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Despite the good work being done by the Dubai Government to cater to mid- and low-income earners in the emirate, much remains to be done by the private sector in meeting the housing needs of this segment, according to a research paper from Core, UAE associate of Savills.
“The current new supply is catering largely to the middle-income segment and affordable living is yet out of reach for the lower income members of society, thus pushing occupiers to rent at penalising high yields instead of transitioning to own,” said David Godchaux, CEO of Core, UAE associate of Savills.
Impact of new regulation
The proposed law by Dubai Municipality for mandatory 15-20 per cent affordable housing in future residential developments, when implemented, may provide impetus to this segment, along with public private partnerships (PPP), which may help negate high land acquisition costs.
However, the report points out that finance options for the lower-income segment are limited as banks operate at an income threshold of Dh15,000-Dh20,000 per month for granting mortgages. Certain banks provide mortgages for income levels as low as Dh10,000 per month for select properties, but only with strict eligibility criteria.
“We are witnessing a surge of off-plan properties, which are being marketed as affordable options,” says Godchaux. “Some of these projects have tried to achieve the intent through innovative construction, marketing strategies and flexible payment plans, yet many don’t fit the economics of a lower income end user. Buyers would be subject to higher down payment in the case of an off-plan property, in addition to their current rent. With delayed project deliveries, they cannot risk this scenario and hence continue to rent.”
In terms of investing in affordable housing, while gross rental yields may reflect higher returns in comparison to prime residential in most cities, this effect is particularly strong in Dubai. “Nevertheless, historic trends in major global cities tend to show that the short-term high level of yields offered by the affordable segment do not compensate the lower overall total return achieved by this investment segment in comparison to the prime market in the long term.”
There are also issues surrounding construction costs and the extreme heat of Dubai. The salt and sand content in the air will also affect the depreciation speed and cost of maintenance even in prime buildings.
“Lower level of total returns in affordable housing over time are typically due to higher recurring costs in the life cycle of this type of development in contrast to prime residential,” said Godchaux. “Across the world, to build affordable housing, builders largely resort to cheaper materials and specifications to reduce their construction costs leading to lower quality of construction. This, in due course, translates to faster depreciation of the building and higher maintenance costs. Investors and occupiers [by mechanism of higher rents] are generally not favourable to spending more on maintenance for affordable properties than they would on a more expensive asset due to the very nature of this low-cost investment.
“This results in even faster depreciation of the property — or a very strong negative impact on mid- to long-term yields when high refurbishments costs become unavoidable to keep the unit competitive.”
However, the report stresses the important role affordable housing will play in the future of the emirate.
Sobha Hartland in Mohammad Bin Rashid Al Mak-toum City will start delivering units from December next year, according to Sobha Group. The company also announced an option to pay half the purchase price after handover. The development comprises L-shaped villas, semi-detached villas, town houses, plots and high-rise apartments.
Source: Property Weekly