More homework is badly needed

Badly planned funds may hold some rude surprises for owners

A walk around some of the once glitzy developments of Dubai reveals the consequences of neglected maintenance: flaking paint, missing tiles and unwatered gardens. But a much larger problem lies behind the walls of the buildings in the form of ageing mechanical and electrical systems. When homeowner associations take control of their buildings this year, they could be hit with a multimillion-dirham shock because of widespread failure to contribute to "sinking funds" that replace and repair costly equipment.

"This is one of the main issues," said Peter Crogan, the chief executive of BCS Strata Management Services. "Some of these communities have not been saving up for the last several years and it could already be time to replace equipment." As much as 30 per cent of a residential building's cost comes from the mechanical, electrical and plumbing systems. A homeowners association usually looks after the repair and maintenance of these systems by saving up funds over a number of years.

But with the two-year delay of the strata regulations and large numbers of defaults on maintenance fees - as high as 75 per cent, some developers say - there has been little regulation of these funds. The Dubai Real Estate Regulatory Authority (RERA) is working with homeowner groups to rectify this by overseeing the future maintenance of buildings. But the lack of adequate savings in a sinking fund could mean maintenance fees for some developments may have to be increased to make up these costs, Mr Crogan said.

"For some of these developments that have been occupied for three or four years, there could be a rush of having to raise money for the reserve funds to deal with these issues," he said. Maintenance fees are traditionally split between operating fees for things such as air conditioning in lobbies and landscaping, and contributions toward bigger projects such as replacing lift parts and repainting the exterior of buildings.

To replace a basic chiller in a tower building costs between Dh2 million (US$544,536) and Dh3m, according to the facilities management company MAG Me Property Solution in Dubai. "If there is no sinking fund, owners have to foot the entire bill at that point of time which could be substantial," said Mazen Falhout, the general manager of the company. Homebuyers should analyse developments to see if these larger maintenance projects have been taken into account, or risk losing out in the long run. "What might seem on the surface to be a good sales price may not be cost-effective over time, when the so-called hidden capital and their respective operational expenses have been factored in."

While the operating fees are important for the everyday upkeep of the building and attracting tenants, the capital maintenance fees are crucial for safety and the long-term value of properties, said Andrew Schofield, the head of buildings at the consultancy Aecom Middle East. "You could end up damaging equipment," Mr Schofield said. "That reduces the value of the capital." By not properly replacing airconditioning filters for buildings, for instance, the cost of energy use can rise "dramatically" and the environmental sustainability of the building is reduced, he said.

"A building is a bit like a car," Mr Schofield said. "When you go in to service your car, you have things that need to be done every six months but there are also bigger things that need to be taken care of over longer periods of time." RERA is working with the Middle East Facility Management Association to draft regulations for sinking funds by ensuring each property takes into account the long-term costs of maintaining the building - a crucial part of retaining the value of a property. This will make it easier for homeowner associations to charge the fees needed.

But with many fees outstanding and, in some cases, not properly set up, the first order of business for owner associations will be to collect debt. "The first 12 months will be about debt recovery," said Mr Crogan. "The significant thing is that debt stays with a building. If you don't save up for bigger maintenance projects, then you'll have to pay later." [e-mail]