Why it’s not easy building affordable housing in Dubai

It’s not only the high cost of land that has Dubai’s developers shy away from going “affordable”.

The lower level of returns can also be a put off for most of them.

These are “typically due to higher recurring costs in the life cycle of this type of development in contrast to prime residential,” states a report by Core, the UAE associate of real estate consultancy Savills.

“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.”

According to Core: “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 spend more on maintenance for affordable property 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 or maintenance cost become unavoidable to keep the unit competitive to the market.”

Perception issue

Again, this reinforces the image of affordable housing being equated with inferior quality, which will only deter prospective buyers from making a commitment on one, it said.

And when there is not much demand — because of such concerns — developers are less inclined to build something in the affordable space.

There is also less clarity on what constitutes affordable or budget homes in Dubai.

Most developers maintain that at prices under Dh800 a square foot (0.09 square metres), it becomes economically unviable to deliver a project.

Therefore, most developments pitched in the affordable space average Dh900 a square foot, which again makes it difficult for an end-user to commit to a purchase, according to sources at a developer who did not wish to be named.

Even if they were interested, potential buyers in the low- to mid-income category will have multiple hurdles to clear before moving close to actually sealing a purchase.

Financing options to the lower income segment are limited as “banks operate at an income threshold of Dh15,000-Dh20,000 per month for granting mortgages,” the Core report adds.

“Certain banks do provide mortgages for income levels as low as Dh10,000 per month for select properties, but only with strict eligibility criteria."

According to David Godchaux, CEO of Core, “We are witnessing a surge of off-plan properties which are being marketed as ‘affordable’ options. 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.”

Factors holding back affordable homes in Dubai

* Acquiring land for construction at the right price and the right location is a challenge that developers in Dubai have largely faced. “Investing energies in affordable housing thus may come across as a non-lucrative business option for the developers, although this issue could be dealt with through the combined efforts of the public and private sector,” the Core report notes. “However, public private partnership may need policy intervention by government and can lead to prolonged delivery timelines and lack of accountability.”

* Any move to change the floor area ratio within residential developments — to lower the cost of construction for low-rise affordable housing — could face resistance from developers due to “loss in profit margins, perceived issues with project branding and difculties to generate interest from the core target audience.”

* The lower quality of the construction material, the upkeep and maintenance charges coupled with higher utility costs may be “counterproductive to the intent of affordable housing”.

Source: Manoj Nair, Associate Editor, gulfnews.com


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