Insolvency fears for new Dubai homeowner groups

, July 20th, 2010

By Joanne Bladd

New homeowner groups in Dubai may find themselves insolvent as soon as they take over the running of their buildings because scores of property owners have failed to pay service fees, a strata management expert has said.

This means associations could find they are in debt to their existing maintenance firm, likely to be a subsidiary of their master developer.

“These associations will inherit whatever is on the balance sheet. When people don’t pay their service charges, the affiliated service providers – say Dubai World Security - don’t get paid. So [developers are] effectively subsidising these communities,” said Jim O’Hare, CEO of community management firm, Place.

Emaar and Nakheel are Dubai’s largest developers. In Nakheel’s Shoreline apartments, located on The Palm, some 40 percent of owners have defaulted on service fees.

“The owner associations are insolvent, absolutely. The only reason that the electricity is not switched off, that the district cooling hasn’t been shut off and that the insurance is paid, is because other things haven’t been paid,” said O’Hare, who has consulted with tenants in Discovery Gardens and The Palm over the recently enacted strata law.

Strata law was decreed in 2007 but was only implemented in May of this year. Backers of the law had hoped it would slash what some property owners consider to be overpriced service fees.

However, the high rate of defaults means that many owner associations emerging under the new rules will begin life drastically short of maintenance cash.

Worst hit are sinking funds – cash collected in advance to ensure sufficient money is available for fund the repair and replacement of building. With these depleted, owners could find themselves facing bills for thousands of dirhams to cover the shortfall when major repair work is needed.

“Sinking funds are meant to sit there and earn interest. But they’ve been used as a top-up to cover the shortfall caused by defaults,” said O’Hare. “Then it’s adding in the provision for equipment that hasn’t been maintained. These are substantial costs.”

Sinking funds were also one of the first expenses to be squeezed when the downturn hit, to pacify owners lobbying for lower service rates, O’Hare added.

“To satisfy the owners in the short term, developers have cut things that perhaps shouldn’t be cut, such as the sinking funds. It’s a big rug that everything has been swept under.”

Under the new strata laws, homeowner associations will have the power to recover service fees from owners who default on payments. Homeowners will also not be able to transfer the deeds of their property until any outstanding service fees are settled.

As a last resort, homeowner associations may be entitled to sell the property to recover the debt.

“It’s a last resort and how the process would be affected is yet to be seen,” said O’Hare.