An oasis in the desert

By Rebecca Goozee, Deputy Editor

“While our approach is very much a long-term one, in line with Plan Abu Dhabi 2030, we will always monitor market conditions and, where appropriate, take action”
-Mohammad Al Mubarak, Chief Commercial Officer at Aldar

When the US subprime mortgage sector imploded - driven by excessive leverage and inadequate regulation - it led to a much broader financial crisis for the world economy. It was only a matter of time before the bubble burst in the MENA region: speculative investment, based on off-plan premises that failed to materialise, plus a dip in oil prices led to a knock-on effect on the region's real estate sector, which has since meant access to funds has become increasingly difficult and the fundamentals of supply and demand forgotten.

However, while Dubai has been left increasingly resembling a giant construction site, Saudi Arabia could potentially become an oasis for the real estate and construction sectors. One of the few markets to witness demand despite the global economic slowdown, the kingdom is in desperate need of affordable housing. In fact, current estimates by CB Richard Ellis (CBRE) predict that Saudi Arabia is currently facing a shortage of around two million homes and that the kingdom will need an additional 1.4 million additional homes in the next decade to meet the rising demand from a growing population, which is projected to hit 33 million in the next 10 years. And with 35 percent of residents currently under the age of 14, the shortage will soon see a much tighter squeeze as more potential homeowners hit the market.

Supply and demand

The large gap between supply and demand is attributed to the higher prices of property. As the real estate sector has commonly focused on the high-end and luxury part of the market, it's unsurprising perhaps that middle-income, or affordable housing, has become the most underserved accommodation segment in Saudi Arabia. CBRE research indicates that the higher prices of property have resulted in 60 percent of people being unable to afford their own homes. According to market experts, affordable housing represents a big untapped market for developers as the demand for housing is only likely to pick up.

Jones Lang LeSalle's MENA House View 2009 report concurs with other research on the subject concluding that the greatest opportunities to increase the number of developers and investors in Saudi Arabia can be found in the affordable housing sector. John Harris, Head of KSA for the consultants, believes that a number of developers and investors will take advantage of this. "We know a number of local family groups are looking at the market, looking at what's affordable, trying to define what the consumer wants at an affordable level and putting strategies together to create development to meet those needs," he says. "We also know that some of the local groups are setting up joint ventures with overseas developers and investors, who perhaps have some experience at developing affordable communities."

The report goes on to identify four key priorities that need to be addressed to provide sufficient affordable housing to accommodate the Kingdom's young and fast growing population, namely: providing more home finance; improved community planning; use of innovative building techniques to reduce construction periods and deliver lower cost units; and, new business models with greater cooperation between the government and major private sector developers. Why are these criteria so important in order to provide sufficient affordable housing? "If you look at other countries, these issues have usually been addressed," answers Harris. "It's pretty hard to do something truly affordable in a developing country unless you've got all four developed. Engineering is very important - you need to be able to build - and in order for projects to be feasible, you need to be able to build quickly. You also need to be able to develop to a high quality, so that people have confidence in them. Low costs are also important and a lot of the way construction is done, particularly on a small scale, is not cost-effective to do things on a piece-by-piece base. Then, in the business models, again, the government in Saudi Arabia has been leaving the private sector to try and address affordable housing. But unless there is some kind of public-private partnership or some ability to sort of maybe reduce the cost of the land or something like this, it's going to be tough."

Investors expect Saudi Arabia to be the first market in the MENA region to recover from the current downturn, mainly because of two factors that have existed in the rest of the Gulf: speculation by retail investors and end users and banks lending significant multiples above the loan base. These factors did not exist in Saudi Arabia. The banks are conservatively regulated and the amount of lending was limited to 90 percent of the deposit base, which was a big help. Coupled with the fact that consumers had not extended their balance by speculating in real estate has meant that the sector has stayed pretty solid.

"Saudi Arabia fares quite well in most categories, whether it's housing or even commercial space, because they didn't build and the excess of construction can get absorbed pretty quickly. We also see Abu Dhabi and Qatar recovering sooner than some of the others," explains Harris. "However, Qatar and Abu Dhabi will probably not focus on affordable housing as much - these are markets with relatively small populations and a fairly high per capita income profile."

Abu Dhabi

Over in Abu Dhabi, Mohammed Al Mubarak, Chief Commercial Officer at Aldar responsible for sales, leasing and property and asset management, explains that all development must be considered within the context of Plan Abu Dhabi 2030, an Urban Structure Framework created to optimise the city's development through a 25-year program of urban evolution. He reveals that because of the long-term plan, the company's focus has not changed significantly as a result of current market conditions.

That said, in February 2009 it was announced that Aldar was changing the strategy at its Al Raha Beach development, placing a greater emphasis on low-cost housing. Al Mubarak plays down what he calls 'minor changes' but agrees that certain areas have been modified to provide a greater mix of housing options. "Once complete Al Raha Beach will be an 11 kilometre, mixed-use mini city in its own right and consequently you expect to see different areas for different individuals of different means," he explains. "While our approach is very much a long-term one, in line with Plan Abu Dhabi 2030, we will always monitor market conditions and, where appropriate, take action."

Al-Falah, another Aldar development, will be a master planned community focused around affordable housing for UAE nationals, providing around 5000 homes for middle-income families. Located to the east of Abu Dhabi International Airport and the Abu Dhabi-Dubai highway it has been designed as a practical and sustainable community that moves away from the typical grid design approach. It is hoped that the design will encourage community gathering through a number of open parks that connect the residential, commercial and leisure elements. "We are very proud to play our part in building sustainable communities to cater to the growth needs of Abu Dhabi," adds Al Mubarak.

Affordable?

Charles Neil, CEO of Landmark Properties, one of the leading real estate firms in the Middle East, believes that standard quality developments are certainly becoming increasingly affordable from both a renting and buying perspective. However, he maintains that there are still few, if any, projects that can be considered truly 'affordable' housing in the sense that they are priced for low-income individuals and families. "We do think this will change," admits Neil, "especially as the cost of construction has come down. According to own index, the cost of construction has declined by 35-40 percent since the peak in July 2008."

Neil goes on to explain that there has also been an increase in home loan financing recently, although the impact on the market has been minimal due to income levels slipping and the risk of redundancy higher down to the global economic crisis. "We've seen an increase in the percentage home loan financing deals from around 17 percent at the beginning of the year to approximately 30 percent of purchases being covered by mortgage financing currently." However, the volumes are much lower then they were a year ago and at these levels the commercial and retail banks are able to cope with demand, but unable to increase volumes due to limitations they face with liquidity ratios.

"Another factor holding back the growth of loans is the high level of interest rates being charged, and potential home-owners simply cannot afford to take on mortgages at the rates currently being offered, which generally vary between eight and 10 percent, combined with the tight conditions being imposed by the banks. With income levels being lower and the risk of people losing their jobs higher, the credit risk for banks is higher than it was and it is unlikely we are going to see any major increase in loans in 2010," says Neil.

Neil goes on to explain that he does not see average housing prices rising significantly until 2011 at least. He says the bottom of the market will be reached by 2009 and in 2010 expects to see housing prices remaining flat overall before beginning to rise in 2011 as economic activity begins to grow. "While we expect average prices to decline at this time, we are seeing prices stabilise and even increase in some developments or for specific buildings. We have seen the bottom in a few segments of the market - mainly higher quality residential projects in completed or nearly completed master developments like the Marina, JBR, Emirates Living - Springs and Meadows - and Arabian Ranches," says Neil who goes on to explain that there will be further declines in some areas. "In developments of standard quality, those projects that have under-delivered on the promised quality, projects with additional supply coming online and projects currently in poor locations or master developments far from completion will also decline."

In addition Neil indicates that commercial office and retail properties in Dubai can expect to see further significant declines in rentals and property vales. Landlords will have to offer extremely attractive features and quality amenities to attract clients and despite this he says, millions of square feet of space will continue to remain unoccupied, particularly older buildings, that may offer Grade A space, will lose their attractiveness as newer and better quality buildings offering superior facilities come on the market.

Indeed, with weak demand and further volumes coming on to the marketing 2010 and 2011, stability may only be achieved in late 2012 in the office space sector. "In the future we could see more redevelopment opportunities emerging in the older parts of town, such as multi-storey car parks, pedestrian link ways, the refurbishment of building and a virtual moratorium on commercial development once the building phase ends," suggest Neil.

So while commercial office and retail properties continue to decline it seems Saudi Arabia's affordable and middle-income housing sector could certainly prove to be one of the strongest performing real estate markets in the MENA region over the next 12-24 months. "It's going to be tough, I think, for the private sector to deliver housing that the bottom 50 percent of the society can afford, but I think over the next two years we're going to see all of this work and discussion bearing fruits for these Saudi housing markets," concludes Harris.

Key criteria

To meet the affordable housing challenge, Jones Lang LaSalle has identified four sets of criteria that need to be addressed to provide sufficient affordable housing in the Kingdom:

• Home finance: Increasing the level of home finance is critical for the development of affordable housing. The approval of the much awaited mortgage law will also give a much-needed boost to the market.
• Community planning: An affordable housing format has to be appropriate and acceptable to the local population. Community planning needs to be improved to create a better balance between utility and social preferences.
• Engineering: Project costs can be reduced by applying innovative building technologies and economies of scale. Such practices will improve affordability and increase the supply of lower cost units. Initiatives by a Saudi institution to develop an integrated building system will certainly result in higher construction quality, reduce project cycle times and ultimately higher affordability.
• Business models: Innovative business models need to be adopted involving greater cooperation between the government and major private sector developers. Currently, there are hardly any public private partnerships (PPPs) in the Kingdom's housing development initiatives.

There are a couple of graphs on page 5 of the pdf entitled MENA House View 2009 in Ben's shares in MEANINF4 for designers/pictures/affordable housing. They are called 'Expected Timing of Market Recovery' and 'Future Price Expectations' - is it possible to redraw these please?

[Source: Jones Lang LeSalle Investor Sentiment Survey, April 2009]