Affordable housing in rocky terrain?

While the flight to affordability continues with strong demand from low- to mid-income households, the segment has its share of problemsImage Credit: Courtesy of GGICO

This year, two major news stories have dominated the UAE’s property sector - affordable housing and the slowdown of the market.

On the face of it, the latter is a fly in the affordable ointment, with sluggish sales disrupting the segment before it’s even gotten going. Property sales in the first half of the year were down a whopping 69 per cent on the previous year, dropping to just 7,400 from 23,800 in 2014.

However, many say this is a cause for celebration as the Dubai property market is showing signs of maturing while it goes through its second cycle. Moreover, the strong US dollar has been keeping international investors at bay, giving residents a crack at ownership.

Finding the right buyers

Analysts say the sales cool-down is more likely having an impact on the luxury segment and professional speculators — the people the affordable housing market  intends to keep at bay. Enough pent-up demand exists for affordable housing that UAE developers will continue to build such offerings and buyers will keep purchasing, says Erik Volkers, Senior Research Consultant with property advisory CBRE Middle East.

“We expect to see the flight to affordability continuing with strong demand from low- to mid-income households. This will drive more and more developers into the affordable market.” GGICO Properties CEO Andrew Chambers agrees, saying the excesses that happened earlier in Dubai’s property market cannot occur in the current climate - good news for the end users who form the lifeline of sustainable affordable housing. “Flipping’s slowed down, capital growth is down and that’s what it was relying on. Stable capital growth is reducing the incentive to flip.”

There are also better practices among developers who are delivering projects on time and at a more sustainable pace, meaning people can move in not long after signing up for off-plan property. This appeals to end users rather than investors or speculators, says Chambers.

With population growth averaging about 5 per cent in Dubai, Chambers adds that GGICO is confident there will continue to be a market for real estate that appeals to more modest budgets.

“The slowdown is creating a stable market but with the population increasing in real terms, there will still be supply and demand,” he says.

Need fuels demand

GGICO has been at the forefront of the affordable housing segment in Dubai for several years, and Chambers says the company was one of the first to push the popular 30-70 payment plan for off-plan property. “What there has been a shortage of is housing to live and invest in [for people] who are based here on Dh10,000- Dh30,000 packages.”

GGICO has eight affordable housing projects in Dubai Silicon Oasis and Dubai Sports City, with its Topaz Residences’ one-bedroom apartments in Silicon Oasis selling for Dh850,000. Middle-income earners can afford these apartments without incurring big loans, says Chambers.

“What we’ve been selling are one- or two-bedders priced from Dh850,000-Dh1 million. That’s an area which has picked up.”

Chambers, an Australian residing in Dubai for the past 15 years, says the focus was almost exclusively on luxury during the first few years of the emirate’s property  boom. “There was pent-up demand because there’s a lot of wealth in the region and people wanted to be here because it’s safe and has a fairly transparent legal system — the safest place to put money is into bricks and mortar,” he says.

But after years of being overlooked, many developers now realise the strong potential of affordable housing, although deliveries could slow down over the next five years.

Rizwan Sajan, Founder and Chairman of Danube Group, says that despite the summer slowdown, the affordable market has been gaining momentum. “The demand for affordable housing in a growing and sustainable economy supported by a rising population will always remain.”

Danube, which claims to specialise in affordable stock, sold out its Glitz 1 and 2 projects earlier this year, as well as the first two phases of Glitz 3. All are located in Dubai Studio City, and have a combined value of Dh1.2 billion. The Glitz 3 properties start at Dh475,000 for a studio apartment and Danube is expecting renewed interest once spring arrives.

“Because of the unmatched security and quality of life, there continues to be growth in the number of expats calling Dubai their permanent home,” says Sajan. “In such a scenario, renting is not a feasible option; [residents] want to buy their own homes. This is a real population in need of affordable property, leading to consistent growth in demand.”

Right moves

However, the future of this segment depends on the government. Earlier this year, it was revealed that the Dubai Municipality has proposed it be made a necessity that all governmental developers allocate a portion of their projects to affordable housing. Chambers says he is supportive of the initiative.

“Where countries have done this, it’s worked well,” says Chambers, who has lived in eight countries over 40 years, and points to Singapore as a model that Dubai could follow. “What they’ve been able to do has kept people there.”

Sajan also welcomes the move, and says it’s a boon to the economy and the real  state sector. “This will act as catalyst in motivating expats to make Dubai their home and increasing their investment in the local economy.”

However, Volkers says the government will need to intervene to keep the pipeline of affordable housing going. “Demand for low-cost housing is far out-stripping supply, with significant population growth exceeding 6.5 per cent per year over the past five years in the low- to mid-end bracket.”

He says households comprising about a fifth of the population earn between Dh5,000 and Dh15,000. Assuming those earning anything less have accommodation taken care of, the question of what is truly affordable is a relevant one.

The Dubai Government has classified affordable housing as targeted at those earning from Dh3,000-Dh12,000 a month. This is vastly different from GGICO’s target group of Dh10,000-Dh30,000, as well as that of Nshama, the developer of  Town Square. Units the latter launched in March started from Dh350,000, with CEO Fred Durie saying they were built with households earning from Dh20,000-Dh35,000 a month in mind.

That means those earning less are left to long-term renting. Also, properties sold at affordable prices don’t necessarily make for affordable rental homes, Volkers says. “The affordable housing issue will not be solved by simply selling cheaper freehold properties.

“There is a requirement to develop and deliver suitable leasehold options for those who cannot afford the high deposit rates [laid down] in the UAE Central Bank’s mortgage rules.”

This has been partially addressed by a municipality scheme to build 50,000 units in Al Quoz. But it can only make a dent.

Faisal Durrani, Head of Research at Cluttons, says most people in Dubai are still spending about half of their incomes on rent. The average rate of a mid-range apartment in Dubai is around Dh112,000, according to Cluttons figures, while the projected average household annual income for expats is Dh199,000. “This suggests that rents really aren’t very affordable at the moment,” says Durrani.

While this is better than the pre-downturn peak, where people had to set aside 65-70 per cent of their income, “having to set aside anywhere in the region of half your income towards rent is quite unsustainable”, Durrani adds.

Volkers suggests authorities could set up a dedicated housing body to manage rental properties specifically for those in the low- to midincome group. “This would help to ensure that rates remain in line with realistic affordability levels.”

Durrani highlights some British schemes that Dubai could look at, such as renting out properties at 70-80 per cent of market value to low-income earners or a rentto-own scheme where a percentage of rent is retained as a stake in a property annually.

A raft of threats

High land values are another area that would require government intervention. In most areas of the emirate, Volkers says affordable housing “may not be possible without government support”, particularly with the current slump in transactions yielding lower profits.

“One of the issues for developers is the profitability of an affordable housing project,” Volkers says, adding that the government could grant land in locations suitable for such housing. It could also look at setting up a dedicated housing body or expanding the role of existing government developers to oversee this move.

The threat from speculators also remains despite flagging land transactions, Volkers says. “In a market that is so often driven by speculation, the main challenge is ensuring that these properties actually remain affordable. Despite a general slowdown in activity and market sentiment, there is still widespread evidence of investor speculation, with investors buying in bulk at rates considered affordable but with a view to flip them in the future for profit.”

As Dubai seeks to navigate difficult waters in an attempt to please investors and residents, Durrani says there are other considerations like location. Lessons should be learned from places such as London, where mandatory affordable housing schemes have resulted in impoverished ghettoised locations where the low-income earners cluster.

“It would be unfortunate to see that happening in Dubai,” he says. Affordable developments should come up across Dubai, “not just in a location that is  inaccessible and cut off from the rest of the city. It would be good to see [affordable areas] properly integrated into the fabric of the city.”

But if any city can strike the right balance, Durrani is confident it’s Dubai. “It is an innovative place and tends to lead the pack in dealing with these [kinds of] problems. They need to be creative in addressing the affordable housing issue.”

Source: Amanda Fisher, Special to PW


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