Over the past five years, the UAE’s two biggest real estate markets, Abu Dhabi and Dubai, have acknowledged the rising housing demand from mid-income white collar workers. While Abu Dhabi has set a quota for affordable housing in new developments, Dubai is yet to implement such a measure. Developers are taking notice, albeit slowly, of the housing requirements of a previously underserved market.

How affordable housing is defined

“The term affordability is often used very loosely in the context of the UAE’s real estate market,” says John Stevens, managing director of real estate firm Asteco. “Although the government announced in 2015 that it allocated over 100 hectares of land for affordable housing, mostly to meet the demand for dwellings for people earning between Dh3,000 and Dh10,000 per month, no real definition exists. Generally, affordable housing refers to housing units that are affordable by that section of society whose income is below the median household income.”

Affordable housing in this context is interchangeable with mid-market housing; low-cost housing for Emiratis is provided for by the government, while low-income labourers are supplied with accommodation by employers.

Still, developers and brokers have quite a broad definition for the price bracket of mid-income housing, and the prices range from Dh350,000 to Dh1.5 million per unit. The term is also used loosely to describe different target groups, e.g. affordable residential projects for both Emiratis and expats are often clubbed together as affordable housing.

Research by JLL shows that the average family in Dubai could afford to spend just under Dh800,000 to purchase a two-bedroom unit, or Dh72,000 per year to rent the same.

“We have defined affordability as being that which can be afforded if a family spends 30 per cent of its combined income on housing based on data available in 2015. With little change in salary levels since this time, these definitions would remain largely the same today,” says Craig Plumb, head of research JLL Middle East and North Africa. “Our estimates suggest that only around 25 per cent of all the new units launched in the Dubai market in recent years have been affordable to the average family.”

David Godchaux, CEO of property broker Core Savills, tells PWthere is ample stock for competitively priced housing below the Dh1.5-million price point. “This surge in supply has resulted in a race to the bottom, with developers competing for the limited pool of buyers, illustrated by aggressive marketing spends and lucrative payment plans,” says Godchaux.

Roger Wilson, managing director of the Dubai studio of US architectural firm Perkins+Will, believes developers will be even more aggressive in pricing their projects to penetrate deeper into the market. “We expect residential developers to increasingly target mid-income investors with one-bedroom units and studios around the Dh500,000 to Dh600,000 mark,” says Wilson.

The target groups

Affordable housing is geared mainly towards those with monthly salaries that make them eligible for a mortgage, thus from around Dh8,000 to Dh15,000 per month. Developers target a younger population group since over 60 per cent of the people in the UAE are now aged 25 to 44 and benefit from the fact that early home ownership, be it investment or owner occupation, has gained popularity. Among this group are also some who can afford to buy the property outright, which has led developers to offer units at a lump sum rather than through a payment or mortgage plan.

“With most blue-collar workers having their housing provided by their employers, the main target is the lower income white-collar workers, many of whom are employed in the services sector, for example as restaurant and hotel staff,” says JLL’s Plumb.

Stevens adds: “In terms of renting, people not housed in staff accommodation tend to live in shared housing, so there is a significant amount of hidden pent-up demand for affordable housing.”

Buyer needs

Some analysts have pointed out that there is sometimes a mismatch between affordable stock and the requirements of prospective homebuyers as developers try to cater to two different market segments: investors mainly prefer studios and one-bedders since smaller sizes generate greater yields, but end users prefer smaller two-bedroom units at similar entry prices.

“Sales and leasing demand for smaller units has always been high given the large percentage of bachelor population and small families and the fact that they provide greater yields for investors,” says Stevens. “This trend is not expected to change in the short to medium term. However, in the past demand was strong for larger apartments and houses, which prompted developers to focus their efforts on these segments. Such units have been or are now being delivered, but unfortunately demand has dried up, so there is a mismatch between current supply and demand.”

Sailesh Israni, CEO of Sun and Sand Developers Group, says that due diligence by a property developer is important in this regard. “When we come to take on a project, our primary research, based on location, infrastructure, demographics and surrounding industries, leads us to profile our end user and decide the product mix,” says Israni. “For instance, if the end-user group is mainly young families, then a two-bedroom unit is most ideal and necessary. If, however, end users are individuals or young couples as per the demographics of a place, then a studio or one-bedder is ideal.”

Compromise on space

Developers have generally reduced the size of units over the past five years to reduce costs and hold on to their margins. Israni describes it more carefully: “Affordable housing definitely economises space, but not necessarily compromises it. It needs innovative planning where maximum usable space is achieved by minimising internal wastage.”

According to Stevens investors have become increasingly sensitive to the price point rather than the price per square foot. “This has resulted in developers reducing unit sizes to protect their margins, which have come under pressure given the discounts and incentives required to entice investors,” he says.

Stock on the market

This is a tough one on which not even industry experts agree. Stevens believes there is enough stock in the market and points to mortgage regulations as a main hurdle. “There certainly is enough stock coming to the market, but the question is, is it accessible to the majority of the population in terms of mortgage eligibility or to people with limited equity?” says Stevens. “Although developers recognised a gap in the market and began offering low down payments, increasingly flexible post-completion payment plans and incentives such as absorbing agent commissions and land department fees, it is debatable how long this is sustainable as their margins are being squeezed.”

Israni agrees there is stock in market, but suggests educating buyers about the value of such properties. “We will come to know how well it is perceived upon delivery. At the end of the day, real end users will have to come forward and see value in such properties,” says Israni. “Also, what is important to note is for families jointly earning between Dh8,000-Dh10,000 annually, there is still a lot that can be done.”

On the other hand, Plumb isn’t convinced there is enough being done in the affordable segment. “Despite the moves by both the Dubai government and the developers, there remains a significant shortage of affordable housing in Dubai, and many residents are still forced to pay a higher proportion of their salary on housing than in other global markets,” says Plumb.

Godchaux says families in the lower-income bracket remain priced out. “End-user demand continues to be unmet with entry points for two-bedroom units still being out of reach for families looking to climb the housing ladder to ownership.”

There has been a definite increase in awareness of the affordable housing issue over the past few years, and more developers are now targeting this market. “The fact that residential prices have declined by around 15 per cent in Dubai over the past two years has eased the problem, but there is no doubt that more is required to be done,” says Plumb.

Meanwhile, Godchaux points out concerns about the quality of affordable homes in the current market. “Average unit value fell by 8 per cent year-on-year. This illustrates the current strategy of developers of bringing lower-entry products to the market, while competing on prices, which brings a significant amount of lower-quality stock to the market,” says Godchaux. “If sales and tenant demand for such products has been overestimated, this may not be sustainable in the long term.”

Challenges in the affordable housing market

1. Limited options for households earning less than Dh10,000.

While not all households should be homeowners, there are few homeownership options for families earning less than Dh10,000, since the supply for this price range is dominated by studios and one-bedroom units. The eagerly anticipated implementation of the low-income housing policy may address this gap.

2. Limited available data.

While undoubtedly Dubai is one of the most transparent real estate markets in the region, more publicly available data about the market is needed to better understand market gaps, including clear definitions of “middle income,” “low income” and “very low income” and data related to household income, cost-burdened households, and Dubai’s older areas.

3. Limited availability of finance.

Financing options for lower-income segments are limited as most banks operate at an income threshold of Dh15,000-Dh20,000. Lower loan-to-value (LTV) and higher registration charges, introduced in 2013, have stabilised the market but have created a hurdle for middle and low-income borrowers. Relaxing LTVs and/or registration fees for first-time homebuyers would address this dilemma.

4. Preserving long-term affordability.

Investors are driven to more affordable units because they can exit from smaller units faster due to the high demand while enjoying attractive yields. Consequently, many middle and low-income housing units are bought in bulk by investors and are subject to speculation. To address this concern, other countries have introduced third parties that are mission oriented to preserve affordability, restricted some affordable housing purchases to end users, or restricted purchases by single investors.

5. From affordable housing to affordable living.

While the cost of housing puts a significant strain on household budgets, there are other costs to consider when choosing a place to live, including the cost of schooling. With rising living costs, we must consider the broader picture of what is “affordable”. As the market matures we need to refine our understanding of affordable housing and more sophisticated approaches to address it.

Source: Cavendish Maxwell

Editor's Note: This article was originally published in Gulf News on Thursday March 29th, 2018 http://bit.ly/GulfNews_AffordableHousing