The development of Dubai’s affordable housing sector  

Introduction

Residential development in Dubai has increasingly focused on the mid-market sector in recent years. Developers have launched mid-market residential projects in locations that include Al Furjan, Dubailand, Dubai Production City, Dubai South and Jumeirah Village Circle. In addition to adding to the substantive inventory of Dubai’s mid-market housing sector, certain residential developers in the emirate have started to offer three to five-year phased payment plans in an attempt to access this sector and, in some cases, convert renters into buyers.

But affordability remains an issue for a number of residential households in Dubai despite these developments. Data from global advisory firm Oxford Economics indicates that approximately 40 percent of Dubai’s households had a monthly income of approximately AED31,000 (or US$8,440) in 2017. The number of households within this income category has almost doubled over the last ten years and is likely to continue to expand in the future.

Affordable housing usually refers to housing costs that equate to approximately 30 percent or less of total monthly household income. To approximately 40 percent of households in Dubai, rents or mortgage repayments are deemed affordable if they are less than AED9,300 (US$2,532) per month—or approximately AED112,000 (c. US$40,500) per year.

Is housing in Dubai becoming more affordable?

From November 2014 to November 2017, sale prices for residential property in Dubai experienced a decline. Based on average residential sale price data from real estate market information service company REIDIN, Dubai’s residential market experienced an average decline of approximately 15 percent from its peak in Q3 2014. Between Q3 2016 and Q3 2017, average sale prices for residential property in Dubai declined by approximately 2 percent, while average rents also declined by approximately 7 percent over the same period.

These declines were largely a result of low oil prices impacting government spending and denting investor confidence, as well as a strong local currency reducing the purchasing power of key international source markets, such as India, Russia and the UK.

With the cost of living in Dubai rising at a rate higher than wage inflation for many workers, housing affordability is becoming more of an issue. Given that expatriates make up over 90 percent of Dubai’s population, it is important that the emirate address this issue in order to remain competitive in attracting and retaining globally mobile workers.

Government policy and key challenges

The Dubai Land Department has indicated that new policies may be implemented in 2018 to support the development of the mid-market residential sector. The specific nature of these policies has yet to be published, but some of the key issues for consideration are outlined below.

Margins are typically low in the real estate development industry in Dubai in comparison with other industries.

Combined with a number of relatively fixed development costs such as land and infrastructure, these low margins often mean that developers in Dubai typically make more profit on luxury residential developments than on mid-market residences.

A key barrier to the development of Dubai’s mid-market sector is escalating land prices. According to data from REIDIN, the average price of land in Dubai increased from AED327 (US$101) per sq. ft.* in October 2015 to AED412 (US$112) per sq. ft. in October 2017. Combined with the decrease in residential sales prices since Q3 2014, escalating land prices have put further pressure on developers’ margins.

In mature markets, the cost of land typically represents approximately 15-25 percent of the end sale price of a residential project. In Dubai, at AED412 per sq. ft., this represents a significantly larger proportion of end sale prices for residential property.

Another barrier to the development of Dubai’s mid-market sector is infrastructure costs. These costs, which include electricity, water, waste water, district cooling and roads, remain broadly static regardless of the type and specification of residential product developed. As such, developers can often drive higher margins from the development of luxury residential property than projects that are marketed at the low to middle income brackets.

Conclusions

Barriers to the development of Dubai’s mid-market sector, which include escalating land prices in central locations, can put pressure on developers’ margins, particularly when combined with high infrastructure costs.

The proposed, but as yet unpublished, government policies aimed at addressing the issue of affordable housing in Dubai will be welcome, as the emirate’s growing middle class is likely to drive further demand for this type of residential development. The key challenge will be addressing the interests of all stakeholders, particularly residential developers, who will be reluctant to place further pressure on margins in an already challenging market.

by Martin Cooper, Director, Financial Advisory, Deloitte, Middle East

Endnotes

* A square foot is 0.092 square meters