The Middle East urgently needs millions of affordable housing units for its growing population. But is the construction industry ready to deploy standardisation and economies of scale to get building? Stuart Matthews writes
There’s one clear consensus about affordable housing: something must be done.
After that, opinions diverge on how best to meet the very clear need for affordable homes that exists in the GCC and the wider Middle East.
The scale of the challenge is significant. While definitions of just what an affordable home is and who it is for vary from one calculation to the next, market sizing estimates show there is major demand waiting to be met by supply. Numbers run by property consultant JLL suggest the size of the market in the UAE is some 820,000 households, in Saudi Arabia with its much larger population this estimate rises to 3.3 million households. Head outside of the GCC to Egypt and the figure rises again to a staggering 12 million households.
By no means are all these households currently homeless, but they do fall into a middle-income bracket for each country and in each of those brackets there are severe and rising shortages of homes available to rent or buy.
The issue is not new. Since the regionally contagious development boom of the mid-2000s the issue of affordable housing for middle-income households has been widely discussed and debated, but rarely dealt with. Depending on where you are, it affects both expatriate families that have made their home in the Gulf and nationals of those same states, to differing degrees. In the UAE it is expats who feel the crunch, there is a balance of demand in Saudi Arabia and in Egypt the vast majority of the market is native to the country. While it appears that to all intents and purposes the scale of the problem has outpaced proposed solutions over the last decade, regional authorities have made some moves to address concerns about where these millions of people will be able to live. But progress has been slow.
“We feel there is a genuine need for more activity in this space and perhaps if enough people say that then we might get something done,” says Craig Plumb, head of research – MENA for JLL.
Plumb says that there is no simple single answer as to why affordable housing continues to be slow to develop. Instead several factors influence the situation with the cost of land and developer strategy being foremost among them.
“Once a developer gets a piece of land they can largely do what they like with it,” says Plumb. “If they can make more money out of building luxury, rather than affordable, then clearly that is what they’re going to do. There’s no incentive for the developers to do social housing.
“The other key piece is the cost of land, which in a free market is driven by activity and obviously there has been a lot of speculation. Therefore people will pay more for land than perhaps it’s worth; certainly more than you could make stack up for an affordable housing project. Experiences overseas have shown that is the case everywhere there is a free market, so in order to create enough of the product the government must take a role, in some way, to subsidise the cost of land.”
The bigger picture
Around the wider region authorities have handled the same issue in different ways. Morocco and Turkey have both put land into developer’s hands free of any upfront charges, instead taking payment as a portion of completed units, which are then made available for social housing. In Saudi Arabia authorities have introduced a tax to tackle the issue of empty land being left undeveloped, while traded by speculators, a practice which Plumb says distorts the market.
Part of the problem is with profitability: affordable housing projects rarely offer developers the same generous margins as luxury property.
Plumb continues: “The margins are fine, but the development industry has been used to very high margins on residential products in the Middle East. Times are changing [the market] is over built in many places and the demand is simply not there, so they will have to change their model and accept a lower return and perhaps make more of a mass-produced product.”
A mass-produced product could suit the growing mass demand. In Abu Dhabi JLL’s research has pointed to an average of 1.9 households occupying every housing unit, whether apartment or villa. This sharing is driven by affordability, with many households having insufficient income to feasibly afford a place of their own. It’s something the Abu Dhabi Urban Planning Council (UPC) is seeking to address through policy and regulation, having recognised that the working professionals who need the affordable housing are the engine room of the emirate’s economy.
“Generally, the types of individuals who require affordable units are teachers, nurses, pharmacists, general office workers and other professions that every city requires,” says Mohamed Al Khadar, executive director of Urban Development and Estidama Sector at the UPC. A key challenge in addressing the issue is the expectation of developers and the stigma sometimes associated with affordable housing.
“In order for Abu Dhabi to remain competitive and attract and retain the best workers in the world, they need to ensure that they can afford to live here,” says Al Khadar. “The development of affordable housing can offer just that.”
Al Khadar points to international examples, such as Singapore, where much housing is affordable and public, developed in conjunction with the government, to keep homes available at rents people can afford. He says that research indicates most governments define that the maximum individuals and families should spend on housing is around 30% of their income, a figure raised to 35% for Abu Dhabi.
“When we put together the Middle Income Rental Housing (MIRH) Policy in 2010 for Abu Dhabi Emirate, most of the developers acknowledged that there was a need for affordable housing and advised us on the development of a sound policy,” he says. “Obviously, there is a time lag between the policy coming into force and the completion of buildings on the ground, but we have already started to see a number of affordable housing projects that have gone through the UPC’s Urban Development Review process and are under development. As the majority of developers see this as a lucrative market, they are now looking to add further affordable housing units into the product mix of their future development pipelines.”
Al Khader believes that doing so can make for profitable business, as part of an overall portfolio, if developers are prepared to be more creative and open minded about how they structure projects.
“Just because a developer doesn’t make a 20% immediate return, it doesn’t mean it can’t be profitable in the long run,” he says. “The UPC is working closely with the developers to introduce a new affordable housing approach in 2016, which will stipulate that 20% of any residential development project above 75,000m2 be allocated for ‘middle income’ housing.”
The joint approach
One path the region may follow to develop the housing it needs could be that of public private partnerships (PPP). PPPs usually consist of some sort of government funding for projects created and managed by the private sector. The prospect of PPPs may be an enticing one, especially for the UAE, where Abu Dhabi has a growing track record of PPP projects and Dubai has just introduced a new law creating the framework for a wide variety of PPP deals to be structured. These could readily include affordable housing developments.
Earlier this year, Dubai Municipality revealed plans to introduce mandatory affordable housing quotas for all new residential developments. Other government-backed incentives that would likely be met with industry approval could include easing and shortening government approval processes, relaxing planning regulations – particularly those around parking requirements – low-cost financing, and concessionary packages that reduce production-related costs. Regardless of what might make progress quicker or help create ideal environments, project activity around the region indicates that some affordable housing is on the way.
“GCC governments are being pressured to take action to address the housing shortages,” says Mibu John, syndicated research director for Ventures Onsite, a project tracking firm. “Bahrain has introduced public private partnership housing developments, while Saudi Arabia has launched an initiative to create more affordable homes for nationals. The Omani government is embarking on a large-scale construction plan to provide affordable, modern residential areas for nationals in the country.”
In Bahrain, affordable housing has become a priority for the government, reflected in the number of new residential projects signed so far in 2015 that are focused towards the supply of social and affordable housing. According to figures from Ventures Onsite about 2,548 affordable housing units are scheduled for completion in 2015, while a further 1,443 units are planned for completion by 2016, with a further 5,241 due in 2017.
“The government inked a $1bn project with property developer Diyar, to purchase social housing units, affordable housing units, and the supporting infrastructure,” says John. “The project is intended to address the acute shortage of low-cost homes in Bahrain, which currently stands at 50,000 units.”
Elsewhere in the GCC the Public Authority of Housing Welfare (PAHW) in Kuwait has committed to the implementation of a roadmap, which stipulates distribution of 12,000 housing units per year over 10 years, starting from March 2015. A decade of implementation may prove a long wait, but offers a steady trickle of work for the contracting community. In Oman a five year development plan that concludes this year sought to implement housing projects with a budget of $1.16bn, some 8% of total planned spending. The country’s ruler Sultan Qaboos ordered a grant of $520m for a housing assistance programme that includes housing loan projects, addressing one of the key challenges facing many middle income households: access to finance.
But for contractors with the right skill set the scale of the projects on offer in Saudi Arabia dwarfs all others. The country’s housing ministry is building some half a million housing units in locations across the country with an earmarked budget of some $66bn being injected into affordable homes.
“[Affordable housing] can be a hugely profitable pursuit as the demand is quite high across the GCC, due to a rapid increase in population,” says John. “The creation of an affordable housing sector in the GCC represents the maturing of the region’s construction market and is creating business opportunities for construction companies.”
Laying foundations
Being ready to take advantage of these opportunities will be the main challenge facing contractors and consultants alike. While the market is potentially huge, addressing it effectively and profitably will mean tackling the industry’s continued addiction to low-cost and labour intensive onsite fabrication. That said, from a contractor’s perspective, affordable housing projects offer solid contracts that are little different to other work they might bid for.
“It’s marginally different,” says Chris Seymour, regional director of markets and development in the Middle East for Arcadis. “The fact is there is usually higher volume there, so from a contracting or consultancy point of view it’s not significantly more or less attractive. While you may lose value in the materials or so forth, you gain in the scale of the development. Contractors would be very willing to build it and consultants would be very willing to design and manage it.
“However, in order to make sure there is some profit margin in the development of affordable homes, is the need to simplify and standardise construction. We need to be thinking more about prefabrication to help lower costs through standardisation, which will also assist the attractiveness of this kind of development.”
The regional industry has traditionally been slow to embrace the benefits of prefabrication, or the factory-scale production of everything from walls and windows, to bathrooms and kitchens. While facilities exist and some companies have made the investment in the infrastructure required to make at least part of a house factory, the market has not always proven big enough to warrant the level of investment required for some prefabrication operations. Industry observers say large international firms have toyed with entry to the market, but have found it hard to drum up the level of interest they required. Seymour believes that the industry needs to develop a more cohesive approach to prefabrication and system building.
“It’s not terribly sophisticated here,” he says. “There are definitely options for it, but it needs to be expanded a great deal. There also needs to be a will to regulate and help the industry find better ways to achieve what’s required. I would say there is now an emerging recognition in this region that it is necessary.”
Seymour believes the key to developing the prefabricated capacity of the industry lies around demand, suggesting there are lessons to be learned from the US and Europe, where system building and prefabrication is well developed.
“What has to happen is there has to be a commitment and consistent demand to make the investment in the plants worthwhile,” he says. “For instance, it’s quite easy to obtain prefabricated bathroom pods, as many hotels use them. That’s because bathrooms are generally the same, so its not difficult to set up a plant to build pods, but taking it a step further is harder because there hasn’t been the volume of middle income housing developed. There has been no consistency in demand for certain configurations of housing. Create that demand and the industry will follow and fill the gap in the market.”
There are some examples starting to lead the way. Contractors Beaver Gulf Group and UNEC have both won contracts this year to work on parts of Dubai-based Nshama’s Town Square project. Aimed squarely at the affordable market, Town Square is set to include 3,000 townhouses and 18,000 apartments, once the 10-year project is complete. The developer has clearly incorporated cost reduction techniques, standardising unit sizes and deploying careful design to optimise internal usage. In addition, Nshama is acting to curtail speculative trading by limiting sales to just one unit per end user. In doing so it is setting out its brand as a clearly end-user focussed option, targeting the large middle income bracket.
While Town Square is just getting started it does demonstrate that developers and contractors can find a business model that allows them to tap into the huge and growing market for affordable homes. The professional skills exist to make it happen too.
“There certainly is a knowledge base built up in the international consultants on how to create high-volume housing at economical rates,” says Seymour. “It is not an unattractive sector at all. I think the consultants and probably a lot of the contracting industry have got quite a bit to offer in this sector.”
All that remains is for the immense pressure being created by demand to build momentum in the construction supply chain. Once a tipping point is reached, the contractors who can standardise and move quickly to take advantages of the economies of scale offered by dense developments will be the ones best placed to benefit from a transition into a house factory.