High land prices crimp plans for low-cost homes

by Claire Ferris-Lay Wednesday, 14 December 2011

The GCC's rising land prices are hurting government drives to tackle chronic affordable housing shortfalls and deterring developers from building low-cost homes, real estate analysts said.

Gulf countries are facing a severe shortage of low-cost housing for their growing populations. But the high cost of plots coupled with the lack of utilities and infrastructure in areas ringfenced for social housing have made it financially impractical for developers to cover their costs.

"The land costs are themselves are a major deterrent and have pushed up the pricing to levels where developers can't make any money out of developing affordable housing," said Craig Plumb, head of research for the MENA region at Jones Lang LaSalle.

"There are a number of constraints and land is clearly one of those but so is the cost of servicing the land. A lot of the sites... tend to be remote from the established urban area so servicing them with power and roads can significantly add to the land cost."

The Middle East and North Africa has an estimated affordable housing shortfall of 3.5 million with nearly half in Egypt, Jones Lang LaSalle said in September.

Saudi Arabia has the largest shortfall in the Gulf of 400,000 homes followed by 40,000 homes in Bahrain, 20,000 in the UAE and 15,000 in Oman, according to property consultant.

The problem is most acute in Saudi Arabia, where less than 40 percent of nationals own homes.

Imad Damrah, country manager at Saudi-based real estate consultancy Colliers, said land in the kingdom is increasing up to 15 percent annually. In some areas of Riyadh, the cost of land constitutes 50 percent of the price of a villa, according to NCB Capital.

Many developers have been forced to utilise urban land but are then struggling to create sustainable living communities, said Damrah.

"You can go a bit far from the urban areas to avoid the land price issue but the problem is they struggle with building proper communities that match with the needs of this segment."

Several Gulf states have pledged to ramp up spending on housing in the wake of the Arab Spring revolutions, in a bid to secure quality housing for their growing populations.

Saudi has pledged to spend $130bn on social projects such as building low-cost housing and creating jobs, while King Abdullah in March pledged to spend $67bn on 500,000 new homes.

Bahrain and Egypt are also pushing to meet the shortfall following widespread unrest in the Gulf Arab state and an uprising that topped former Egyptian president Hosni Mubarak in March.

Public private partnerships, like those already trialed in Morocco and Turkey, could help resolve the problem, said Plumb.

"The government is allowing developers to build affordable housing on government land. The developer doesn't pay for the land in cash, they pay for it by providing a certain amount of government housing. I think it's likely to be a model that could be looked at in the GCC."

Emaar Properties, developer of the world's tallest building, in November said it was in talks with several UAE emirates to roll out affordable housing schemes. Chairman Mohamed Alabbar told Arabian Business he sees opportunity for properties in Dubai at a price point of around AED500,000 ($136,000).

"We're talking to a few emirates. I'm going to focus on Dubai to start with," he said. "We are talking about [property] of maybe AED550,000 for someone with an income level of around AED12,000 a month."