A.T. Kearney: Affordable Housing in the Middle East
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The road to home finance has been a long one for the Kingdom, but with its highly anticipated mortgage law edging ever closer to ratification, would-be homeowners and financial institutions are gearing up for a new era of opportunity.
With the announcement this year of a US$66.7 billion initiative to address the demand-supply imbalance in the Kingdom’s housing market, social infrastructure spend is topping the Government agenda as it focuses on building affordable homes for the future.
The South-East Asian island has seen a number of distinctive developments come to fruition over the past few years as the country further establishes itself.
During the boom years, real estate developers in the Middle East catered to people with high-end tastes. But as the elite market has reached a saturation point, developers have shifted their focus to affordable housing.
With massive housing shortages throughout the region, it is no wonder that most developers are keen to tap into this market.
Middle East real estate developers are revising their plans. While the market for high-end mixed-use projects, which dominated in the past decade of growth, has left an over saturated market, low to middle-income residential developments represent a pressing need. In Saudi Arabia, there is an annual shortage of 150,000 units; in Egypt, the shortage is 280,000 units. However, to serve the low to middle-income segment, developers don't just have to change their master plans - they need to revise their business models to maximize volume and optimize margins.
To succeed in the affordable housing markets in the Gulf region, government agancies and developers must shift their business models and views on land prices and profitability to align them with shareholders expectations. Most developers agree that land prices should represent no more than 30 percent of the 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.
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