The Gulf's budget boom

By Lucy Douglas

Luxury is big business in the Middle East. A region renowned as a hotbed for the most extreme developments in the world, bigger, bolder, brighter and above all more expensive has become the norm here. The emerging economies of cash-rich young professionals operating in the lucrative industries of fossil fuels or finance that are prosperous in the region are a prime market for high-end retailers, hoteliers and property developers. And between the seven star hotels, labyrinth shopping malls and reclaimed, purpose-built peninsulas of ornate residences, there has been no shortage of supply for this affluent consumer demographic.

“Irrespective of what the economy's doing, there will always be people of middle income who will need somewhere to live.”
-William Dewsnap

For over a decade, the Middle East's property markets have lent towards the more sensational. From the world's tallest building complete with designer-brand hotel, to the world's first carbon-neutral city, to even the world's first underwater resort (although this project, the Hyrdopolis, was shelved back in 2008) the developments popular around the region were less a well-conceived residential opportunity for the rapidly growing populations than an extravagant statement to the world proclaiming the region's potential as a globally competitive market.

Even emerging from a tough economic downturn, a plethora of mega-projects are still under development, adding to the top-end tourist, commercial and residential space that is already abundant across the region. The MEED's Top 100 list of projects, which includes developments such as Saudi Arabia's King Abdullah Economic City or Kuwait's City of Silk, have a combined value of US$1.3 trillion, more than the entire combined GDP of all six GCC nations. 

But with so many mixed-use, master-planned, multi-billion dollar mega-projects still springing up across the MENA region, it's easy to forget that this standard of residential space does not necessarily reflect the means of the average resident.

Well, until now. Following the glory days of the Middle East's construction boom, the effects of the economic downturn are still being felt throughout the region, with many projects cancelled or still on hold, and those that have gone ahead uncertain as to the stability of the market onto which the properties will emerge. With the large-scale speculative developments that frivolously took place across the region last decade drawing nearer completion, only to be met with a smaller and smaller pool of potential buyers available to pick up the overwhelming supply, the attention is beginning to turn away from the top-end market of luxury villas and penthouse apartments, and looking towards the more modest income markets.    

"Historically," explains William Dewsnap, the Head of Valuation in the Abu Dhabi office of property consultancy firm Cluttons, "developers have always thought, 'I'm going to build the biggest and the best and only the top end stuff because that's the most valuable and that's what will get me the best return,' and the mid-market has largely been ignored."

Indeed, a much-needed shift is taking place in the property markets of the Middle East. Between the ostentatious, high-profile multi-billion dollar super-developments for the region's most affluent residents at one end of the spectrum, and the government-funded grants and social housing schemes for lowest-earning nationals at the other, those in the middle-income brackets across the Middle East have hitherto been left with a deficit in appropriately priced housing.  And they represent a significant sector of the market. The young and well educated demographics in the GCC nations (the mean age of residents varies between only 24 and 30 years old across the GCC) represent a large contingent of residents with an income high enough to take them out of the social housing bracket, but not high enough to live in the luxury residencies that have become so common-place in the region.

In Bahrain, explains Dewsnap's colleague Ben Cullum, the government offers a loan of up to BD40,000 to married couples or families than earn up to BD1200 a month. "We tend to classify affordable housing being about BD40,000 to BD80,000, which covers a large sector of the population," he says. "In broad terms there's very little that is on the market within that band of 40 to 80. So there's a disconnect between what can be afforded by local Bahraini families and what's actually being and developed, either as master planned schemes or just individual properties."

Over in Abu Dhabi, Dewsnap agrees, highlighting that while the government has some very generous rules in place to provide a significant proportion of nationals with housing, there is massive population of residents, most notably expatriate workers across all income brackets, that can not afford the accommodation readily available in the country.

Market opportunities

And so thanks to a generation of optimistically speculated over-development, these middle-income residents are providing the next big real-estate consumer market for developers. According to management consultancy firm A.T. Kearney, the affordable housing market in the Middle East is estimated to be worth around US$125 million every year; the firm puts the shortage in Saudi Arabia at around 150,000 housing units annually, and in Egypt an estimated 280,000. Real estate firm Colliers stated in a recent report that the undersupply of housing in Abu Dhabi would reach 42,000 homes by 2013.

Moreover, the Urban Planning Council of Abu Dhabi is bringing rules into place to regulate the provision of affordable housing to meet the demands of this sector. "Large-scale multi-residential projects of over 75,000 square metres of gross floor area (GFA) are now required to allocate at least 20 percent of the GFA to housing for lower income groups," explains Matthew Green, the Head of Research and Consultancy for the UAE at CB Richard Ellis. "Strict guidelines will also ensure that the 'affordable' units have a minimum floor space, specific for each bedroom type, and strict rent ceilings in place to make certain that rates are adhered to and the tenants are not exploited. Rents will then be reviewed and updated regularly to make sure that leasing rates are maintained at suitable market levels."

But why has this market gone for so long without being tapped by developers? And indeed, so much focus on this sector now begs the question, what has sparked the sudden interest in this sector?

"During the boom times," explains Dewsnap, "people found properties in Dubai unaffordable. They tended to migrate north; so they went from Dubai into Sharjah, and then went further north into Ajman. Now as he market has turned, you're seeing that happening in reverse. People are moving back down south."

This seems to have been a common trend; if centrally located property is too expensive, move further away. In fact, it is this issue of location that is behind the interest in reasonably priced housing in Oman. "The government has always issued one plot of land per person and so each Oman will have a plot, normally 600 square metres, and that is for them to build their own house on," explains Philip Paul, Head of Country in Oman for Cluttons. "Most of the employment is in Muscat, or another major city like Sohar, and a lot of these plots are given out in people's home locations, the home villages and home towns and therefore they might be working in Muscat but their plot is outside, so it doesn't fulfil their housing need." 

Now, the middle-income earners are coming back. With the vulnerable and recovering market shifting to establish a new equilibrium, this demographic are in a prime position to reap the benefits. The global economic downturn left large proportions of the region's construction industry in tatters as investors pulled out and funding dried up. But despite the timing of this focus on affordable housing in the Middle East - not to mention the current tendency to attribute any market shift to the financial crisis - it is not simply an after-effect of the recession. "Irrespective of what the economy's doing, there will always be people of middle income who will need somewhere to live," Dewsnap points out. "Obviously the numbers who fall into that mid-income bracket may fluctuate a little, but there will always be quite a substantial number of people in that sector who need property."

In Baharain, Cullum is more pragmatic about the situation. "Certainly people are tightening belts and probably looking to more, for want of a better word, affordable accommodation than they necessarily were thinking two or three years ago, as job security becomes more of a concern and so on, but really the affordable housing drive certainly in Bahrain and to some extent in Saudi Arabia, is coming from pure demographic analysis."

Cullum reiterates the pressing reason underlying this shift in the market: the luxury developments are in massive over supply, and finally the pendulum is beginning to swing the other way. Thanks to a young population coming through, and old residential accommodation becoming obsolete, the affordable housing demographic is growing, and the developers have no choice but to follow where the business goes. "Most developers wanted to produce high-end, luxury accommodation, whether that's commercial or office or hotels," he says. "That's what developers wanted to do. So they'd buy a plot of land in an appropriate area and start the developments. Now, there's a big supply/demand imbalance of that style of property in most of the countries.

"At the same time, the demand is reduced for that type of property, and you end up with a situation where supply has outweighed demand in a very big way. So developers say, 'here is a product; we can now turn our attention to where the demand/supply imbalance is the right way for development. So in that sense, the developers are coming at affordable housing as a knock on result of the recession, I would say, but in terms of the demand, it has been there underlying and is increasing as time goes on because of the demographics of the countries."

Paul agrees, pointing out that in Oman, though the activity in the affordable housing sector is more measured, it is largely a reaction to market situation. "I think there's a category of middle level developers who are looking for a niche in the real estate market to make money. The government, as such, doesn't provide housing other than very small schemes generally in the interior for rural families. So the talk about [affordable housing] is really partly a recognition that other parts of the real estate market are saturated. There's oversupply issues [surrounding other sectors] and given the underlying economics, you're not going to make money from them, and I think people have turned to housing and are just at the stage of researching."

Bright prospects?

Though this more modest market might present an attractive opportunity for developers to stay active in the region, it is not as straight forward a transition as they might like, and certainly does not take the industry back to its hedonistic heights of 2007. The fragile nature of the market in the recovery has thrown up a cocktail of challenges that developers must navigate a way through in order to have a commercially viable product.

"It certainly is noticeable that the big, mainstream developers are getting involved with these more affordable projects," says Dewsnap. "To give an example in Abu Dhabi, the main developer in town is ALDAR, and one of their flagship schemes is Rajah Beach, which was an enormous waterfront scheme on the road in from Dubai, approximately 12 kilometres long with 10 or 12 different phases. [They] originally planned to be built as quickly as possible, obviously to get [the properties] ready and on the market. That has now been scaled back significantly, and you've now only got the first two or three phases that are well advanced."

Dewsnap's is not the only such example; numerous developers across the region have tried to hedge their bets with a project currently mid-construction, diverting from original plans and making it more affordable so as to increase the chances of selling units once it is completed. In many cases this has required a massive re-design and scaling back on a project, so as to fit into the tighter budgets.

However, in many cases no amount of re-designing can create an affordable project that covers the cost of the land it has been built on. "Land prices grew very rapidly during the boom years," Cullum highlights, "largely on the back of speculation than an underlying economic value. You know, we had this situation where land was being bought and sold as a commodity in itself and values rising because of that." Matthew Green agrees. "The main obstacle to this type of development is really the cost of land, especially if it was purchased in 2007 or 2008 when values were hugely inflated. Many affordable housing projects have already failed to get off the ground, as the developer just can't make the numbers work for the type of product."

Projects that have been conceived more recently with the intention of supplying the affordable housing market are able to address these issues directly so as to maximise profits. Still, there is speculation as to how well these projects will be met once they come on the market. Dewsnap points out the these mid-market properties, in order to be affordable, will be less centrally located, often smaller, and with fixtures and fittings of a lower specification. "That is going some way to meeting the demands of the mid-market," he explains. "Only the first phases are now just starting to be handed over, so there is admittedly a long way to go."

Paul agrees. "A lot of land within the capital city [of Oman] is still too expensive for affordable housing, so it has to go out onto the fringes and further, and developers are still concerned that might not be acceptable to the local market." Cullum explains how in Bahrain that fear is a reality, and one of the biggest challenges that developers of affordable housing face in that country. "We see a tendency for the affordable housing sector to be demanding quite large properties, a villa that's 250 or 300 square metres in size is very large. For the local population here, it's what's generally expected by the up-and-coming young Bahraini professional who would fit into that affordable housing bracket." He concedes that the ball is beginning to roll in terms of a change in cultural attitudes, and the young and growing population are likely to be under pressure to move towards a more European style of apartment living. "But from a developer's perspective," he adds, "they don't want to be the ones to blaze the trail just in case the pressure hasn't melted enough, and they end up with an empty building."

This cautious attitude that Cullum speaks of is evident around the region when it comes to this sector. Paul explains that in Oman, developers are more dipping their toes in the water of the affordable housing market, building 50 houses here or there, as opposed to diving right in. "A lot of mid-level developers are looking to initially introduce small schemes. There have been one or two that have planned and tried to introduce investors to really large-scale developments - master planned affordable housing with parks and mosques and some mixed-use buildings - and developers are still feeling their way."

The uncertainty surrounding the market has fed into the funding aspect of development. Even as costs can be cut on certain aspects such as the location, size or interior decoration of a project, developers are still finding funding hard to come in the current climate. "[Investors] have definitely taken a step back and are far more cautious in terms of the investments they are willing to make," explains Dewsnap. "It is certainly being viewed with some interest by investors," adds Green, "but there remains significant barriers to actually developing and delivering projects in the current market that are profitable."  This puts the whole market in a bit of catch-22. Finance is not only difficult for developers to come by, but also for potential buyers, a situation that in turn further dictates the need for affordable housing.

Still the cautious attitude of investors comes with good reason. With this new sector yet to reach maturity, developers are awaiting the reaction from the market; and making the figures work on a project such as this is harder than it has ever been. Newly built affordable communities will require infrastructure development to support it, an addition that may have a crippling effect on t he budget of a project. Cullum explains how man developers find a project would be most profitable if it was built on a large scale, producing in the region of 500 units. If a local municipality does not take on that infrastructure, he says, then charges for its initial development and on going up-keep will be levied onto the residents, driving up the costs of the properties and making them no longer affordable.

 Moreover, purpose built affordable housing projects are not without competition. The massive over supply in other areas of the real estate market has led to slashed rent rates on high-end properties, meaning those in the middle-income bracket are now able to afford properties that two years ago would have been well beyond their means.  "For example," points out Dewsnap, "a one bedroom flat in Dubai Marina, which is a top-end, waterfront development that's very popular, would have cost say Dh150,000 a year to rent in 2008 is probably now half of that, Dh70,000 or Dh80,000. So that represents really good value. So someone who has a mid-market property, which is of a lower specification, it's less central, it has less facilities, they are going to struggle to shift their properties."

While the way is fraught with challenges, and developers are reasonably cautious about the opportunities this market brings, there is no doubt that this is a demographic that needs supplying. "Affordable housing is currently a burning issue throughout the region," reiterates Green, "especially in countries such as Egypt and Saudi Arabia, which both have very large, young populations that are growing very rapidly."

"It's almost a case that affordable property doesn't really exist at the moment," adds Cullum. "So the development is developing into a part of the property market that is wide open and waiting." With the population in the region set to double over the next 40 years, this is not a temporary market, and Dewsnap suggests that as long as developers are shrewd about the timing of delivery of their projects on to the market, they will generate significant interest from this under-supplied middle market. With all this in mind then, only time will tell just how far this can go to boosting the convalescent construction industry.