Land Sterling champions data-driven service fee decision making
Land Sterling is a leading real estate and property consultancy based in Dubai, Abu Dhabi, Riyadh, Leeds and London. Backed by analytical and research-based reports, Land Sterling offers a full range of real estate advisory services to help clients make informed property decisions, reduce risk and improve overall success.
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Decoding service charge
For years, service charges have been created to cover the costs of managing, operating, maintaining and repairing condominium properties. The concept was built around a cash flow loop where the owner of the unit finances the maintenance of the property, which ensures the long term preservation of the asset. By relying on this, service fees help to allay investor concerns and build confidence that allows for sustained development of the real estate economy.
However, the practice of imposing service charges on properties has evolved differently in practice over the past few years.
Identifying pain points in the cash flow model
The cash flow model does not work as efficiently as it did in theory. Unit owners are in default of their service charges, delaying essential repairs and maintenance. To keep pace, remedies are put in place but are especially carried out when the damage has already been done. As a result, service will be negatively affected, unit owners will be dissatisfied, service providers will be dissatisfied, and the cycle will continue until the system falls into a degenerative loop.
Although the system was designed to create value, each participant in the cycle has different views on what constitutes a value-added service. In a loop of varying biases and opinions, who should be responsible for value?
To err is human because we have different concerns and perspectives. For example, a unit owner and occupant have changing priorities and economic uncertainties such as job loss which could be the reasons they do not pay service charges. On the flip side, for developers, unsold inventory and the remarkable upturn in capital investment could be the reasons they are delaying paying service fees.
There are many factors that lead to high levels of service charges:
Providing facilities management is resource intensive as current models are based on theories and assumptions
Decision making has a high margin of human judgment errors
Insufficient availability of high-quality data to promote precision in decision-making
These factors lead to over-specified services, inefficiency and the production of a significant waste of resources.
How to improve the process and the collection of service charges
To optimize operations without compromise, some of the best ways for building management teams to make decisions are through computer-aided facility management systems (CAFM) or other digital systems for facility management. However, it is also essential to stress to stakeholders that delaying the decision to migrate to smart models will only make the process more time consuming and expensive.
Service providers should use a predictive model rather than a preventative model. And to create a predictive model, service providers should consider automating and digitizing their processes. Especially for new buildings, design specifications should focus on optimizing operating costs and improving the life cycle of assets, especially for new buildings.
Redefining service fees
At the political level, the Real Estate Regulatory Authority (RERA) and the Mollak system in Dubai have undoubtedly contributed to the transparency of service charges. However, despite these policy innovations, the challenge remains, as unit owners tend to view service fees as an expensive expense.
Over the past decade, soft and hard services have been optimized several times with the sole aim of reducing service costs. And yet it has failed to eliminate or reduce the perception of the owner of the unit, who still believes the cost levels are high.
The solution is to redefine the cost of the service charge as a creative value, making the services more desirable to the occupant and owners of the unit rather than a burden. Therefore, optimization must be a process of continuously creating value by improving all aspects of building operations such that the service provider and the unit owner lock themselves into a symbiotic relationship.