The mindset of retirement planning now needs to be applied to the built environment in the UAE at the federal level, Aecom's Matthew Anthony says. Anthony is senior consultant in the Middle East at Aecom.
The UAE Cabinet recently announced special residency visa privileges for expat retirees wishing to remain in the country after working age. The announcement of these visas, to be granted to people that meet certain financial conditions, has received a largely positive response and has created a discussion around just how much money one ‘needs’ to retire and live comfortably in the Emirates. I would like to use this as an example of forward thinking and financial planning that transfers seamlessly into the world of property management through the operation of the humble sinking fund.
The question of how much money you need when you retire may have many subjective answers, taking into consideration where you retire and what quality of life you expect to maintain. However, there will be two relatively fixed answers for each person: the expected date of retirement and the minimum amount of money needed to sustain a desired lifestyle from that point onwards. In the property management industry, the cost of replacement when assets reach the end of their life cycle is a relatively fixed date based on manufacturer’s guidelines, recognised performance criteria, local operating conditions, and the level of maintenance applied over the course of the asset’s operation. Sinking funds attempt to answer the question of how much capital is required to allow that asset to ‘retire’ and be replaced.
In this respect, sinking funds can be thought of as pension funds for building retirements, albeit elements of properties are retiring at different points of the property’s life cycle rather than the entire property at the same time. The concept of ensuring funds are in place to allow for these ‘retirements’ is the same as a personal plan to provide enough funds to allow the retirement to happen. The crucial difference is that if an individual doesn’t achieve the required savings to allow retirement, they may need to work a little longer, whereas built assets may not necessarily have this flexibility.
The risk of not having sufficient funds in place at the end of a built asset’s life expectancy effectively is asset failure, potentially creating wider impacts on property function, business operations, revenue, and reputation. The operation of assets beyond their expected life cycle, successfully or not, is widely seen in the Middle East. Although not uncommon in any part of the world, the reasons for doing so differ from one location to another. Emerging and developing markets are more likely to experience this due to a lack of planning or relative inexperience in understanding the balance between obtaining maximum value from an asset, versus 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 analysis), but the forecast replacement cost and how much capital needs to be put aside each year to ensure these funds are available when they are needed.
It comes as no surprise that the operation of a sinking fund when managing property is considered as best practice and critical to effective property management. The UAE already recognises this in Dubai, with the emirate's Real Estate Regulatory Authority requiring owner associations (and therefore their appointed agents) to show sinking fund contributions in service charge budgets, with the contributions based on a study of the assets the fund intends to cover. The mindset of retirement planning now needs to be applied to the built environment in the UAE at the federal level.