Strata Update: Stasis Quo

Is the industry ready for the strata law

Stephen Kelly of Clyde & Co.
Stephen Kelly of Clyde & Co.
Elaine Jones.
Elaine Jones.

The implementation of the strata law still hinges on the long-awaited regulations. Is the industry ready for them?

Dubai’s strata law was first enacted in November 2007, with the theory that the accompanying regulations would come out by April 2008.

Here we are in April 2010 and there are no regulations. While rumours about the imminent release of the regulations are hotting up, the fact is the property industry is still waiting. This is the stasis before the transition.

When the regulations are released, there is likely to be a frenzy of activity as buildings make the long journey to compliance.

“It may take up to six months to bring a building into the strata regime,” says Stephen Kelly, a senior property lawyer with Clyde & Co’s Dubai office. “Given the number of lawyers and consultants available, that is going to be a tough task.

“There may not enough professional power to make that transition happen. But I think most of those organisations are waiting to resource and, that being said, for a reasonably complicated building, it takes three to six months.”

The period of retrospective implementation could be prolonged if the regulations are particularly tough or complicated. The hope is that this will not be the case, and that they will be a clear and simple addition to the framework established by the law.

“If the laws and regulations are clear, they will not be difficult to implement,” says Elaine Jones, CEO of Asteco, a property-management company. “Many of us have been doing property management and have engaged a mixture of nationalities who have experience with a variety of approaches.

“Fortunately the software required for managing home owners’ associations is available from a variety of different markets.

The learning curve may be a little tough, but I am confident there are enough well-qualified people available within a reasonable timeframe. Interestingly, teaching the owners will also take some time, as their understanding and perception may well be different to the reality.”

There will be much to be done. Once the requirements are revealed, there could be a small windfall of business for key professions. Top of the list, according to Kelly, are surveyors.

“Buildings generally have not been surveyed, except by the contractor,” says Kelly. “They are going to need proper surveying, with proper methods. The cost of doing all that for a big development is massive.

“A lot of people have underestimated the process of making buildings strata-compliant: they want a tick in a box equivalent to a title, but the cost of the tick may have caused them to back off a bit.”

Kelly predicts that it is the market that will drive compliance, if international experience is anything to go by.

“Elsewhere in the world a strata-compliant title has been worth up to 20% more and the bank finance level was higher, and that will happen here in five to ten years,” he says. “We will end up in a substantially better position than the one we are in.”

The current position is one that needs to change, and the desire for that change is strong among industry professionals. While it is worth asking if the industry is ready for the regulations, there seems to be no doubt that their introduction will be a good thing for the market.

“Yes, we are ready for the regulations,” said Jones. “We are so desperate for the regulations because it will re-invigorate the market and reignite the interest in buying property here. It is such an important thing for the whole market.

“Of course there will be challenges, but that is fine – we will work through them, and there may need to be adjustments, but they can be addressed. But we need to be regulated properly and follow a consistent system, so that all buyers and all developers know what has to be delivered and received.” This is a view echoed by Kelly.

“I do not think investors appreciate the benefits the law will bring to them,” he says. “They would have a title similar to that from Australia or Canada, with clearly-defined units and consistent methodology following survey rules, so you know exactly what you have purchased. It is hugely beneficial for investors.”

Defining title is the main purpose of the law, but one often masked by the publicity and public interest around the property-management aspect. The fundamental theory of strata law is that it is a system for the subdivision of buildings, resulting in titles being able to be issued for owners that comply with world standards.

As it stands, the law currently only really provides for traditional subdivision – taking a plot and making it into smaller plots.

“There is a reason we do not have a lot of foreign ownership, especially institutional, and it’s partly to do with the title system for buildings with multiple ownership not being at a level comparable to other locations those institutions are used to investing in,” says Kelly. “So part of the strata law was to take property registration to the next level.

“The whole region is going this way. There needs to be a system for proper subdivision of buildings; this is especially important for mixed-use developments. There you really need two layers of subdivision. You need to be able to break the building up into separate use components, then you need to subdivide those individual parts that have multiple ownership again.

“The first Emirate that sorts the regime out can say ‘invest here, you are protected’.

“Institutional investment will go anywhere to make money, but normally there are quite stringent rules as to where insurance companies will invest: traditionally it is commercial property.

“I would think that, when the law comes in, there will be more confidence in this area. We have acted on behalf of people buying portions of multi-owned buildings, and at the moment there is a degree of uncertainty. We can give them a reasonably good idea of where we think it will be once the regulations are issued, but we can’t say exactly how it will work until the regulations appear.”

Introducing the regulations to make all this possible quickly was always going to be a tough call. The law itself is very short, at only 11 pages, with little information. As the law really just provides the framework, the bulk of the law had to come in the regulations.

“We are in a transitional period, where we have a law with no regulations and nothing to force developers toward implementation,” said Kelly. “Ones who want to implement are inhibited from it; everyone is basically in a standstill period. They just need to release the regulations, whatever they may be.”

There is lots of speculation as to why they have not been released yet. Lobbying from interested parties is one key reason. Master developers have a significant vested interest in the outcome of the law’s introduction, and were very active in trying to influence its structure.

“There was a lot of lobbying from that sector, to the point where that sector was almost taken out of the requirements of the strata law,” says Kelly.

“I think what they are trying to do is release the perfect set of regulations, but when that results in them not coming out, it becomes a source of criticism.

“If they release the regulations, it will force developers to make a business decision. Do they really want to continue to manage buildings or not? A lot of those who thought they would may now say it is all too hard, let’s pass the management over to the owner’s association.”

The part of the strata law that does account for most of the attention is the management side. The strata title will bring in a whole lot of management rules, and it is those that have courted the most controversy. The theory is that, if a building is subdivided into units and common areas, it cannot be left up in the air as to how it will be managed. There needs to be some kind of structure in place so owners can manage their building effectively.

“Strata is very much a consumer-based system that takes the management and puts it in the hands of owners to manage their buildings,” says Kelly. “That is consistent with how the great majority of multi-owned buildings are managed in other sophisticated jurisdictions.

“In this region, we have had an unusual situation where developers have wanted to be involved in the management of buildings. In some instances they have had no choice because there was no mechanism to take the management of the building and hand it over to the owners.”

As owners’ associations are formed, it is expected there will be significant changes in the way buildings are managed. While some developers will be glad to see the back of their management responsibilities, there are plenty that earn a premium from their maintenance activity.

“The million-dollar question,” says Kelly, “is will a developer be allowed to manage a building? There is a possibility that there will be restrictions placed on the management of buildings. An owners’ association is probably only going to be able to appoint an association manager for three to five years. They will probably only be able to appoint an FM manager for three to five years as well. There could be forced retendering on day one.”

How does this affect FMs? The simple thing is that an FM provider has generally been signed on to provide services to a developer so the contract is between the developer and themselves, not with the owners.

“Any FM provider who thinks that its customers are not the owners is not the FM provider any owner will ever want,” says Kelly. “Will the law come in and say any arrangements put in place by the developer are available to be reopened by the owners? If so, FM providers doing a poor job are at serious risk.

“Whether or not you are worried depends on who you are. If you are a big provider doing all the management for a developer or master developer, then you could lose it all if the owners are dissatisfied with the service levels or charges. If you are a smaller FM provider, who has a good business doing a bunch of boutique buildings, then it will open up the market from that sense.”

Other questions up in the air at the moment include whether or not master community common property will be included. It is not expected that master community common property will be taken away from master developers, but there may be some restrictions on how they raise service charges for those areas. Also, will there be any restrictions on master developers, or their affiliates, being providers?

“The smaller FM providers do not see a lack of tenure as detrimental to them because they think they should be there based on performance,” says Kelly. “It is the ones who are unsure of their performance levels that are worried.

“When you talk to FM people about lack of tenure, a lot of them do not seem that concerned about it. Given the negative comments certain owners groups have expressed regarding management of buildings, if certain developer and master developer affiliates are not concerned, perhaps they should be.”

Surveys essential for true valuation
Jones Lang LaSalle has recently suggested that credible valuations are part of making the market transparent and, in turn, attracting foreign and institutional investment.

“The lack of regular, accurate and professional real-estate valuations results in enhanced financial risk exposure to a diverse spectrum of stakeholders,” said the company in its March 2010 MENA House View. “These include banks and other lending institutions, investors and general business entities that own the real estate from which they operate their business.

“As real-estate markets across the region continue to mature and become increasingly open and transparent, it is essential for the real-estate industry to develop and consistently apply common standards implemented by professionally-trained valuers able to demonstrate independence, integrity and objectivity.”

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