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Can incentives encourage GCC affordable housing?

The GCC’s private sector developers can drive an upsurge in affordable home construction, but are they being motivated to do so?

ANALYSIS, Projects, Affordable housing, Gcc, GCC region, Housing

Days before the end of 2015, Danube Properties, the real estate arm of Dubai-based Danube Group, launched the 452-unit strong Ritz project – its third affordable development in the Emirate. Based at Al Furjan, near the 1bn Battuta mall, all the Ritz project’s studio, one-, and two-bedroom units will be fully furnished. The design for the project’s architecture and interiors came from Danube’s in-house team.

The rooms feature a bed, which can be tucked into the wall during the day, thus creating a larger living room space. It can also be lowered to create a bedroom.

Speaking at the project’s launch, Rizwan Sajan, founder and chairman of Danube Group, commented: “With property prices coming down to a more realistic level, we see the possibility of a large-scale migration to home ownership from rental homes. Consumers are looking for more with less.”

Danube Properties’ Dubai strategy appears to have been founded in recognition of that value-added demand, and for good reason. In September 2015, the Emirate was ranked as the worst hit in terms of real estate prices around the world. Knight Frank’s Global House Price Index for Q2 2015 placed Dubai last on a list of residential sector performances, comprising 56 cities from around the world. Residential prices fell by 6.4% in the first six months of 2015, and by 2.8% between Q1 and Q2 2015, the report found.

Furthermore, as consultancy JLL said in its January 2016 report, The UAE Real Estate Market 2015: A Year In Review, the country’s property market is expected to continue to soften as the appreciating US dollar hampers purchasing power and tourism revenues.

Nevertheless, Sajan is confident about the potential of affordable real estate in Dubai. Speaking to Construction Week, he says the non-luxury property segment will soon grow in the city.

“Without a doubt, 2015 was the year of affordable housing and convenient payment plans,” he explains.

“We started the properties division with a clear focus on affordable housing segment. We identified the gap that existed in the market, which was too focused on luxury and super-luxury segments while the mid-income population was left untouched.”

Sajan is undeterred by the current upheaval in global crude values, and says oil prices will not impact the “simple supply and demand situation”. He contends that a reduction in the number of development launches is unlikely during the coming year.

Two crucial questions must be answered in order to understand this seemingly straightforward equation: what is affordable housing, and how many such homes does the UAE – and the wider GCC – really need?

Paul Philipp Hermann, co-founder and managing director of property portal Lamudi Global, volunteers an explanation. Speaking to Construction Week, Hermann says that whilst the definition of affordable homes is similar across all GCC countries, differences emerge when these markets are examined within a global context.

“We would define affordable projects as those that are accessible to the middle 40%-to-60% band of households, which would spend around 30% of their gross income on housing,” Hermann says.

“GCC countries have higher standards than typical affordable houses elsewhere, in terms of size, number of rooms, house amenities, and so on. The main difference between countries is the nationality of property hunters.

“For example, in the UAE, the main focus is on expatriate families looking for homes. In Saudi Arabia, it is nationals who are more likely to be house hunting.

“In Qatar, residential demand varies by nationality. Over 60% of Qatari nationals live in villas, while the majority of foreigners (over 50%) live in apartments.”

Naturally, these are important considerations for developers eyeing their next investment. As Hermann explains, firms must research demographic trends within the local area, including income, family size, nationality, gender, and generation. They must also account for geographic factors and market trends to identify their optimum target market.

“Initiating dialogue with public institutions is also important when identifying target markets,” he continues.

“For example, identifying that the middle-class monthly income in the UAE varies between $2,700 (AED9,916) and $8,200 (AED30,118), and that around 39% of the population is in this income bracket, allows developers to define the price elasticity of the market. Bearing that in mind, an affordable house price [in the UAE] is around $215,000 (AED789,684).

“In Saudi Arabia, middle-class incomes range between $1,600 (SAR6,006) and $5,400 (SAR20,272). It is estimated that around 62% of the Saudi population falls into this bracket. As a result, an affordable house in Saudi would be $120,000 (SAR450,498),” Hermann adds.

Cluttons’ Abu Dhabi 2015/16 Winter Property Market Snapshot, released in December 2015, noted a 34% increase in average house prices since 2010. Edward Carnegy, head of Cluttons Abu Dhabi, said the UAE capital is “clearly” short of affordable neighbourhoods.

“This issue of affordability has been building for some time, initially following the introduction of the federal mortgage cap and doubling of property registration fees,” Carnegy continued.

“These had the desired effect of cooling the market, but now many people are forced to pay premium rents, limiting their ability to become owner occupiers in the long term. This presents a major opportunity for developers to deliver housing that is ‘genuinely affordable’, while still of a high quality, with the potential to offer flexible access to home ownership through models such as rent-to-own.”

The dearth of affordable homes and a reduction in overseas allowances since the financial crisis have started to push out expats on middle incomes to less glamorous areas of Dubai, far from the office. Some are even relocating to neighbouring Emirate, Sharjah.

In September 2015, JLL research found that expats in Dubai, who bring in household incomes of $2,720-$8,170 (AED10,000-30,000) per month, can afford annual rents of $19,600 (AED72,000).

At the time, JLL said this figure was “a fraction of home values in expatriate neighbourhoods Dubai Marina and Downtown, for instance, where two-bedroom apartments sell for up to $1m (AED4m)”, according to Reuters.

Employers in the Emirate may also have to re-evaluate remuneration packages if they want to retain the same calibre of talent, Dana Salbak, a research manager at JLL, said.

“Employers will have to increase wages or housing allowances to attract and retain staff.”

It may not be an incorrect proposition to suggest the UAE, much like the GCC, would benefit from the development of a strategy combining housing and socioeconomic factors.

Saudi Arabia’s 2.5% levy on white land, while primarily viewed as an additional revenue stream for the government, is also aimed at encouraging private-sector development in the Kingdom, where three-million homes will be required by 2025.

Such initiatives are even more critical in Qatar, where a shortage of inexpensive homes has driven residents to openly flout housing laws. Limited-income expatriate families and single workers are increasingly becoming ‘tenants of sub-tenants’ by renting rooms in illegally partitioned villas and apartments, despite crackdowns by authorities.

Whilst accommodation shortages are an issue, some ‘landlords’ appear to be using the situation to make money. The Peninsula said that a supervisor of some illegally partitioned villas and apartments admitted his aim was to make more money, especially as the tenants do not insist on having a contract. In the absence of a contract, rent increases are easier to implement.

Qatar’s situation also highlights the need for pertinent legislation, which would help to improve prospects for affordable development in the region. Cluttons’ December report stated that new legislation planned around fixed quotas for affordable homes – which may help to ease access to the property market – has been drafted in the UAE capital, but further details are yet to emerge. Lamudi’s Hermann emphasises the need for laws that alter the contemporary dynamics of inexpensive housing.

“Land is expensive, often in the hands of powerful family businesses, and there are no regulations on incentives to build or sell. This is also a major factor for developers, as there seems to be a lack of interest in building affordable housing,” he says.

“There are also difficulties when it comes to securing mortgage financing, and of course this influences the buying power of the middle class. GCC governments are currently building properties that will be aimed at lower-middle and middle-class buyers.

“Making affordable housing projects successful depends on affordability criteria. It requires governments to support developers in key areas such as serviced land, home investment partnership funds, and favourable developer financing options, such as active incentives. Many mega-housing projects are only fulfilling short-term goals, he continues.

“They provide physical housing, but fail to address the big picture. Without sustainability and the establishment of a community, these apartments do not retain their value for long. Furthermore, such projects do not make much of an impact upon the broader socioeconomic issues of the region,” adds Hermann.

Socioeconomics did, however, play a role in Danube’s decision to develop its Dreamz, Glitz, and Ritz projects. Broadly speaking, Sajan asserts that anticipated population growth in the UAE represents a significant driver for his firm’s affordable housing activities.

“I am expecting population growth of at least 1.5-million people in the next five years, before Dubai Expo 2020, of which I would say 40% (about 600,000) will be white-collar workers,” he explains.

“To cater to that number, you require 150,000 new homes, [based on an] average family of four people. So you’re talking about delivering 30,000 apartments per year in the next five years. The planned delivery of property is not more than 18,000 to 20,000 homes, leaving a sizeable deficit in supply,” Sajan adds.

Such figures have often been disputed, and indeed, it is a monumental challenge to predict the future of affordable housing in a real estate landscape as crowded and complex as the GCC’s. However, as regional governments revisit their investments in a phase of lean financing, developers too could reap returns by reprioritising their target demographics.

EmiratesGBC: a sustainable view

“Affordable housing is generally defined as accommodation with special focus on low- and middle-class incomes, which provides all necessary community services,” according to Saeed Alabbar, chairman of Emirates Green Building Council.

“However, sustainable, affordable housing ensures that the above relates to and complies with existing green buildings standards and regulations, and takes into consideration the ecological footprint of the project while guaranteeing its financial and technical feasibility.

“The definition of ‘affordable housing’ in the Middle East varies from one country to another, based on the economic and political context, the state of the real estate market and the actual need of the population,” he adds.

“A solution suggested in one country, such as regulations, banking solutions or incentives, might not apply in other markets throughout the region. Each country has a different economic context too, based on its GDP and investments,” Alabbar tells Construction Week.

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