Face to face: Ian Harfield, Cofely Besix
GM speaks out on service charges in UAE and dealing with defaulters
It’s one of those topics everyone in, or related to, the FM industry has an opinion on: service charges and the JOP law in Dubai. And Ian Harfield, the general manager of Cofely Besix Facility Management, is one of them.
As a facilities management firm, Cofely Besix provides maintenance services which normally form an essential part of the service charge.
He says one of the things the company always encounters is the view that service charges are far too expensive, and that while contractors are making large sums of money, people aren’t getting their regular service.
Another issue, he says, is that the people who represent the owners always have a view that they’re paying too much.
“It’s become quite a hot topic because Owners' Associations are companies that manage the properties, and try to drive down the service charges with a primary focus on the fact that they are trying to get best value for money.
"But our view is that the actual service charges that people are paying currently are actually quite cheap in comparison,” Harfield explains.
He informs fmME that the average rate of service charges per square foot in the city stands at $4.40-$6.80 (AED16-25), but people often complain that that is expensive. Harfield smiles and says he tries to help people become more aware of what the reality is worldwide.
“I always use the example that if you’re in Dubai and you’re paying $6.50 per square foot for service charge, that if you compared that to say, Central London, you would be paying approximately $5 per square foot in an apartment.
So obviously people will say, ‘oh that seems cheaper,’ but the actual reality is that in the UK, that is only half your charge, because you also pay the owner of apartment block for services like a concierge, for corridor cleaning, and maintenance of the block.
Additionally, you have to pay tax, and in the UK you pay a community charge. The community charge on that block would add to your service charge and make it around $7.50-$8 per square foot.
“What everybody always forgets is that you pay taxes in Europe, and some of that contributes to waste removal, street lamps, and dealing with all the community areas around where your building is. Whereas here in Dubai, you’re paying $5-6 and you’re getting all of the rest of it for free.”
Harfield points out that while Owners Associations (OA) are always trying to get the best deal out of contractors, “the best price isn’t the best service.”
He explains that prospective owners should be worried when a contractor charges a price as low as $2 per square foot for a 40-storey tower for example, because this implies it cannot be maintained.
“The fact that the fee is $6 should mean that the actual services being provided are relatively proportional to what needs to be done. Whereas if some people drive the cost down to a relatively low point, then all you’re doing is compromising your ownership experience.”
He adds the strategy of owners sometimes seems flawed because they are not necessarily seeing the bigger picture; rather they are being driven only by cost.
When questioned about whether economies of scale is a concept that can be applied to service charges, Harfield disagrees. “Even with economies of scale there is a base price, and I think the problem is that people don’t really understand what that is.
Say you’ve got a contract with one stand-alone tower and the cost is $X. Just because you add 10 towers to it, you’ve still got a certain element of cost that’s fixed in relation to that tower.
The only bit that can fluctuate is the co-ordination. You can’t get economy on maintenance activity ... you can, however, get economy on the co-ordination of your management, because your team still has got to do the same tasks.”
Recently, a wave of Interim Owners Associations and facilities management companies across Dubai have been reissuing access cards for car parks and swimming pools in a bid to block residents with outstanding service charges from using facilities. An effective collection method is the issue, rather than blanket non-payment, according to Harfield.
“The principal issue at the moment is that because most of the towers are still owned by the developers, they are actually cushioning the activity of the non-payers.
The actual developer is trying to devolve their responsibilities to the OAs but is still very much involved. The developers are bankrolling many of these OAs, and the OAs are blaming the developer for not doing the activities correctly.
Whereas actually, you could take a view that the developer is actually helping the residents because they are providing them with the cash flow,” muses Harfield.
He points out that the actual collection activity has to come down to a clear legal framework, which includes the ability to take possession of the unit.
“Because JOP law is not fully implemented, everything is in limbo. Once it is fully implemented and the Owners Associations are fully empowered, they should have the authority to collect the service charges.
“But the principal point is that someone somewhere has got to take an owner to court and set a precedent. And at the moment, there is a degree of reluctance to do that.
It’s only going to need one or two Owners Associations to take possession of somebody’s unit and then sell it on the market to pay their outstanding service charges to give the motivation to the people that don’t pay, to actually make the effort,” he explains, taking a hard-line.
But the actual framework for the OA to do so does not exist. While the JOP law has been around for a few years, it has not been completely implemented.
The Owners Association Management (OAM) companies exist to help OAs with producing all the bills and invoices, and then the current arrangement is that all collections are supposed to go into an escrow account.
Currently the creation of the account is facilitated by the developer, and OAs do not have direct access to them. Harfield is quick to inform about recent developments: “But there is a slight evolution in the last few months where, I believe, one of the local banks is now being sat as the approved bank to hold Owners Associations’ money.
They will only allow the OAs or the developers on request to draw out money if certain criteria is fulfilled but that criteria is still vague. So it comes back to the requirement for a clear legal framework.”
Another issue plaguing Owners Associations is that the relationship between them and the contracting community is immature, because the latter doesn’t necessarily trust the former.
This comes down to OAs not having money of their own. “Some of the residents are pretty disrespectful towards their developers, but if the developer wasn’t there, they would actually be in quite a mess because the contractors wouldn’t work for them on their tower because they have got no sustainable credit, and they do not have the ability to pay.”
He explains it is slightly complex right now because there are three or four parties in the setup.
“With residents, it’s all about their own money, and they look at it quite personally. So if you have a tower of 400 people, you have 400 opinions. Then there’s an Owners Association that the developer would have facilitated to put in place, to try to cajole those 400 opinions into one consensus.
The OA will then go to the market and get ten quotes to maintain the building. They then have got to convince the 400 people that that price is the correct one.
“That’s where we go back to the original point that trying to convince 400 people to buy a BMW instead of a Tata is the right decision, and these people are saying, ‘no I don’t want to spend this, I want the cheapest.’ And so they buy the cheapest quote, and then you start a whole different circle of life.
“In my opinion, service charges are only going to go one way: up. Because the less you spend on them now, the more they will cost you in the future.”
When the suggestion is put forward that developers don’t necessarily want to give up control of the escrow account and hand it over in the hands of the owners, Harfield is honest.
“There is some truth in it, but it’s because you’ve got this complex arrangement. The principal issue for the developer is his or her brand. There are significant developers in the region and their brand represents their product.
Their concern is that if they hand over their product to a third-party to manage, the third-party is being manipulated by many people who don’t want to spend any of their money, and the quality of what they built could be severely compromised.”
He adds: “So when they build a new building, somebody will say, ‘oh did you do tower xyz, look at the state it’s in.’ Because people don’t differentiate between the company that built it and the people that own it.
So in that sense, developers don’t want to relinquish control. But at the same time, if they did relinquish control, many of the towers will be bankrupt because the developers are the ones that have got the strongest ability to collect the money.”
Harfield asks the question: “If only 40% of the owners pay, where does the other 60% come from? Because the service contractor, as far as they are concerned, are engaging with an entity, and not a multitude of individuals.
Their fee is fixed for the year and they expect to be paid that amount, whether or not the collection is made from individuals.”
Collection is hoped to be facilitated with the help of OAM companies. However, Harfield explains that OAMs are simply providing a service, and aren’t actually able to bankroll a tower.
“They have the ability to collect the money under the current framework — which needs to be clarified — but the fundamental point is that without the developers behind the OAMs, the OAMs are basically just providing a service.”
He provides the example of a similar structure which exists in the Australian market, but where the OAMs create a sense confidence between the contractor and the owners.
“There you have branded OAMs that the contractors know are good at collecting money, and have the ability to pay. So there’s a confidence to do the work. Whereas here, the contractors have this uncertainty which makes them say, ‘ok I get a contract from XYZ tower’s OAM... Can they pay me?’
“At the moment, we know that when we contract from a certain tower, that although there’s an OAM there, there is still the developer floating around in the background, and invariably it’s the developer that’s sat on the pot of cash. And the OAM then asks the developer to release the money.”
He says that in tower communities, he spots three types of owners: a reluctant owner, who never really wanted to own their unit, they were speculators that ended up buying; the real owners who plan to live in their unit as their primary residence, for a long-term period; and, tenants or landlords. With them, he explains, there are three completely ownership strategies to deal with.
“The first doesn’t want to pay [service charges] because he didn’t want to buy the property in the first place. Then there’s the person who wants to live there long-term, and who wants the building to look fantastic and be great.
And then you’ve got the landlord who wants to maximise his rental income, so he wants it to look great but he doesn’t want to spend any money on it.”
These three have to grow, Harfield says, and come to a point where they understand the role of the OAM. “They need to understand that the strategy of the OAM is to do what the owners are going to ask them to do.
So if the three types of owners can agree an ownership strategy then the OAM can buy services in line with that strategy. At the moment, the OAMs are just trying to get the best price. And by getting the best price, they are not getting the best service,” concludes Harfield.
Poll: thoughts on service fees?
“It’s hard to say the fees are too high when information is based on actual costs. There are always ways to save money on fees but reducing services and/or eliminating common area amenities should be a last resort.”
Ellen Rosenbaum, senior association manager, Stratum OAM
“I believe service charges are on the higher side on most properties. The reason is, in my opinion, the lack of transparency by the developer. There is no serious consideration given to the owner’s point of view as most IOAs aren’t registered and have no power.”
Gautam Patel, OA member
“Maintenance should be carried out to manufacturers’ recommendations and it is vital to keep up these standards. OAs must take this into account when determining value; the cheapest quote is rarely the best long-term option.”
Donna Newman, business development manager Middle East, Intertek
“The largest part is DEWA. On top of that you need to collect reserve funds as stipulated by RERA, plus service and management fees. Many owners struggle to understand this.”
Ian Monastyrski, OA member
All you need to know about JOP law
• Passed in 2007, implemented on January 13, 2011
• Also known as Strata Law, jointly owned property in Dubai will be managed and administered by Owners Associations, rather than developers
• JOP includes structural areas of a building, as well as common areas like lobbies, lifts, stairwells, swimming pools, gardens, and utility systems including drainage and pipes
• Mollak is an electronic web-based service developed by RERA to register Owners Associations
Service charges explained
According to RERA’s Mollak: “The service charge is the annual fee approved by the Owner Association which represents the cost of managing and maintaining the common areas in Jointly Owned Property to ensure the continuity and quality.”
This is divided into two parts. The first is the General Fund, comprising expenses relating to: service and maintenance fees, as calculated by licensed service providers via contracts; utilities fees, such as electricity, water and air-conditioning charges; management fee; insurance fees; and master community fees, if the jointly owned property forms part of a master community. The second is the Reserve Fund, comprising expenditure relating to long-term maintenance.