Property Weekly Finance: Dream house made affordable

PWPawan Dhawan

The UAE is famous for its spectacular urbanscape and infrastructure, but now it is gearing up to provide high-quality affordable housing for all its residents. Over the past 18-24 months, policymakers and real estate developers have worked together to provide housing solutions for the middle-income market and going by the interest, this promises to be a long-term trend.

Providing homes aimed at the affordable end of the property market has significant advantages. Not only does it inculcate a sense of security among middle-income groups, it also widens the pool of potential home buyers. Affordable housing is a must for any mature real estate market, as it creates long-term sustainability, with the risks being spread.

As per reports, Dubai Municipality has plans to introduce quotas for developers. If this proposal goes through, developers would have to set aside 15-20 per cent of units as affordable in their new projects. Over the past few months, a number of affordable home projects have been launched by some of the wellk-nown developers for moderate-income buyers.

The UAE government has also been keen to encourage expatriates with modest incomes to invest in the country, instead of repatriating their entire incomes to their home countries.

Housing hurdles
Although not a new concept, affordable housing took a back seat as developers focused entirely on profit maximisation from high-end property during the boom period of the past. The industry has since realised that a balance needs to be maintained between social security and profitability. Low-cost or affordable housing used to be considered financially unviable and if built, construction and maintenance tended to be poor.

The Dubai Municipality defines affordable housing as living space for households whose income is between Dh3,000 and Dh10,000 per month. Dubai has allocated over 100 hectares of land for affordable housing mostly to meet the demand for dwellings for people in the aforementioned salary bracket. Such homes must also be structurally stable, built with standard quality material, adequate internal amenities, high-quality sanitation and lower running costs.

The government is working on a number of solutions to scale down costs. Public-private partnerships will go a long way in lowering the price of land. Developers are being urged to use prefabricated and off-site building methods that bring down expenses. However, in reality, this is not always the case.

Developers are putting the affordability tag on property developments that are low in cost compared with existing high-end developments. These projects actually do not fall under the widely accepted definition of affordable, low-cost housing. But due credit needs to be given to such developers who ventured into offering relatively affordable housing to cater to the mid-market.

Home solutions
The most crucial support, however, can come only from banks, which provide the last-mile connectivity between the buyer and the market. Financing options for the lower-income segment remain limited as currently the majority of financial institutions have a minimum income of Dh15,000 as an eligibility criteria for availing a home finance, which leaves out a small but important segment earning between Dh10,000 and Dh15,000 per month.

However, there are a few institutions such as Noor Bank that provide financing for income levels as low as Dh10,000 per month for select properties. In the post-2008 financial crisis era, the regulators were forced to discipline errant real estate and financing sectors. Finance regulations, introduced in 2013, require expatriate buyers to put down a minimum of 25 per cent as a down payment before securing finance for their first ready property. This means, a buyer has to put down approximately Dh225,000 (including property registration and other charges) to afford a Dh750,000 home, which is a challenge for the mid-income segment.

Innovative tie-ups
Fortunately, efforts by the government to promote affordable housing have started to pay off, with banks now adopting flexible financing norms. A handful of banks and some developers are working in tandem to offer solutions through flexible home finance products and financing for under-construction projects.

Noor Bank, for example, has tied up with developers to make inroads into this growing segment. The bank offers flexible terms, longer payment tenure and pays attention to individual client’s financial capacity.

However, homebuyers should always be cautious. They should not choose a property which is valued at more than five times their annual salary, neither should they spend more than 30-40 per cent of their income paying equal monthly instalments on their home finance.

Long-term trend
Although the affordable housing sector in Dubai is in for the long haul, it is still in its infancy, and the UAE has a long way to go before homes become truly affordable for mid- and lower-income sections. For mid-income residents, it is still quite a challenge to buy property in Dubai, but strong legislation, combined with safe and flexible bank financing terms can ensure that our social welfare aim is not just served, but served well. It’s a work in progress and we are not far away from this aim being realised.

Source: Pawan Dhawan, Special to Property Weekly
Head of Home Finance at Noor Bank

Al Nisr Publishing accepts no liability for the views or opinions expressed in this column, or for the consequences of any actions taken on the basis of the information provided.


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