Warning over office service fees

A report published yesterday criticised the opaque way in which landlords charge tenants for services, cleaning and maintenance. Razan Alzayani / The National

A price war among commercial landlords risks leaving office blocks across the country without sufficient funds to maintain them.

Service charges are increasingly determined by what the market is willing to pay rather than what is required to maintain buildings, warns Jones Lang LaSalle.

It estimates that so called "sinking funds" used to anticipate future repair costs are just 1 per cent of overall service charges in the UAE.

But that compares to between 8 and 10 per cent of service charges in Europe and North America.

"Unlike more mature markets, there is little correlation between the actual costs of operating buildings and the amount the owner can recover in service charges in the Dubai market, said Graham Howat, the head of property and asset management at Jones Lang LaSalle for the Middle East and North Africa.

A report by the broker published yesterday criticised the opaque way in which landlords charge tenants for services, cleaning and maintenance.

The practice of applying blanket charges that are not based on actual usage provides no incentive for tenants to conserve energy, it said.

The agent estimates that average service charges for prime office space in Dubai was about Dh33 (US$8.95) per square foot per year during the final quarter of last year - or just a third of the London average.

Annual charges varied between Dh60 per square foot at the Dubai International Financial Centre and Dh12 per square foot at Jumeirah Lake Towers. This equated to service charges costing about 25 per cent of annual rents which were about Dh130 per square foot.

Jones Lang LaSalle yesterday said that these charges often bore little relation to the actual costs of occupying buildings in the city, where the harsh climatic conditions and the high cost of energy pushed up costs for landlords.

It meant many owners were experiencing a shortfall between their costs and their ability to recover them from occupants.

The report found that service charges in Dubai were far more varied than those in Abu Dhabi, where they averaged out at Dh29 per square foot per year - 18 per cent of prime office rents, which averaged out at Dh178 per square foot per annum.

It also found that service charges in Dubai were lower than those in most other global cities. Annual service charges in Hong Kong were on average Dh68 per square foot and those in London averaged Dh69 per square foot.

Researchers found that many prime office buildings in Dubai still had their service charges included in the rent rather than charged to tenants separately with an explanation of the charge.

"In these circumstances, there is no financial incentive for the tenant to use utilities judiciously, as their charges do not reflect actual consumption," Mr Howat said.

Jones Lang LaSalle researchers predicted that service charges in Dubai were set to increase over the medium term as landlords started to adopt itemised charges.

"As the market matures, we expect to see the adoption of more transparent measures of operating costs and service charge arrangements," Mr Howat added. "Widespread adoption of global best practices may take time as it's a relatively new real estate market, but the UAE is definitely moving in the right direction."

Last year residential service charges hit the headlines in the UAE in a number of disputes. Most notably, developer Nakheel blocked beach and pool access for residents whose homes had outstanding service charge payments saying that it was owed Dh58 million in unpaid fees. Property owners complained that the company's charges were unfair and being used as a way of boosting the indebted company's income stream.