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The sustained property price correction in the past several months has exposed defects in the business model of many developers in the region. The excessive dependency on property sales, while disregarding recurring income from leasing and other assets, has been cited by analysts as a serious flaw in the strategies adopted by some developers.
The drop in transactions in the past few quarters has exacerbated the problem, prompting many developers to revise their strategies.
Craig Plumb, Head of Research at JLL Middle East and North Africa, says developers are now renting out entire residential blocks rather than wait for buyers. Others are incorporating various amenities into their projects to generate recurring income. “This reflects the increased interest in annuity income and the strength of the rental market relative to the sales market,” says Plumb. “More and more investors seek to create assets that provide ongoing rather than one-off return.
“As a result, more rental components, such as retail, are being added to residential buildings.”
Apart from helping tide over developers during lean periods, the additional revenues could also benefit residents in the long run.
Jumeirah Golf Estates
For instance, revenue from various facilities at Jumeirah Golf Estates (JGE) is partly used to offset services charges paid by homeowners. JGE generates revenue from its two championship golf courses, which have around 900 members, clubhouse, restaurants and tennis academy.
“Creating revenue-generating assets within a development is an evolving trend,” says Amer Kalantar, Head of Asset Management, Leasing and Infrastructure at JGE. “We have several income-generating assets and now we’re going to open a new retail centre for all community members in the last quarter. This will further create opportunities to generate income across the community.
“My intention is to lower the service fees over the next three years by streamlining operations, implementing cost-saving practices and creating more income-generating assets,” explains Kalan-tar, adding that he plans to increase customer footfall of the community facilities.
Each district in JGE charges a different amount as service fee, in addition to a master community fee. The combined amount ranges from Dh5.28-Dh6.82 per square foot. “My aim is to reduce charges to between Dh3.75 and Dh4.75 within three years,” says Kalantar.
Integrating revenue-generating facilities, such as groceries and other leisure and retail outlets, in residential developments has become a must, according to Richard Paul, Director of Residential Valuations at Cluttons.
“It will help the development’s value in the long term,” he says. “People are talking a lot about creating revenue-generating assets within their residential and commercial developments here. Developers are certainly heading into that direction.”
Reducing service fees is important in building customer confidence as details of how service charges are spent are not always readily availa ble to owners and tenants, according to Plumb. “This is an area where the market needs to become more transparent,” says Plumb.
Paul adds: “Being transparent can increase the confidence in a development, and with that its value.”
Source: Nicole Walter, Special to Property Weekly