Talking Dollars And Sense

Source : The Business Times, September 27, 2007

Effective deployment of funds can boost the capital appreciation and rental yield of an estate, says JORDAN NEO

IT IS an important mandate of the management council to keep watch over the expenditure of their estate, ensuring that funds are sensibly ploughed into areas which best meet the estate's needs.

For example, should the money in your sinking fund for the year be used for lobby upgrading, or should it be used to build a state-of-the-art swimming pool? When the council is clear about long-term plans and its objectives (ie, functional over aesthetic), as well as the impact of certain major works on the estate's value, decision-making becomes much more painless and effective. The situation whereby too much money is spent on some areas with not enough left over for others can then be avoided.

Clearly-defined plan
The council, with help from the managing agent (MA), also has the responsibility of devising a well-planned budget for the year, phasing various works by importance and collecting appropriate amounts for the maintenance and sinking funds to carry out these works.

Defects management is one area where council members must learn how to discern appropriate professional advice, knowing their likely orientation. An inexperienced council serving their first term often feels pressured to go all out. Over time, such actions can often do more harm than good. From our experience, the hefty amounts spent on futile lawsuits could have been better used to enhance the estate's ambience and facilities.

Having said that, council members must be careful not to save money at the expense of the well-being of the estate. It is unwise to keep appointing different MAs in favour of the cheapest one, sacrificing the familiarity of the estate gained by the previous MA. Saving a few hundred dollars each month might look like a lot, but it is a negligible savings in the context of a budget for larger estates.

Similarly, experience tells us that it is often a short-sighted move to be stingy about the condominium manager's salary, when he has the right skills to contribute to the estate. The returns of managing your estate effectively can outweigh the few hundred dollars saved per year many times over.

Council members would also do well by working with better established MAs who, by virtue of their portfolio size, are in the position to negotiate for better value through initiatives such as contractor accreditation, bulk purchase and so on. For example, Knight Frank Estate Management (KFEM) has in place panels of carefully selected and accredited contractors, subject to reassessment every year. Such value-added support for the council could help prevent instances where certain contractors are awarded jobs by certain council members 'by default', even if their pricing and workmanship are not necessarily above par.

Sinking fund for en bloc estates
We would caution owners not to stop maintaining their sinking fund unless they are certain that their collective sales is likely to go through and that there are sufficient funds for essential works before vacating the estate.
Even for estates which have just secured a collective sale, money from the sinking fund should still be spent on repair works pertaining to the safety, health and convenience of the residents, where necessary.

As there are usually one to two more years to go before the estate would be vacated, it would be unwise to ignore issues such as loose window grilles, faulty water tanks etc, in the hope that nothing major will happen before the developer takes over. On the other hand, it would certainly be pointless to spend money on further enhancing the estate aesthetically.

Under current rules, owners should not expect to collect back the sinking fund, though there have been some instances of developers redistributing the remaining sinking fund to subsidiary proprietors according to their share value. However, that would depend on the agreement between the buyers and the sellers before the closure of the deal. However, amendments to the law, which have yet to come into effect, would have money from the sinking fund returned to owners.