Developers in the Middle East and Gulf region need to change their focus and look at building more affordable properties, it is claimed…
They have spent too much time focussing on the higher end of the market but it is the affordable homes sector that could bring in revenues in the future as demand soars, according to consultants A.T. Kearney.
It sees affordable housing as the new frontier for the MENA real estate industry which is says is worth $125 million a year.
In Egypt there is a shortage of 280,000 units annually and in Saudi Arabia there is an annual shortage of 150,000 units, the company estimates.
To serve this growing middle income segment, developers will be required not only to change their master plans but to revise their current business models to maximize volume and optimize margins, according to A.T. Kearney.
‘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 Larches, principal in the real estate practice, A.T. Kearney Middle East.
Most developers agree that land prices should represent no more than 30% of total development costs in order to avoid jeopardizing projects, but in many Middle East locations, 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, it says.
A recent example is the announcement by the Urban Planning Council in Abu Dhabi that all developments larger than 75,000 square meters 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% 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.
‘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 con¬solidation opportunities and diversification strategies, he added.