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House proud

CW investigates why the GCC is looking forward to housing projects

The economic boom in the GCC had widened the gap between supply and demand for affordable housing.
The economic boom in the GCC had widened the gap between supply and demand for affordable housing.

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At a time when the GCC construction sector is going crazy for government-led infrastructure projects, there has never been a more appropriate occasion to address the widespread deficiency of affordable housing.

Over the years, growing populations and a desire among residents to relocate to more suburban locations has driven high demand for new housing, and at the same time increased the need for governments to improve the standard of living and provide more affordable, quality housing to those on middle- and low-incomes.

As a result, as we enter this fragile, post-recession period, more and more governments across the region are looking to splash out on affordable-housing projects in the coming years.

“There is a need, particularly in places like Bahrain, Kuwait and Saudi, not only to build new stock to house expanding populations but also to replace old stock,” says Standard Chartered Bank’s director and head of commercial real estate, Middle East, Fergal Harris, who is acting as financial advisor to the Bahraini government.

“Certainly in cities like Manama in Bahrain, for example, there is a need to relocate people from prime city centre locations to more suburban areas and to improve the standard of living.”

According to Meinhardt’s divisional director, Grant Bowery, however, the factors driving demand for affordable housing vary widely from country to country. “In countries such as Saudi Arabia, and similarly in Egypt, the demographics of the countries are changing rapidly,” he says.

“The population is growing quickly, becoming increasingly youthful and swiftly urbanising. This is causing supply to be outstripped by demand.

“In other areas, such as Oman, the increasing economic growth is fuelling the need for expatriate labour, which by its nature is not market driven. Finally, in well developed markets such as the UAE, the focus has been more on high-end market residential units, leaving the affordable housing markets less well supplied.”

As is the case with hospitals and schools, it seems that governments are finally making a concerted effort to create longer term solutions.

In Bahrain, for example, a four-day Affordable Housing Summit was held in Manama earlier this year and saw government officials and housing experts come together to discuss the legislative development frameworks related to affordable housing schemes, as well as the various challenges facing the industry.

Further, there are at least two projects due to be announced in the fourth quarter of this year in the country. The question is:
why now?

“Up until 2008, the economic boom in the GCC region resulted in high inflation and caused the cost of housing to increase substantially. This created a huge gap between supply and demand for those on low and middle incomes,” explains Sakana Holistic Housing Solutions CEO R Lakshmanan.

“Also, as the price of land and construction materials shot up,” he says, “developers continued to pursue projects at the luxurious end of the market, as these were more profitable for them. Post-recession, when there is oversupply of luxury projects, developers are forced to look at the affordable segment where there is real demand.”

It would seem then that affordable housing is climbing the priority ladder. Last month, management consultancy firm AT Kearney suggested that with an annual shortage of 150,000 residential units in Saudi Arabia and 280,000 in Egypt, affordable housing was indeed “the new frontier for the MENA real estate industry”, worth as much as US $125 million annually.

But the problem with affordable housing is that in some ways the sector is as volatile as it is young. Not only are these kinds of projects unlikely to yield the profit margins of those at the luxury end of the market, but according to industry experts, they will usually require developers and contractors to revise their existing business models and master plans.

“To succeed in the middle-income markets in the Gulf region, government agencies and developers must shift their business models and views, particularly on land prices and profitability,” AT Kearney Middle East’s principal in real estate practice said in a public statement.

“In terms of profitability,” he added, “investors and shareholders must take a more realistic approach to market demand. Given that there are millions of people to satisfy, volume is the goal; developers of adequately managed properties should plan on project returns in the 10% range, not the 20-plus margins of high end projects.”

Bowery admits that the margins on affordable housing projects are generally much lower, but the scale tends to be larger. “This can be attractive for contracting organisations, especially if they are able to influence the manner of construction by utilising their experience in efficiency.”

For developers also, he believes that affordable housing projects are becoming much more attractive. “This is because now we are seeing more governmental support, an increase in home financing solutions and new housing laws permitting development to proceed, as well as new business models whereby private finance is attracted in support of public finance.”

An emerging trend among infrastructure projects, these “new business models” are clearly proving popular among government-led developments. Unlike the more traditional client-developer arrangements, affordable housing developments are among a wave of new infrastructure projects relying on public-private partnerships (PPP).

According to Harris, not only are PPPs important in this sector to ensure there is sufficient expertise for a project, but also to free up government capital as more projects take off in the region.

“The main reason is so that the government can outsource the professional management of large scale residential projects to the private sector. The truth is that ministries of housing cannot sufficiently handle these projects, because they don’t have the in-house expertise. Outsourcing therefore puts a greater discipline around the physical construction, in terms of quality, delivery, general management, and we think it’s good for the government to outsource rather than create massive internal housing departments.

“The other reason is that whilst the industry is currently very young, over a longer period of time, as governments do more and more of these projects, they can tie up quite a lot of government capital expenditure. If the government is supporting the social aspects of these developments, then it should be attractive to private capital,” he added.

Last month the Bahraini government announced a private partnership for a 4,500-unit project being developed across three sites in the north of Bahrain.

According to the project’s technical advisor, Mott MacDonald, due to the nature and scale of the project, each consortium that tendered for work had to be made up of 10 to 20 companies, including a developer, several contractors, a facilities management firm that could potentially manage the facility for 25 years, funders such as banks, and the design team, so architects and quantity surveyors.

“The government started the proceedings for this development towards of the middle of 2009, but they’re at a critical stage of the tendering process at the moment,” says Mott MacDonald’s divisional director John Seed. “Three consortiums have prequalified for the main contract, and the government is likely to announce the winner this October.”

No project is without its challenges, even a basic housing development. The source of most difficulties, the experts say, is the size of projects, not to mention their roll-out.

Bowery explains: “Affordable housing projects do indeed have their own very specific challenges when it comes to design and construction.

Firstly, the fact that they tend to be large scale and relatively dense creates huge infrastructure requirements in terms of utilities supplies of water and electricity.

In addition, they have the potential to create large volumes of refuse and waste water, and require traffic and transportation impact solutions. All of these challenges need to be dealt with at a high level and require governmental and planning influence.”

There are also difficulties related to affordability and logistics. In terms of affordability, Bowery makes clear that in order for schemes to be successfully delivered, they need to be viable.

“This doesn’t just mean desirable, but affordable to their target market. Part of the solution lies in establishing financial assistance to the end users through an affordable finance arrangement, but the other part depends on designing the developments so as to cut waste and create lean, efficient buildings which are inexpensive to build on a mass scale.”

To achieve this, he suggests strategies such as prefabrication, creating economies of scale, or using innovative building technologies to attain the desired specification at lower cost. Creating designs that can reduce the build cycle times and ensure quick delivery, is also advisable.

With regards to logistics, he believes the real challenge revolves around keeping as many production faces available for work as possible, while maintaining the flow of materials and labour, which in the end requires “a detailed knowledge and understanding of construction logistics”.

There are also difficulties related to urban design. According to Bowery, these communities need to be sustainable, not just from an environmental perspective but from the perspective of being attractive, pleasant places to live.

Thus, they require “long-term, quality, urban design, which looks at amenities and transportation solutions, landscaping and environment quality, as well as how the community will interact with itself over the long term”.

By comparison, projects at the high end of the market are often far less challenging, simply because they are smaller and quality is easier to control.

As an example, Bowery explains how a small mistake, such as ordering the wrong ironmongery, is likely to have a much bigger effect on a large scale project when you are ordering 10,000 doors, than it would on a small-scale development, such as a luxury villa.

On larger projects, it is therefore much harder to cover every single workface and ensure that quality control is in place. “From an engineering perspective, these schemes are attractive partly due to the challenges they create,” he says.

This being the case, those contractors looking for new business are keen to know what it takes to get noticed in this emerging market. “Anybody can bid for these projects,” says Harris.

“But the first thing developers will go and look for is someone with expertise of scale, which is based in-country. Contracting and developing is not a simple matter of brick on brick, there are local laws, local regulations and local permits required, and if you don’t understand them and you don’t plan accordingly, your whole project can come completely undone and defeat the purpose of doing a PPP in the first place.”

He adds: “The good thing about these projects is that you don’t need the specialist skills required to build a hospital or a school. If you go and tender for a hospital or school project and you haven’t got a particularly strong track record of these kinds of projects, that’s going to put you at a disadvantage.”

Thus, for those with offices in high-demand regions, there may be more infrastructure projects available to them than they
originally thought.

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