Affordable housing new frontier for Mena realty industry

Affordable housing is the new frontier for the Middle East and North Africa (Mena) real estate industry in view of the huge shortage and potential for growth, a new survey has said.

Developers will be required to change their master plans and revise their current business models to maximize volume and optimise margins to serve the middle-income segment, AT Kearney, a leading management consulting firm, said in its report.

The affordable housing market in Mena is estimated to be worth as much as 125 billion annually. In Saudi Arabia alone, it is estimated that there is an annual shortage of 150,000 units and in Egypt of 280,000 units.
"To succeed in the middle-income markets in the Gulf region, government agencies and developers must shift their business models and views on, particularly land prices and profitability," said Olivier Laroche, principal in the real estate practice, A.T. Kearney Middle East.

Most developers agree that land prices should represent no more than 30 per cent of total development costs, in order to avoid jeopardizing projects, but in many Middle East locations, such as Saudi Arabia, land speculation has driven up prices and made middle-income housing difficult to pursue.

“Governments and municipalities will have to get involved to ensure balanced urban development, by monitoring short-term private interests and supporting the development of the middle-income market. A recent example is the announcement by the Urban Planning Council in Abu Dhabi that all developments larger than 75000 sqm must set aside rental options for the middle-income group

"In terms of profitability, investors and shareholders must take a more realistic approach to market demand. Given that there are millions of people to satisfy, volume is the goal; developers of adequately managed properties should plan on project returns in the 10 percent range, not the 20-plus margins of high-end projects," said Laroche.

According to A.T. Kearney many developers regionally are already revising their plans for high-end mixed-use projects to incorporate more affordable residential space, and more can be expected in this area regionally. The recent announcement between Mubadala and Pramerica Real Estate Investors, expected to funnel millions of  dirhams into mid-market housing in the Abu Dhabi, is an example of this.

"To make this change, developers need to align their operations to the new targets, so that their business models take into consideration costs and affordability throughout ... all the way from design and construction to sales and marketing," said Matthieu De Clercq, senior manager, A.T. Kearney Middle East.

The challenge for local developers is to meet not only current needs and the demand for affordable housing but doing so with an eye to con­solidation opportunities and diversification strategies.

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