MEP Middle East – November 2018

COMMENT

48 MEP Middle East | N o v e m b e r 2 0 1 8 http://www.mepmiddleeast.com

Following the recent spate of UAE visa law reforms, the

mindset of retirement planning must be applied to the built

environment at the federal level

T

he UAE Cabinet has recently announced

special residency visa privileges for

expatriate retirees who wish to remain

in the countr y after working age. The

announcement of these visas, to be granted to

people that meet certain fi nancial conditions,

has received a largely positive response – and

has sparked discussion about just how much

money one needs to be able to retire and live

comfortably in the UAE.

Rather than get wrapped up in that discussion,

I would instead like to highlight how the example

of for ward-thinking fi nancial planning can be

transferred almost seamlessly into the world of

property management through the operation of

the humble sinking fund.

WHAT IS A SINKING FUND?

There are many variables to consider in answer-

ing the question of how much money you might

need when you retire. Where you plan to retire,

your expected age at retirement, and what quality

of life you expect to maintain, will all need to be

taken into consideration.

Similarly, in the property management industr y,

the cost of replacement, and when assets are likely

to reach the end of their life cycle, are important

considerations. And the date by which replacement

will become necessar y will be relatively fi xed,

based on manufacturer’s guidelines, recognised

performance criteria, local operating conditions,

and the level of maintenance that has been ap-

plied during the course of the asset’s operation.

Sinking funds, therefore, attempt to answer

the question of how much capital is required

to allow an asset to ‘retire’ and be replaced. In

this respect, sinking funds can be thought of as

pension funds for buildings, although elements

of properties tend to retire at different points

during the property’s life cycle, rather than the

entire property retiring at once.

The concept of ensuring that funds are

in place to allow for these asset retirements

is similar to a pension plan that provides enough funds

to allow for a person’s retirement. The crucial difference

is that if an individual does not achieve the level of sav-

ings required for retirement, they may need to work a lit-

tle longer, whereas built assets may not necessarily have

this fl exibility.

AVOID AT YOUR OWN RISK

The risk of not having suffi cient funds in place at the end of a

built asset’s life expectancy is effectively asset failure, which

can potentially have an impact on a property’s function, busi-

ness operations, revenue, and reputation.

The operation of assets beyond their expected life cycle –

successfully or not – is widely seen in the Middle East, and

indeed around the world. However, the reasons for doing so

differ from one location to another. In fact, it is more likely to

be seen in emerging and developing markets due to a lack of

planning, or their relative inexperience in understanding the

necessar y balance between obtaining maximum value from

an asset and mitigating the risk associated with its failure.

Sinking funds mitigate this risk by providing not only a

forecast of the asset’s replacement date – in conjunction with

life cycle cost analyses – but also of the associated replacement

costs, determining how much capital needs to be put aside each

year to ensure that these funds are available when needed.

SINKING FUNDS IN THE UAE

It should come as no surprise that the operation of a sinking

fund when managing property is considered best practice

and is critical to effective property management. The UAE

already recognises this.

Dubai’s Real Estate Regulator y Authority requires owners’

associations – and, therefore, their appointed agents – to show

sinking fund contributions in ser vice charge budgets. These

contributions must be based on a study of the assets that the

sinking fund is intended to cover.

The mindset of retirement planning now needs to be ap-

plied to the built environment in the UAE at the federal level.

Building pension funds

Matthew Anthony is senior consultant in the Middle East for

Aecom.