Can Service Charges Be Reduced?

Dubai rents are down 30%, so why can’t service charges be lowered?

Service charges are the only rates that have remained intact through the property market downturn and the subsequent COVID-19 hit on income and activity. Now, property investors want some changes to services charges to reflect market realities.

Service charges on freehold property in Dubai will need to start dropping if new investors are to feel comfortable with buying again. More so as rental income has dropped by 30-40 per cent in the last 24 months.

That’s according to Rizwan Sajan, Chairman of Danube Group and who operates a full-fledged property development arm of his own. But his call on real estate authorities to push for lower service charges is not linked to the positions he holds at Danube Group or Danube Properties.

Instead, it comes from the fact that he owns more than 150 investment units in Dubai, and a few in Sharjah and Ajman. These properties were bought over the better part of the last 15 years from various developers at different projects. (The portfolio also includes a few units from Danube’s own projects.)

“If rents have dropped to this extent, there’s no way property investors will want to keep paying high service charges like they do now,” said Sajan. “Those service charges made sense when rental income was high… not now.

“There’s still no justification if service charges are maintained at current levels – the only favourable outcome for property investors/homeowners would be if they come down.”

Will hit investor sentiments

Industry sources say that hard questions are being raised by prospective buyers on service charges and whether they are likely to see sharp increases one or two years after a purchase. Some developers in the recent past have tried to fend off such concerns by offering fixed service charges for three to five years and thus reassure buyers.

But more will need doing, says Sajan. “With property investors, they will need clarity on their rental incomes,” he added. “But in an uncertain rental market, with rates declining, that clarity will be missing. Investors have the right to demand or request for lower service charges.

“I bought the majority of my rental portfolio over several years and when service charges were yet to see the inflated rates of now. But that’s not how a buyer wanting to come in now will see it – service charges are way too high.”

Call to drop rates

On its part, RERA (Real Estate Regulatory Agency) has made its stance clear – 2020 service charges will have to be brought down. It has issued this directive to owner association management companies, which is the entity liaising with RERA on setting service charges and preparing the annual budget for the buildings’ upkeep.

But homeowners across communities say they are yet to see any downward revisions so far. “RERA has made its point clear on 2020 service charges… it’s now up to owner association management companies to ensure this gets done,” said an investor with multiple units in Dubai Marina.

There are also instances of RERA’s audit committees yet to give approval for 2020 service charges, which gives property owners hope that the changes in market situation will be reflected in any eventual decision. Any drop from current levels would be welcome, investors say.

No plans to sell

As for Sajan, he has no plans to sell some of his rental portfolio… despite the steep decline in the income it has been generating these two years. “That’s not the way I look at property – it’s always the long-term with me with these assets,” he added.

But the Danube chief made it clear that he has not bought any property in Dubai since the start of the year. In fact, the last purchases he made were in Hyderabad, India, last year.

“That’s because these residential units there were going for 3,000-4,000 rupees a square foot last year,” said Sajan. “I have the feeling they will likely double in the next three, four years.”

Across the board rent cuts

On his Dubai rental portfolio, Sajan is offering rent reductions of 15 per cent and more. “It’s not a set percentage drop, but varies by the location, the unit size, etc.,” he said. “But as a responsible landlord, those rent cuts had to be offered… the marketplace reality demanded that we do.

“Thankfully, there aren’t many units that are vacant – even with all the turmoil of recent months, I still had enquiries coming in. That’s a most encouraging sign.”

On what sort of annual income his rental properties generate in a good year, Sajan was less forthcoming. All that he would say is: “Enough to keep my children happy… and their children too.”