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Dubai and Affordable Housing

Why Dubai Needs Affordable Housing?

The debate about affordable housing has gained significant attention over the past few months in light of the rising cost of living especially since mid-2014. The World Expo 2020 bid win in November 2013 fed fresh impetus to the already escalating prices, pricing out small investors who had started to warm up to the idea of property ownership in Dubai.

There are a number of factors that make affordable housing a must for economies that have a growing young population. In the recent times, the idea of early home ownership has gained popularity implying that as soon as people enter their 30s they aspire to own a home (investment or owner occupation). Hence, affordability plays a key role to drive a young investor with negligible savings towards ownership. Expensive cities, hence, tend to distract skilled professionals with strong job and income potential elsewhere.

A second factor is absence of low cost housing will mean degradation in living conditions of over 90% of the UAE’s population who fall in the category of low/mid-income group and are unable to keep up with the increased cost of living. High cost of housing, in turn, increases hiring costs for companies thereby affecting their profitability and potential to expand which will negatively impact the UAE’s FDI attractiveness globally.

A third factor is that provision of low cost housing significantly increases the disposable incomes of low/mid-income households as  that will be spent in purchasing goods and services in the local economy. Absence of affordable housing also weakens the competitive advantage of an expat driven economy like the UAE, as a significant proportion of the expat income’s will be diverted towards investments back home rather than the country of residence/employment.

Attracting Developers to Build Affordable Housing

Until mid-2014, project launches in Dubai and Abu Dhabi were highly skewed toward high income groups. However, since then there have been a slew of affordable project launches mainly a result of tapered demand for luxury properties and an evident high demand for affordable housing. Government needs to incentivize affordable housing development by offering developers development incentives like height, density, floor area ratio bonuses and other fee waivers.  For instance, a density bonus allows a developer density increases (number of units per square footage etc) over the maximum density allowed by right on a particular parcel of land.

New York’s inclusionary housing program is a good example. Under the program, affordable housing developers are granted air rights that can be sold off to market rate developers who use these rights to build their buildings taller than originally permitted. This extra cash flow can be invested in fill in the funding issues that affordable projects often struggle with. Such incentive programs are economically more viable than a government intervention through quota restrictions.

 Rental Properties and Affordability Factor

The only way for rental properties to catch up with the affordable factor is through the rent caps that the government has put in place. These rental caps need to be aligned more realistically to the changes/growth in the median household incomes rather than solely on market forces.

Progressive rental schemes can be applied especially in affordable projects wherein the rentals increase gradually as tenant earnings increases until it is equivalent to the market rate rent. Also, development of mixed-income communities where a certain proportion of units are affordable with majority offered at market rates can help in creating sustainable projects. For instance, low income group provides a number of support services to middle and high income groups. By creating societies wherein the reach of both groups to each other is easy, greater efficiencies and cost effectiveness can be achieved.

Any sort of federal rent control to keep housing affordable or below market rate will be detrimental to the city’s property market both in terms of volume and quality. Affordable rental housing schemes can be initiated to target specific income groups, offering rent to own schemes and enabling more people to own properties and hence contribute to the stability of the property market.

Key Questions Regarding Affordability

In the argument regarding affordable housing, some key questions need to be addressed. First is how to sustain the affordability of projects that are launched in the said segment over the long term. Discovery Gardens and International City are two such communities which were launched as non luxury affordable projects yet have ceased to be so as small investors were priced out of the market as sales prices gained momentum in 2013.

Another point that needs attention is defining affordability for the local UAE market and accordingly restricting affordable housing purchases to only those who actually make up the category. Also bulk buys by a single non-corporate investor should be limited. This will ensure that such housing is not misused to speculate or create an artificial supply shortage. This is similar to limited edition premium properties in Dubai that are offered to only select high net worth investors.

Conclusion

Affordable Project launches not enough, Mortgage/Financing Rules need revamp

It’s ironic. When properties were most affordable post recession, financing opportunities had figuratively dried out completely especially for low/mid-income group making home ownership not just distant but an impossible dream, and by the time economy improved and banks became less restrictive, property market had already edged beyond affordability for the said group. The mortgage cap revision and the hike in transaction fee in October 2013 was effective in alleviating the bubble conditions, but on the flip side it made property ownership difficult for long term small investors especially those in the mid-income group.

Let’s look at the mathematics. A person with AED 12,000 monthly salary has been working in the UAE for about 2 years and wishes to buy a 1-Bedroom apartment in Discovery Gardens which averages AED 700,000 at present. Even if he saves 30% of his salary each month for 2 years, he will have accumulated only 40% of the total upfront payment required to buy the property which is considered affordable. Loan installments may work out to be lower than the existing rentals, but it fails to make a case that buying is better than renting since purchase is practically impossible.

Hence, mortgage regulations need a major revamp specifically for affordable housing projects to enable low/mid-income investors to own property in the UAE.

Land Sterling’s Role as Development Advisors

Being a firm with significant regional presence, we have developed an in-depth understanding of the complex issues that affordability housing schemes involve. Since we have a well-established network not just among the developers/contractors but also small and high net worth investors, we are able to comprehend the cost/supply side as well as the demand/price side with technical accuracy and efficiency. As investment advisors we provide an end-to-end solution, from in-depth and detailed market feasibility research and advisory, to devising optimal funding and cost optimization strategies, as well as assistance in property management post project completion.

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