Back to basics

A meltdown in the Gulf’s real estate sector is pushing developers to consider building cheaper accommodation.
Back to basics
In the wake of the real estate crash, middle-income housing offers better returns to developers.
By Tom Arnold
Thu 11 Jun 2009 04:00 AM

A meltdown in the Gulf’s real estate sector is pushing developers to consider building cheaper accommodation — and meeting the region’s shortfall in affordable housing stock. Tom Arnold reports.

A silver lining of a slump in the gulf’s premium real estate market has been a sharper focus on addressing the pressing shortage of affordable housing. Signs are emerging that developers are gradually switching their attention from high-end residential developments, featuring high rise luxury penthouses or beachside villas, to projects with smaller, less expensive dwellings.

The property sector slowdown has exposed an oversupply of premium real estate developments, priced out of the financial reach of many ordinary GCC nationals and expatriates.

Conversely, the need for middle to low-income housing has never been greater.

“At the moment new projects tend to swing between luxury housing and worker accommodation, and there’s nothing in between,” says Kevin Leahy, director of Broadway Malyan Architects, which has an office in Abu Dhabi.

“It’s a two-tier society and there’s a huge amount to do.”

One million homes are required over the next five years in Saudi Arabia, the Gulf’s largest country and biggest economy, to meet a growing population that is likely to double to 50 million in 28 years, according to a report released in May.

Meanwhile, the lack of cheap accommodation in Abu Dhabi has been acknowledged by John Bullough, CEO of Aldar Properties, the emirate’s largest property developer, which recently launched a $2.6bn housing project specifically for middle-income UAE nationals.

“There’s an awful lot of high-end residential property and an undersupply of affordable [property], so it’s going to be a question of matching that,” he told a conference in Abu Dhabi three weeks ago.

Until this year, Aldar and other developers were clamouring to outdo each other by unveiling a glut of luxury residential real estate projects. In return, developers were assured healthy profits thanks to six years of soaring sale and rental prices.

At their peak, prices in Dubai, where the market was most highly leveraged, reached an eye-watering $2,858 per square foot for a luxury Armani residence at the Burj Dubai last year. In Abu Dhabi, rental prices shot up between 80 percent and 160 percent in the 12 months until December 2008, according to property consultants Asteco.

That was until the real estate sector hit the buffers at the turn of the year after the full force of the global financial crisis rocked the Gulf. A slide in property prices, combined with saturation in demand for top-end property and a new era of tighter lending by banks, means developers are starting to turn their attention to more realistic developments.

“The disappearance of easy credit was the one influence strong enough to make the overly exuberant developers reconsider their positions on which projects are worth doing,” says Ivar Krasinski, design director and principal in the Dubai office of US architect Burt Hill.

At the same time, government planners pushing for progress in addressing a shortfall in cheap accommodation are spurring developers into action.

Aldar’s Al Falah project will provide around 5,000 homes for middle-income UAE families, as part of an Abu Dhabi government housing initiative. Launched under the government’s Abu Dhabi 2030 directive, the masterplanned community will feature five villages with their own schools and mosques surrounding the town centre, which will act as the focal point of the development, accommodating civic buildings, a retail mall and hospital.

“It’s all about prioritisation and focus — focus on delivering the projects that Abu Dhabi needs,” says Bullough. “We and a number of other property developers in Abu Dhabi are focusing increasingly on working with the government on projects. This is very important in underpinning and sustaining the health of the property market in Abu Dhabi going forward.”Abu Dhabi’s second-largest developer, Sorouh Real Estate, revealed in January that it was planning an affordable housing project in the emirate. And Al Qudra Real Estate has already announced plans to adjust its portfolio to cater for the middle-income segment of the market as well as high-end investors.

In Dubai, Arabtec Construction has been contracted by the government’s Mohammed Bin Rashid Housing Establishment to build 2,290 villas across the emirate. The $817m scheme is aimed at supplying affordable housing units for UAE nationals.

Burt Hill is working on several masterplans for projects in the region, Krasinski says, branded under the concept of ‘housing for all’.

“This notion provides for a range of unit sizes within a given development, allowing for the provision of accommodation for a variety of income levels,” says Krasinski. “Developers are becoming more open to this approach, because it allows their products to be more diversified.”

Bahraini developer Diyar Al Muharraq is expected to launch its first phase of affordable housing later this year, as part of its mixed-use development on the coast of Muharraq in Bahrain. A large part of the development will comprise of housing for the middle-income demographic.

However, a population expanding at 2.5 percent each year and a current undersupply of housing means that the most urgent requirement for cheap accommodation in the Gulf is in the Kingdom of Saudi Arabia. Some 70 percent of Saudi nationals are under the age of 30, and just 35 percent of families are home owners, according to the research by UK-based The Architect’s Journal.

Figures from the Saudi government’s housing forecast for this year show demand for apartments is double the expected demand for villas. In Riyadh, 16,170 extra apartments, or self-contained apartments within a villa, are required in 2009, in addition to 8,396 villas.

In response to this surging demand, work is progressing on a number of large property developments in the Kingdom. Dubai developer Limitless is building the $12bn Al Wasl project north of Riyadh, which will accommodate 200,000 people in 55,000 homes, in addition to providing offices, mosques and health and educational facilities and more than 300 hectares of open space. And the UAE’s Emaar Properties is developing the vast $100bn King Abdullah Economic City (KAEC), which will provide 260,000 apartments and 56,000 villas upon its completion in 2025.

“In the region we see a broader trend of what we call real homes for real people — focusing on demand, focusing back on accommodation that people need to run an economy,” Blair Hagkull, managing director for the MENA region at Jones Lang LaSalle, told a conference in Abu Dhabi three weeks ago.

The industry veteran defines affordable housing as accommodation which costs around 30 to 35 percent of an individual’s monthly income.

“In most parts of the Gulf in the last number of years that percentage was higher,” he says. “In periods of high demand, modest is average — what’s been sold is luxurious. So what we’re starting to see with prices going down is that affordability happens.”

So what happens to the affordable accommodation segment if demand in the GCC for high-end real estate returns, forcing prices upwards again?

Burt Hill’s Krasinski believes revisiting the “top-heavy patterns of the 2002 to 2008 period” is not feasible.

“On the other hand, if we are talking about diversification, then yes, there will always be some room for high-end and premium level products,” he continues. “The central question is one of balance. When deciding on the positioning of any development it is important to take market studies seriously before bolting for the peak.”

He points out that most architects are happy to engage in affordable housing projects and accept the lower margins that the work involves.

“If the market finally moves in the direction of affordability after several years of ignoring the issue, rest assured the architects will follow,” he adds.

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