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Affordable housing quotas in Dubai: A middle-class dream

A proposal on affordable housing quotas in Dubai is a big step, but how far are we from execution, examines Deepthi Nair

Why is Dubai residential real estate so heavily skewed towards luxury? Well, do your math and it emerges that developers earn high margins on projects at the higher end of the spectrum. This has resulted in a gross undersupply of affordable housing in the market.

In a bid to rectify this imbalance, Dubai Municipality recently proposed that mandatory affordable housing quotas be implemented for the developer community. With the proposal still being optional, it remains to be seen how Dubai’s mega developers can be made to toe the line.

“The experience from Abu Dhabi and from overseas is that it is very difficult to enforce quotas on developers unless there is some other financial incentive for the developer to provide a proportion of affordable units in their project,” says Craig Plumb, head of research at consultancy JLL Mena.

According to Declan King, director and group head of real estate at ValuStrat: “More mature Western property markets display a precedence of affordable housing quotas being introduced for developers — several such models exist. Wider discussion would be necessary to understand if any of these concepts would be suitable for the Dubai market.”

Rizwan Sajan, founder and chairman of Danube, spoke of the challenges faced by the developer community. Coming from the head honcho of Danube Properties, which launched affordable off-plan apartments in Dubai Studio City last year, his words are worth paying heed to.

“Larger interest from developers can be generated by creating dedicated communities to accommodate such projects and incentivising the developers for participation in such developments. Also, the affordable housing segment because of narrowed margins does come with its own set of financial challenges. So, a provision must be created from the initial master planning stage, else the feasibility of such developments can get diminished,” he says.

Incentives

Lower land costs and associated transaction fees are the common demands of developers for construction of affordable housing. “Developers can be directly incentivised to deliver affordable housing units with specially reduced transaction costs on such projects and the release of lower-priced serviced lands. Purchasers of such units can be assisted with lower transaction fees and innovative finance solutions,” said King.

However, with land values in central Dubai at a premium, the ground reality is that mid-income housing can come up only in the city’s periphery. This would result in segregation of communities and a clearly demarcated two-tier residential market.

“There are areas where it is financially feasible to purchase and develop affordable housing, but the vast majority of those locations are far from public transportation, which is a critical factor for maximising the real value of such projects,” explains Jesse Downs, managing director of Phidar Advisory.

With authorities struggling to reduce the gridlock on roads, it is imperative that communities with such a critical mass of population have good connectivity to public transport. Ease of mobility is a key factor for businesses seeking to set up their operations in Dubai.

“This will ease and more evenly disperse pressure on major arterial roads and increase usage of the public transportation systems, like the [Dubai] Metro. It also decreases commute times, which can help to increase labour productivity,” adds Downs.

“We would see optimum land values for such developments to be at less than Dh100 per square foot of permissible BUA [built-up area] for vacant sites,” says King.

However, with most land deals in the secondary market commanding a premium, this automatically drives up the build cost, thereby rendering affordable housing non-feasible.

“In the current market, not many lands are suitable for planning affordable housing. For any development, the first capital expenditure is land and it accounts for a fair percentage of the overall cost. So, a rightful decision needs to be made regarding which land and at what price. Engaging directly with the master developer can help you purchase the ideal plot at the right price,” suggests Sajan.

Off-plan no panacea for low-income tenants

The off-plan sales model is not a solution for the undersupply of affordable housing in Dubai, says Jesse Downs of Phidar Advisory.

Even though low-income households wish to purchase affordable properties, demand is likely to be in favour of completed property, not off-plan project sales. This means yield-seeking investors are developers’ primary targets.

“However, in the off-plan model, ownership is dispersed across individual units or small lots of unit. Dispersed ownership will inevitably lead to opportunistic rental policies in an inflationary market,” she explains.

Affordable no more

Budget-conscious tenants often opt to live in communities such as International City, Discovery Gardens, Al Khail Gate and Dubai Silicon Oasis, or the older Dubai neighbourhoods of Al Qusais, Karama, Satwa and Deira. However, the steady recovery in rentals in 2013 and the first half of 2014 have pushed such areas out of bounds of many families, who instead opt to commute to other emirates for cheaper accommodation.

“The issue here is that most of the policy initiatives to date in the UAE have only focused on the initial delivery of affordable units and there has been no mechanism to control future growth in prices and rentals. Experience has shown that projects that were initially designed as ‘affordable’ quickly become less so. There is, therefore, a need for other policy initiatives or restrictions on future price and rental escalation to ensure units remain affordable over time,” says Plumb.

So, who qualifies to live in such affordable communities?

Market experts estimate that only families whose monthly income ranges from Dh5,000 to Dh15,000 are allowed to avail of subsidised housing. Strict eligibility rules regarding income and family size will need to be enforced to ensure that only those who deserve affordable housing receive it.

In terms of sales, although affordable housing is typically targeted at low-income tenants who are trying to turn home owners, in the wake of the introduction of federal mortgage caps and doubling of property registration fees, this demographic often fails to qualify for home loans.

“Although a few households may wish to purchase and become owner occupiers, most banks have a minimum monthly salary requirement around Dh15,000 or Dh20,000 [for them to] even to qualify for a home loan. Unless new mortgage products are created or developers introduce lease-to-own product, owner occupier demand will be marginal,” says Downs.

“The consumer for affordable housing is the end-user aspiring to own property instead of paying rent and the long-term investor who banks on rental yield,” adds Sajan.

“Over the years, Dubai has become home to several thousand people who have spent decades working and earning here, and the number is constantly increasing. With the lifestyle, security and social equilibrium that the city provides, such families would want to own their home here. This accounts for the largest volume of potential buyers for affordable homes. The growth in the city’s population keeps feeding the rental market as well, thereby keeping the buy-to-let investor keen on buying new assets.”

In more developed property markets, developers sell entire affordable housing buildings to institutional investors or real estate funds seeking yielding assets with medium- to long-term investment horizons. “Ideally, the operators must implement stable rental policies. It may be necessary to disallow individual title deeds so that ownership is not fragmented and the asset remains centrally and professionally managed,” says Downs.

Anything between Dh600 to Dh800 per square foot is typically considered a feasible sale price ceiling for affordable housing. “Affordable rental units should be priced as follows: studios for Dh24,000 per year, one-bedroom apartments for Dh33,000 per year and two-bedroom apartments at Dh42,000 annually,” King concludes.

— deepthi@khaleejtimes.com