times led to extremely high service charge levels, not justified by the operating costs for maintenance, thereby impacting the return on investment negatively. Unregulated service fee level with low quality of service can be detrimental to the property valuation and to its leasing or sale potential.

A broader view

Colin Dowall, head of property and asset management, JLL Mena, feels strongly about the impact. “Yes, it drastically impacts the saleability and rentability of a property. For residential units, market practice in Dubai is that service charge is paid by the owner/landlord, regardless if he chooses to rent out or live in the unit,” he says. “If the landlord rents out the unit, then service charge costs must be deducted from the total rental amount to calculate the annual net property yield.

“Since rent is market driven and service charge is operating expense driven, there is no direct correlation between the two. If the ratio of service charge to rent amount is high, then the net property yield is low, which makes the property less attractive to investors.”

According to Paul Kelly, operations director at Allsopp & Allsopp, says it’s important to take a broader view of things before reaching a conclusion. “If I can use the example of Green Community Motor City, the apartments there are, in my opinion, the best in Dubai without getting into penthouses or premier developments,” says Kelly. “However, the service charges are high and this does put people off purchasing there.

“Looking at it from another angle, though, the actual price of the apartments are a bit lower than what they should really be for size, quality, view, community and location. A big reason for this is the service charges. So it’s all part of the decision-making process; do you want a much larger living accommodation than anything else in the price range, but pay a higher service charge, or do you want a slightly smaller place and lower service charges?”

End users and investors

Interestingly, the impact is different on end users and investors, with service charges playing a greater part in the decision-making process for the latter as higher charges would mean lower yield. However, real estate brokers believe the rentability is not necessarily impacted by higher charges in popular areas of Dubai. The exception to this rule, however, could be areas with high charges, but low service levels.

Srinivasan Krishnaswamy, vice-president of business development and strategic planning at Deyaar, says it is also the responsibility of the owners’ association and the association manager to ensure the property is well maintained, which in turn may increase the property value. “Furthermore, there are Rera-regulated experts for both financial and technical aspects who shall evaluate and provide feedback on the performance,” says Krishnaswamy. “In Deyaar, all the properties are certified by a third party, setting high standards in the market place. This shows that the building is built, maintained and performs well in all aspects.”

The way forward

As end users and landlords continue to feel the burden of increasing service charges against diminished service quality impacting their overall asset pricing, experts suggest several measures to pave the way for a more constructive property landscape.

“The concern for landlords would be that the market and legislative changes can affect the level of service charge and they might end up operating at a loss for that reason,” says Dowell. “As a rule of thumb, occupiers generally want to pay the lowest amount possible and get the most value for money for their service charge. This is the case for residential owners in particular, as regardless if they choose to rent or live in the unit, they have to pay the developer a service charge.”

According to Kelly, the biggest concern at the moment is the rate of the service charge. “But I personally feel that buyers should look more into the quality of the service that is being given and look at both the advantages and disadvantages of the service charge in any given area or building when making their decision,” says Kelly.

To ease the situation for landlords, tenants and developers, several factors could help, including increased awareness about rights and responsibilities, especially the dos and don’ts, involving all parties in the decision-making process, getting feedback regularly to improve the services and addressing issues effectively, always providing quality service, transparency on service and charges, and good governing rules.

“We believe that this would help everyone to respect each other, while living in an active community,” says Srinivasan.