Your Guide to Buying off-plan property in Dubai (Part 1)
- What are annual service charges?
- How do annual property service charges work in general in Dubai’s property market?
- What is the trick?
- So how can you negotiate with your Developer and how can you protect your investment?
- Will every Developer agree to it?
What are annual service charges?
Service charges are annual fees that cover the ongoing cost of maintaining, supervising and managing public areas and communal facilities within your project, including the annual maintenance for the master community.
If you own a property in Downtown, a very small portion of your annual service charges will go to Emaar, the master developer, for maintaining the overall community. The rest of your service charges will go to the owners’ association to cover all the services and maintenance provided for the common areas of your building. This is why the value of your annual service charges is proportionated to the quality of facilities and the size of the common areas within your project and your master community.
*Below table represents a sample of Service Charge breakdown for an apartment in downtown;
|
Item
|
Fee per square foot - Year 1
|
Fee per square foot - Year 2
|
|
Maintenance Costs
|
AED 5
|
AED 5
|
|
Management Fees
|
AED 1
|
AED 1
|
|
Utilities
|
AED 7
|
AED 8
|
|
Insurance
|
AED 1
|
AED 1
|
|
Reserve Fund
|
AED 1
|
AED 1
|
|
Master Community Charge
|
AED 3
|
AED 3
|
|
Estimated Total
|
AED 18
|
AED 19
|
To know more about service charges of each area.
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How do annual property service charges work in general in Dubai’s property market?
On your Sales and Purchase Agreement (SPA), developers are obligated to state the anticipated annual service charges for your apartment per sq ft. such amount must be pre-approved by Dubai Land Department, However, the SPA also states that you are due to start paying service charges upon receipt of the project completion notice once the project is surveyed by the Dubai Municipality.
What is the trick?
Often, landlords receive the key to their unit at the time of your handover appointment, however, you should not postpone this until the property is fully rectified. Keep in mind the following:
1. Project completion as surveyed by the Dubai Municipality (DM) does not mean that the project is ready for you to move in. In fact, in some cases, the Dubai Municipality often provides developers with the completion certificate subject to the rectification of selected pending comments on the project, which may mean a severe delay.
2. Furthermore, once the DM issues developers with a NOC, developers still have to obtain a certificate of completion from RERA which entails further delays.
3. In order to take hand over of your property, you must be provided with the completion notice by your developer, and to do so, you will be obligated to make your final or due payment.
4. Once your final payment has been made, you will have to book a handover appointment with the developer. Note:
a. Your project is most likely to have many other apartments and sometimes hundreds of units, which means that you will be scheduled your handover appointment according to the queue. This can take a couple of months.
b. Once the time for your appointment comes, it is essential that you invite a third party professional engineered based snagging team to inspect the apartment upon handover and assemble a list of all defaults of which the developer is responsible for rectifying. This, in turn, leads to further delays.
c. The issue here is that the developer is not directly responsible for repairing or paying for any issues. It is the contractor that will be notified by the developer to fix all the defaults in your property.
d. Bear in mind that your project may have many units, sometimes hundreds and depending on the severity of the defaults, it may take weeks or months to have your property snags fixed.
With the above being said, you may be realistically looking at 3 to 6 month’s worth of service charges that can really kill your rental income for the first year if you are an investor aiming to generate rental income. Even if you are an end-user, you will still have to pay for a different property to live in, until your property is rectified by the developer (and contractor). This is an integral part of completing any project and I have no problem with this. I do however have a problem with severe delays and I have a much bigger problem for being charged for services that I am not using since my property has not been ready to use yet.
So how can you negotiate with your Developer and how can you protect your investment?
Document the following on your SPA:
· Service charges to start counting only after having received the key, and not upon receiving the handover notice.
· The key handover must be subjective to the developer rectifying all defaults discovered during the snagging and inspection process.
Make sure you hire a professional snagging team to inspect your property.
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Ensure that you invest in a well-constructed project and with a trustworthy developer that has a carried interest in your project:
· Investing in a low-quality project will back-fire on investors in a year or two from the handover date, as a result of having to start rectifying ongoing major maintenance issues, from elevators to flooring, shared facilities and much more.
o Ensure you look into the schedule of finishing stated on your SPA.
o Preferably invest with developers that offer mockup units to showcase the level of quality you can expect.
o Seek unbiased professional advice. Salespeople at any developer’s office have one single mandate and that is to sell every and only project developed by their company. Seek professional advice from an independent professional real estate consultant.
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A quick overview about the author: Firas Al Msaddi
I enable real estate investors to make well-educated investment decisions by providing a simplified set of undeniable facts that form the backbone of each and every investment opportunity I recommend.
· There is always a major difference in quality when you invest in projects where the developer will handover and walk away, as compared to investing in projects where the developer has a carried interest in the same project. The best example is when you invest in projects where the developer continues to own and run the retail shops, hence providing investors with an additional layer of assurance when it comes to the quality of that development.
Important note;
To be fair to developers, it is their right to allow a reasonably short time frame for investors to meet their obligations at every phase. Defaulting investors will have to pay service charges despite receiving their keys or not, as a result of their default on their obligations toward the developer.
Will every Developer agree to it?
I think if it becomes the only way for Developers to sell, then they will have no option but to agree on it. In general, it will be harder to negotiate with large mass developers, but it is not impossible especially for large investors. But nevertheless, it is indeed a challenging market and buyers do have an upper hand to negotiate.
This takes me back to square one; many investors ask why do they need a smart seasoned middleman if they can access and reach out directly to developers. The answer is simple, it takes a lot of experience to know what to ask for once investors set on the table with a sales team that has one mandate to sell the entire stock with all its slow- and fast-moving units.
- Let's establish that whoever knows it and understands it best as a result of having practiced it the most can make the best winning strategies.
- Let's also establish that it is essential that investors make well-informed decisions grounded in facts and driven by real market fundamentals and not just by brochures.
- It is highly unlikely that investors will have matched experience and knowledge of a market as experts that practice real estate 7 days a week for many years.
- But with common sense, general business experience and some time and effort, investors can identify the right knowledge-partner who can provide them with the right advice.
A quick overview about the author: Firas Al Msaddi
I enable real estate investors to make well-educated investment decisions by providing a simplified set of undeniable facts that form the backbone of each and every investment opportunity I recommend.
With over a decade of real estate experience, I offer investors educational, factual and informative content grounded in my solid market understanding and my ability to read market trends. Look beyond the lifestyle images and videos produced by property sellers.
Founder & CEO of FÄM Properties
Dubai Land Department – Government of Dubai Award Winning Agency 2017/18 and 2018/19
With over 10 Years of in-depth real estate experience, he has executed over AED 10 Billion worth of sales transactions in the Dubai Real Estate Market
Firas Manages a real estate investment portfolio for ultra-net-worth individuals as well as institutional investors for over AED 2 Billion
Author of Straight Property Talk
Author of Straight Life Talk
Public Speaker
Government Award Winning – Dubai Land Department – The highest number of Sales Transactions in Dubai for 2017/18 and 2018/19.
A serial entrepreneur that has ventured into other industries: Founder & CEO of FÄM Living, FÄM Interiors, FÄM Outdoor Media and Media Force Outdoor.
Instagram: Firas_Al_Msaddi
Linkedin: Firas Al Msaddi
[email protected]