SHOULD LAND OWNERS DEVELOP THEIR PLOTS?

By: Fadi Nwilati, CPA, CGMA

CEO, KAIZEN AMS

Many land owners today have made a call today to offer their plots for sale or scrapped their decision to develop their real estate projects. While in many cases these decisions are correct, there is no harm in conducting a fresh feasibility analysis and reconsidering the decision, as in some cases, land owners may be losing on a great opportunity.

Over the last 2 years, I have been leading and working with several land owners developing real estate projects and have been leading, since 2015, approximately AED 1.5 Billion in projects value all the way from feasibility study, design management, tendering, authority approvals, project financing, project & unit registrations, escrow account set up & management, tendering and construction award, and construction supervision.

While most large-scale contractors remain busy with Expo 2020 projects, and trust me, there are many in planning & execution stage, construction prices remain reasonable. Margins for real estate developers remain healthy. When conducting feasibility analysis for the projects I have been involved with, the worst-case scenarios, which are based on the absolute bottom prices of the global financial crisis, result in breakeven. So as a worst-case scenario, the capital invested by real estate developers remains “safe’ in principal.

Land owners today should seriously consider to develop their plots, or at least explore the opportunity, whether their intention is to rent or sell the properties. Banks continue to offer construction financing, even for first time developers, to projects that have been well planned and analyzed. I have assisted in arranging over AED 500 Million in bank funding in the last 18 months and can tell first hand that some banks’ appetite for the right real estate projects remains positive.

Of course, not every land passes the checklist for development today. A thorough analysis of the location, demand, sell-ability or rentability, and exit strategy must be conducted prior to making such decisions. In a project we are currently leading, the projected annual returns, which have been analyzed by multiple professional entities and banks, are 20%. This proves that despite the current market situation, there are projects that remain promising and tick all the boxes. If you happen to own a plot of land, explore the option of developing it. There are multiple scenarios for land owners to explore if they wish to limit their exposure and minimize their risks.

Dubai remains in need for specific types of properties that remain absent, with few developers exploring built to suit schemes, and certain unique, not necessarily prime, residential & commercial projects. As a real estate developer, it’s time to decide not to copy what’s already being developed, and to think differently. Unique projects, both on the prime & lower end of the market, have been in historically in demand and healthy.

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FLUSH YOUR WATER; TEST YOUR WATER

By: Fadi Nwilati, CPA, CGMA, CEO, Kaizen Asset Management Services

43% of UAE residents travel outside the country during the summer vacations and residents with children travel for longer periods during summer, so while the average family takes the right precautions before travelling for example turning off water heaters, disconnecting power sockets, and keeping the AC on at the right temperature, the majority forget an important post-travelling measure, cleaning their water pipes and ensuring a healthy water quality upon their return.

Local water distribution authorities continually monitor the water supplies physical, chemical and microbiological parameters to ensure the water quality falls within government recommended limits, however these tests are conducted at specific points, and not at the apartment or villa.

Free chlorine is present in water as a sterilization agent and should range between 0.2 – 0.5ppm (parts per million) this is essential in inhibiting bacterial growth such as E.Colis and Coliforms. Water that remains still for two to three days can be classified as stagnant as the chlorine degrades and therefore the water sterility drops permitting bacterial growth.

An investigation which KAIZEN Asset Management Services was involved in, demonstrated the importance of taking the right measures by understanding the time it takes for the water to become unsafe for usage while stagnant.

In apartment buildings, the risks are reduced when compared to villas as the main water tanks will still be in use by other residents and thus are rarely stagnant, however in saying this caution should always be taken as the water in the water heaters within the apartment may remain stagnant if the resident is away.

In villas, the risks are higher as villas would ordinarily have their own water tanks, so the water here would be stagnant for the entire duration of the leave and therefore the water purity will be at risk.

As a precautionary measure, specially for families with children, conducting water tests through a professional laboratory is an affordable exercise (costing approx. AED 500), and is a worthwhile investment for the peace of mind. The laboratory technician will test the parameters such as Total Plate Count (total bacterial colony forming units – not all bacteria are harmful), Pseudomonas aeruginosa (related to respiratory complications), Escherichia Colis (E.Colis) (related to digestive complications), and Total Coliforms.

Useful Tips For Residents, Property Managers & Facility Managers

Villa residents should ensure that their water tanks are being cleaned at least twice a year by a professional company who will empty and clean the water tanks after a lengthy vacation due to water stagnation. Landlords may even consider installing additional filters within the property as an added safety measure.

Residents coming back from vacation should flush the water within their property at every point (toilets, kitchens. etc) This method of shock flushing is advised should the water be unused for more than a couple of days only.

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Improve Efficiency At Your Building

By: Fadi Nwilati CPA, CGMA | CEO KAIZEN AMS

With the VAT tax approaching on the horizon, it has become imperative to understand how tax will affect real estate investments and the overall industry. While a lot of focus is being invested towards the effects of VAT tax on the real estate development and the construction side, it is important to invest an equal amount of focus for occupied properties, particularly, residential and commercial buildings. Many real estate developers hope that residential properties will be zero-rated rather than tax exempt, as they may not be able to claim back VAT paid if residential properties were tax exempt. We are yet to see how the tax law will treat occupied and leased buildings.

To defer the risks of the potential impact on taxes on the operational costs, building owners should consult with their property managers and legal counselors to consider a separate base rent and service charge allocation towards the lease agreements, in order to maintain the current net income generated at the property. This has proved successful in several buildings managed under KAIZEN AMS in the last 4 years since KAIZEN AMS initiated this concept. For freehold buildings managed under the JOPD and Strata law, managers need to assess how VAT will affect building budgets when the VAT Tax law is published. As an added measure, in case recouping VAT tax will not be possible from building occupants, whether tenants or owners, then building managers must seek alternative approaches to generate additional savings on operating budgets to match the potential VAT amounts to be paid. Professional property and asset managers are continuously diving deeper into the properties’ operating budgets to try and generate additional savings, while maintaining the same level of quality. Generally, in the UAE, approximately half of a building’s budget goes towards resources related to maintenance, cleaning and security, among others, while the other half goes towards utilities, mainly electricity and cooling. The goal is not to minimise expenses, the goal is to manage the target level of quality at the right level of expenses. The cost of managing a property should reflect the vision of the owners.

In order to generate savings on maintenance, security, cleaning and other resource-driven services, the managers should try and renegotiate contracts with service providers to try and achieve better rates, or alternatively, better contract terms and threshold amounts. They should also review KPI’s to reflect important aspects of the community and encourage a repair-first mindset for equipment.

On another note, generating savings on energy and cooling is generally more straightforward. From experience, we know that reducing energy costs by 10 percent is relatively easy without having to spend large capital amounts. It’s critical to understand where the most energy is being used and where energy is being lost. Being a member with the US Green Building Council, we are always up to date on the recent technologies and methods to reduce energy and cooling bills, and have historically generated excellent savings from small measures. If the building manager has squeezed the costs to an absolute optimum level, again, without affecting on quality, then perhaps it’s time to look into adding revenues into the community. This can be generated by straightforward approaches such as decreasing vacancies, increase rents strategically and minimizing turnover. Additional revenue can also be generated from other services such as creating and managing a visitor parking management, car cleaning services for residents, vending machines and magazine stands, among others.

In summary, it is important for building managers and financial managers of building owners to review the budgets and analyze areas to generate additional revenues and areas of generating additional savings. It is important to begin this exercise immediately and implement the necessary plans, in order to be ready for a potential negative tax impact on net income.

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