Expert: Affordable housing in Dubai a mirage?

With most Dubai developers fixated on building the next big luxury property, is affordable housing in the the emirate a myth?

Dubai has always been an exciting destination for employment – for Indians as well as the rest of the world.

The petro-dollar ensured that the country grew in leaps and bounds, and provided excellent employment and living conditions. This explains the swanky high-rises, glittering malls and commercial centres sprawling all over the country.

Investors with deep pockets have shown market preference to invest in residential projects catering to the luxury segment, thus prompting developers to come up with projects that cater to the affluent.

This resulted in a shortage of affordable housing for the service class which generally lives on rent and cannot afford to buy homes in Dubai.

The average household income of service class citizens is between Dh10,000- Dh30,000. At this income, given the cost of living, they can afford to pay annual rentals of Dh72,000 and maybe buy a property costing around Dh800,000.

However, as per the UAE mortgage regulations, a prospective buyer needs to deposit 25 per cent of the property’s cost in advance.

If a property costs Dh800,000, the buyer needs to deposit Dh200,000, not an easy amount to cough up at a  moment’s notice for the average citizen.

In the case of off-plan sales, the loan-to-value is 50 per cent maximum, which means that a borrower has to pay 50 per cent using his or her own resources in savings, equities or other sources.

A 2-bedroom apartment in areas such as Dubai Marina and Dubai Downtown sells for approximately Dh4 million.

Even though Dubai’s property prices and rentals have stabilised in the past year or so, they are still higher than two years ago and look set to rise again by 2017, owing to Expo 2020 being hosted by Dubai.

Besides, developers are currently not investing in building projects catering to the middle-income segment. As per the records till the 3rd quarter of 2015, out of the 19,500 projects launched in the country, a mere 22 per cent meets affordable to middle-income housing criteria, despite the substantial demand in this segment.

The primary reason is the low margins in this segment, compared to the high margins in high-end properties. Some big developers in Dubai have as much as 50 per cent gross margins in their projects, thanks to government-provided land banks and other tax benefits.

The so-called surge in affordable housing projects development in the past year-and-a-half is not making much of a difference, as these are being sold on freehold title and mainly to investors in bulk.

This way prices of such properties are subject to market influences and do not necessarily reach the targeted middle-income group.

This has resulted in more and more people moving away from the centre of the city for the more affordable homes being made available on the fringes. However, it has also led to an increase in rentals in these areas, as well as a longer commute for employees.

It has’nt helped them build on savings either, required for those advance deposits.

Sharjah has proved to be an attractive destination though, with property prices here being almost half of those in Dubai.

But long distances and the comparatively lower quality of life than that being offered in Dubai are matters that concern the working class when considering the move to Sharjah.

Another factor that has led to a higher demand and lower supply of affordable housing in Dubai is non-compliance with government regulations, one of which categorically states that developers building high-end luxury projects should reserve a certain percentage of the property for the mid-housing segment. The rule has largely remained on paper.

That said, regulators and developers alike realise the escalating demand for affordable housing in Dubai. This has resulted in a flexible payment plan, which has met with some success.

Under this plan developers either provide finance to buyers themselves or ensure that buyers pay a fixed monthly amount instead of a huge initial lump sum.

Things may not change overnight, but the fact that demand clearly exists will ensure that more funds flow into affordable housing projects.

However, developers will not compromiseon minimum profit saturation; being business establishments, they are answerable to their shareholders as well as financiers.

Once that is ensured, the supply of affordable housing in Dubai will begin to match demand more logically.

– The writer is CEO, Residential Services, JLL India

Originally published in Gulfnews

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