When, in February 2015, a relatively rookie developer Nshama launched Town Square, a sprawling 750-acre development in Dubai, investors took note. Oil prices were sliding – although they had yet to touch their record lows - and Dubai’s real estate deals were facing headwinds due to volatility in certain markets. However, Town Square grabbed more headlines when Nshama revealed that its apartment sales prices would start at AED 349, 988 ($95,287), way below the million dirhams price tag that is normally associated with purchasing property in Dubai.
Home to the world’s tallest tower and a manmade archipelago in the shape of a date palm tree, luxury developments in Dubai easily found ready buyers queuing to snag a deal. But lower crude prices and volatility in key markets have pinched the pockets of luxury home buyers, reducing the purchasing power nominally. This has in turn opened up an entirely different segment to developers -of affordable housing, a yet untapped and largely ignored area of the market.
One player that caught on to this trend early and perhaps much earlier than Nshama would be Danube Properties, whose residential project Glitz in Dubai Studio City features a much lower price point than others. The apartment complex where studio, one, two and three bedroom apartments ranging from 470 square feet to 1,645 square feet were sold at AED 900 ($245) per square feet and saw a stellar response from investors. Other firms such as MAG 5 Property Development and Gulf General Investment Company also followed suit with similar projects in various locations across Dubai.
The launch of such projects indicates the huge scope for affordable properties in Dubai, a city that is coming to terms with the impact of rapid urbanization. Nearly a million residents in the U.A.E. commute daily to the emirate, according to Dubai Statistics Centre. The number of people working in Dubai but living in other emirates rose from 3% in 2013 to 5% in 2015, partly because of lack of housing options within Dubai, experts say. But a recent report from real estate agency CORE, noted that long traffic snarls during the rush hour were now leading to a reverse migration as residents look for cheaper options within Dubai, significantly boosting the need for more affordable housing stock.
“It is a segment of the market that is underserved and actually is a very important part of the real estate markets in most major developed cities where you have the issues of affordability,” says Faisal Durrani, Head of Research at Cluttons. “Dubai is growing up and we have seen this problem in other global cities. So it is only a matter of time that the affordability question came to the table.”
Pricing the Middle
But even as affordability takes center stage, developers are struggling to correctly price the units that are marketed as affordable. The report from Core Real Estate indicates that the term affordable housing is very “loosely used” in Dubai with the new supply catering to middle income segment while still putting it out of reach of the lower income segment for which such units are the most essential. Durrani agrees as he says: “There are various schemes that are classed as affordable but actually nobody knows what that means. There has been some move by Dubai Municipality to target people earning less than AED 10,000 ($2,722) a month while the federal government is talking about mandatory provision for housing people who are earning less than AED 2000 ($544) a month. These are positive steps in the right direction. But the amount of housing stock that is built has historically and continued to be skewed towards luxury/high end of the market. The affordable middle is still being left out.”
But difficulties persist in classifying affordability which hampers the growth of this sector. The Dubai Municipality defines affordability as living space for households earning between AED 3,000 to AED 10,000 per month. In order to cater to this demographic, Durrani says that an affordable unit in Dubai should be ideally priced at AED 600,000 ($163,347). “If we go for AED 200,000 (54,449) (of average annual income in a household) and if we go for lower mortgage multiplier of three times the annual salary then that is AED 600,000. You need to be able to purchase a family home for AED 600,000. That’s the kind of price that I would associate with affordable property.”
However units launched as affordable in many developments could cost up to AED 1 million and more. Developers attribute such a price tag to a number of factors such as high land costs and lack of ample home finance products.
“The struggle for mid segment market is finding a piece of land in decent location at the right price and controlling the rising cost of construction,” says Rizwan Sajan, founder and chairman, Danube Group. He agrees that moderate land prices could help developers to stop breaching the criteria of affordability. “Land price can certainly be bettered in the primary market to make projects more affordable. I also believe increased focus towards low density housing can add further incentive for such projects. Midsize land parcels directly available from master developer purpose built for affordable housing can also help create economies of scale and avoid additional burden of premium on plot from secondary market.”
Fueling Supply
As the pricing dilemma continues for developers, affordable housing segment is clearly gaining interest in Dubai. A recent report by finance comparison website compareit4me showed that mortgage queries from people within income brackets of AED 8,000 and AED 19,999 are steadily on rise. When compared against the average number of enquiries of the previous 22 months, enquiries from people earning between AED 8,000 ($2,177) and AED 11,999 ($3,266) tripled in March and April, the website said in a note published in July. This clearly indicates a shifting mindset to residents wanting to own their homes. But the supply of affordable housing is clearly not keeping in with the demand.
In order to solve this imbalance, experts have suggested a quota system where a portion of a development could be dedicated as affordable housing. Last year, Dubai Municipality briefly toyed with the idea of introducing mandatory quotas for affordable housing but no concrete step materialized. “I think there needs to be a little bit of steer from the government for this segment of the market to take off because it is an important and growing segment but it remains roughly underserved and not understood,” says Durrani. He points out the practice in the U.K. where a developer with more than 10 years of experience are required to dedicate 20 to 30% of their units being built to affordable housing. “What they do under the affordable bracket is if the developer is going to continue holding the property as a rental asset, they can rent it out but at a maximum of 80% at a prevailing market rate. It has to have a 20% discount if it is being rented.”
Developers are also not offered any incentives to embark on affordable housing projects currently but Sajan lists some that could be helpful. “A series of incentives can be looked at, like subsidized registration charges capped with condition of holding the ownership for a fixed number of years and in case the owner sells before the expiry of the holding period a penalty can be levied.” He goes on to emphasize that lack of easy payment options currently could also dampen buyer’s interest. “Mortgage facilities are not popularly and conveniently available on properties while they are under constructions so the payments until handover have to be self-financed by the buyer. It is worth noting that as per Central Bank ruling banks can finance off-plan property only once the buyer has paid 50% of the price of the property. There are several avenues through which incentive can be created for affordable housing.”
Although uncertainties persist on how Dubai will accommodate its missing middle, developers and analysts unequivocally see potential in this segment. Danube Properties has revealed plans to launch around three to four affordable housing projects annually while other major developers such as Dubai Properties and Sobha Group have also now entered the residential affordable housing segment. But if they will get the equation right between the prices and market demand is yet to be seen as race for building affordable homes heat up in Dubai.
