Laying down the law

As confusion surrounding the imposing Strata Law heightens, Becca Wilson gets the low down from the only two independent strata management companies based in the Middle East.

ANALYSIS, Facilities Management

The first half of 2008 is set to see a dramatic change for everyone involved in the Dubai property market, with the introduction of the Dubai Strata Law.

The law has been on the radar for about two years, with whispers sweeping the facilities management (FM) market about the effect it will have on the sector and concern mounting over it being just another job title to add to the equation.

The strata manager is not there to duplicate a facilities manager's role.

In a bid to eliminate any confusion, facilities management Middle East sits down with Peter Crogan, CEO, BCS Strata Management Services and Adrian Quinn, executive chairman, Essential Strata Management for a lengthy discussion on strata.

"A strata is only for a multi-owned property with shared common property, also sometimes referred to as common areas," explains Quinn.

These common areas include anything from street lighting within a community, to lifts, lobbies, fire equipment and security - anything where multiple owners share the use. Every building or development has different facilities and it's important these areas are thought about and properly budgeted for.

"The common areas will be indicated on the site plan which is registered in the Lands Department," confirms Crogan. Both Quinn and Crogan state that currently, many developers do not understand the implication of the new act and they both fear problems will occur for both purchasers and developers if responsibility is not taken now to set up the owner's association.

"The owners will know that developers have to comply with the new law in a specific time frame. If developers don't, penalties could be served by the Dubai Government and non compliance could reflect badly on the developer's reputation," says Quinn.

To help regulate the law that will be enforced under the signature of HH Sheikh Mohammed bin Rashid Al Maktoum, the Real Estate Regulatory Authority (RERA) will act as a mediator and control the law.

Once the property industry has an implementation date, it is hoped that existing buildings will have a grace period of six to 12 months to comply with the law and that properties under development will have to implement the strata management straight away to comply in time.

"We hope the new law will make developers think more about the post-construction operations and bring the strata managers (SMs) in from the beginning of a project, that's what happens in Australia," explains Quinn.

By paying more attention to the planning of the building or development, developers and building owners will help retain the value of the asset.

Although the new law is currently only applicable to the Dubai Emirate, Abu Dhabi has announced it will soon implement its very own Strata Law and there are rumours of Oman doing the same.

Strata manager Vs FM community

While it is a positive step to see another Emirate and another country considering strata implementation, Dubai's FM community is still struggling to come to terms with the effect the law will have on them.

During a conference in November 2007, two presentations were given on the strata law. Many questions were raised over the need for a strata manager, with one delegate saying "it seems another person has been inserted into a management structure to do a job that a good FM should be doing".

But FM consultants will still be a favourable option to developers wanting advice before and during construction, to ensure efficient operability. Post-construction, service providers will still be needed to carry out a scope of works. And finally, in-house FMs will still be required to manage individual units that are used solely by that owner or his/her tenants.

A strata is only for a multi-owned property with shared common property.

Each job title will have the following basic responsibilities:

  •  A strata manager will be there to advise the developer on the strata during design, construction and handover. They will also take on an administrative role to manage the upkeep of all common areas and create the Budgets and Fees schedules that owners will have to pay;

 

  •  The facilities management consultant will not really be affected. They will still be needed by developers and also by companies looking to restructure their in-house FM;

 

  •  Facilities management service providers will be appointed by a strata manager to maintain the common areas and also by an internal FM to maintain non-common areas;

 

  •  An in-house facilities manager will still go about their normal day-to-day job of operating and maintaining their property. However, they will report into the strata manager for all issues relating to common property.

"There is definitely confusion over the role of a strata manager," confirms Quinn. "But the strata manager is not there to duplicate a facilities manager's role."

Crogan describes the strata manager's role as "an administrative, specialist skill" and claims there is a distinct division between the SM and FM job functions.

"The SM will send notices, arrange general membership meetings, pay contractors (including FM service providers) and collect funds etc. They will look after the administrative side of the management," Crogan adds.

They will also manage the owner's association on behalf of all owners and handle disputes that arise between the developers and owners, including warranty issues.

From both the developer's and building owner's point of view, the SM is there to act as a safety net. They will help developers with things like the initial strata plan, liability and allocation of different common areas, while acting as an independent authority for the owner's association.

Owner's assocation

Made up of five council members, including one from the developer, the owner's association is a council that will be forged to ensure a building's or development's common areas are maintained and operated to suit all the strata owner's needs.

The decision process to decide who can be a part of the association is still in progress, but it is believed that a ballot system will be used and the people with the most votes will be elected as the owner's association council.

"We believe there will be a licensing fee of about AED 500,000 for strata manager companies to be registered," says Quinn.

Both Crogan and Quinn agree there needs to be a course set up to teach owners what they are expected to do, how the associations will work and what are there liabilities in sitting on a council.

Crogan adds that the quality of people who are part of the owner's association is crucial and also cites that associations can come up against problems.

The strata law aims to introduce transparency between developers and building owners

"The board should be a group of professional and intelligent people who understand the law and can accurately make decisions on behalf of the owners. It's a big responsibility," he says.

"You often get some people who like to cause trouble and try sway others into their way of thinking. For this reason, there needs to be an independent authority to go to when there's disputes," Crogan adds.

The independent authority in question is the Real Estate Regulatory Authority (RERA) previously mentioned in the article. With the owner's association running as a democracy, the majority will rule. RERA will mediate any disputes the strata manager takes to the authority.

Developers will possess 100% of the votes at the first AGM, giving them the power to allocate things like budgets, leases and licenses over the common property.

But after the first 12 months, power then shifts to the owner's association, giving them the authority to approve all future budgets.

Building and unit owners need to remember that the cost of setting up the association lies with the developer. But some developers are trying to recoup these costs through the owner's association.

"They are trying to recover these costs by including them in the first year's annual budget, but it's the developer's responsibility to hand over the owner's association and take care of the costs incurred to set it up," Quinn states.

While some of the major developers like Emaar and Nakheel have in-house owner's associations that they manage of behalf of the strata's, the chance of them getting back these costs increases as control stays with them until the first council of owners is appointed. This happens at the first informal meeting of all owners, about three months after the first settlement of a lot/apartment.

In-house Vs outsourced

Although the law is not yet officially implemented, it is encouraging to see some of the major players taking a proactive approach by incorporating an internal strata management team.

But with this comes an issue of transparency. "Nakheel has something like 50,000 units that are coming on board. It has its owner's association division but the owner's perception will be, just how transparent is it?" claims Crogan.

Quinn agrees with his comments and thinks that it's not in the developers best interested to manage the strata. "Owners will always see them as the developer and not independent entity acting in their best interests. A major Conflict of Interest is perceived by purchasers if a Developer manages a strata after handover and it also puts the developer in a position where they have to continue funding defects as it is seen that they may have hidden the true position while they were the managers," he comments.

So how can developers get around the problem to create transparency for building owners and potential buyers?

Essential Strata and bcs Strata Management are the only two independent strata management companies in the Middle East. By employing an independent entity, developers can expect to increase property appeal.

"The law will increase buying confidence in the market place as buyers will feel safe that the it will protect their properties and maintain their value. Employing an independent strata management company will also help create transparency," claims Crogan.

Both Crogan and Quinn are convinced other large players from across the world who are already experienced in the strata law, will be entering the market over the next 12 months.

"As much as I'd like to think Adrian and I can pick up all the business, it's simply not going to happen. There is too much. There will be players coming in from Australia, Canada and America," explains Crogan.

For FM companies establishing a strata management division and those wanting to recruit strata staff, the recruitment pool is currently fairly limited within the Middle East market.

Until the strata sector has established itself, recruitment will essentially take place from those areas already familiar with strata - Australia, Canada and America.

"I've already got applications from Australia, it's going to drain the Australian market," Crogan worries. "But we'll also recruit from places like Canada. What's important is to recruit a well experienced strata manager, regardless of where they are from.

Service charges

"At first, residents will be hesitant to accept the law, but as time goes on they will appreciate its value as properties will be protected," says Crogan.

With service charges a constant source of concern for worried building owners, the new strata law aims to introduce transparency between developers and building owners. It will endeavour to alleviate the opportunity for developers to try and recoup additional costs in the service charge fees.

"The law will have a positive impact on residents and owners as it will give them back control. Developers will have to walk away from day-to-day decisions," adds Quinn.

But Crogan admits that for existing buildings, there might be an increase in service charges, with 90% of existing buildings run by in-house divisions failing to comply. For example, in the past, developers have subsidised service charges and not allocated an adequate sinking fund for the development.

"A realistic service charge will be given instead of it being guessed and being incorrect or under what it should be. Some communities' service charges will go up but others may go down," argues Quinn.

For the existing buildings with inadequate sinking funds, it is still undecided who will have to make up the shortfall. If owners have to subsidise the required sinking funds, service charges will ultimately increase. The strata law will require a developer to produce a sinking fund for the first 10 years once the building has been handed over.

"This ensures the owners know upfront what their service charges are going to be. The sinking fund hasn't been given a lot of lip service over here, that will have to change once the law is implemented," says Crogan.

For potential buyers and on a positive note for the future building/unit owner market, the law will put every developer under the spotlight and allow people to compare fees from one development to another.

While is it hard to predict how Dubai's Strata Law will be received by all involved in the property sector, it is welcoming to see the government implement some form of legislation that will ultimately help regulate service charges. "The law will bring all developers to one balanced playing field and they will all have to comply identically," says Quinn.

The next couple of years will no doubt be a challenge for the property market trying to understand the law and its benefits, but once settled, Crogan thinks developers, building owners and the FM community will hugely benefit.

Example – Jumeirah Beach Residence (JBR)

With 36 residential towers including 6,500 units and four hotels, JBR will stretch across 22 million sqft gross floor area and be one of the largest strata managed communities in Dubai.

Crogan thinks each towers will have it's own owner's association who will then report into a building management statement. "The building management statement will set out each owner's monetary liability to maintain the common areas throughout the whole development. There will be two budgets, one for the building and one for the master community plan."

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