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Development Advisory and Real Estate Research
There is currently a perceived lack of affordable housing in the UAE.
This note focuses on ways in which affordable housing could be
delivered, rather than the demand side initiatives, such as access to
mortgage finance, flexible payment plans, or public subsidies and other
concepts.
The general definition of affordable housing, for the purpose of this
note, is ‘good quality’ housing that requires a maximum expenditure
(rent or mortgage) of approximately one third of a households gross
income for the middle-lower income segment of the population that
earn up to AED 20,000 per month.
Introduction
Affordable Housing Product Options
A potential option for developers is to offer a different product for
end users, for example the ‘Rent to Own’ model which was delivered
by Emaar during the launch of the ‘The Greens’. Under this scheme
purchasers sign up to a defined lease term at a specified rent, enabling
them to save for a deposit and access mortgage finance, in order to
eventually buy the home they are already occupying.
Pros
• Defined affordable housing stock
regulated to be made available
• Affordability determined with end user
in mind
• Can be regulated and imposed upon
developers
• Directly affects affordable housing
supply.
Cons
• Requires government interaction and
policy intervention
• Likely to reduce developer profit as full
market value not achieved
• Can lead to prolonged development
times
• Perceived to not be the total solution
as there is still persistent affordable
housing shortage in the UK
• Social stigma attached to occupants of
this type of housing
• Need to maintain control on planning
and design to ensure appropriate
integration of stock into wider
developments
Product Options
The items that can be considered as supply inhibitors that are explored
in within this study are as follows:
• Product Options
• Cost of land
• Construction risk
• Government/Corporate/Institution backed projects/entities
• Corporate Housing – Risk Reward
This note is intended to act as a guide only to
encourage further debate.
Social Rent
• Guideline target rents are
determined through a national rent
regime
• The rent levels are usually set
through end user income analysis
Affordable Rent
• Rent is usually capped at 80% of full
market rent
Using examples from the UK, new developments over a certain size,
in terms of units being delivered, include stipulations to make a
provision for affordable housing. The proportion of affordable housing
is guided by government policy at a central level and negotiated and
implemented at a local level. Eligibility for these affordable homes is
usually defined by government guidelines, and the different types fall
into three broad tenure types, listed below:
Shared Ownership
• End user purchases a share of the
home upon completion (typically
25-50%)
• A rental charge equivalent to a
fixed percentage of the value of the
‘unowned’ value
• Purchasers are entitled to increase
their equity stake in the home
periodically
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Development Advisory and Real Estate Research
The cost of land is a significant burden on the overall cost of
development, and with developers having to maintain an expected
profitability target this typically leads to the need for high end
residential unit prices. Development delivery structures that engage
the land owner could be utilised to mitigate the adverse profitability
impact of this cost and in turn potentially help reduce residential unit
prices, whilst maintaining an appropriate profit to a developer.
A few examples are listed below:
Cost of Land
Delivery options can be considered where the construction risk
is reduced and potentially entice investors/developers to take on
residential development at a reduced profit level. Potential risk sharing
structures are shown below:
Construction Risk
1. Land payment timing
Long Leasehold
Already common practice, landowner grants developer a lease over the
land as opposed to upfront capital sum, which reduces upfront capital
cost and financing costs over time.
Structured Land Payments
Landowner effectively takes payments over time, which can be linked to
sale of units, or certain profit targets being met by the developer. This
would mean the landowner taking on additional risk, which could be
compensated in the form of an interest payment/rent, or agreed regular
sum. This could be thought of as lending the land to the developer and
receiving principal repayment on completions/sales.
1. Master Developer
Infrastructure and site works are conducted by a master developer,
effectively removing burdensome upfront expenditure and the serviced
land is sold to plot developers.
2. Creation of entity to forward
fund/purchase stock
An entity can be formed to purchase and manage affordable housing
stock, essentially providing an ‘off take’ agreement.
This provides certainty of end value and receipt of payments and
reduces construction risk.
3. Build-to-suit model
Similar to example 2 where an ‘off-taker’ mandates a developer to
provide housing in return for a long lease. The lessee effectively
guarantees lease payments to provide certainty of income, and
manages affordable housing stock for profit.
2. Joint Venture (JV)
A JV arrangement with a landowner can be structured in many different
ways, one of which is where the developer provides development
funding and landowners equity stake is the land value and receives
payment through development profits. This again reduces the upfront
land cost.
Pros
• Leasing structures already
utilised within certain master
developments
• Relatively simple to deploy
• Design/control clauses
inserted to stipulate
allocation of affordable
housing
Pros
• Landowner retains some
control
• Mitigates land cost as linked
to development profits
• Can be a flexible structure,
that is negotiated for the
benefit of both parties
Pros
• Can be delivered in
partnership with landowner
• Process already utilised
widely
• Significantly reduces
upfront expenditure for plot
developer
• Enhances land value
Pros
• Should reduce funding costs
• Certainty of income to
developer
• Ongoing provision of
affordable housing through
entity created
Pros
• Should reduce funding costs
• Certainty of income to
developer
• Already widely used in
corporate housing
Cons
• Need to get buy in from
landowner
• No formal requirement
to force developers or
landowners to reduce unit
prices
• Leasing already used, but a
perceived lack of affordable
housing persists
Cons
• Potentially more expensive
to deploy
• Likely to prolong
development lead in times to
allow for negotiation
• Again no formal requirement
to reduce unit prices
Cons
• No formal requirement to
force developers to reduce
unit prices
• Plot developer profit could
remain similar due to
enhanced level value
• Land value enhancement
may be reduced if lower
value housing included
Cons
• Need to get buy in from
developer
• Land prices may not be
affected
• Significant lead in time
• Appetite to create new entity
Cons
• Need to get buy in from
developer
• Land prices may not be
affected
• Potential restrictive
alternative use
• Potential increase in delivery
times
Developer
JV
Landowner
Project
Development
Profit
Funding Land
Development Profit
Master
Developer
Serviced
Land
Plot
DeveloperEnhanced land payment
Horizontal development
Vertical development
Developer
Forward
Funder/
Purchaser
Affordable
housing
Funding
Agreed sales price
Ownership and
management of
stock
Developer Lessee
Affordable
housing
Funding
Lease payment
Ownership and
management of
stock
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Development Advisory and Real Estate Research
Taking on developer role
Within the UK there are a number of housing associations with a
mandate to manage affordable housing stock, they are typically
‘back stopped’ by the government and have their own fund
raising capabilities. These entities have also been known to act as
developer, and usually are a forward purchaser of affordable housing
developments. A similar model could be applied to the UAE, where
Taking on development risk
Essentially the concepts discussed, can be generally thought of as
mitigating risk for the developer, which would hopefully lead to the
potential development of more affordable homes.
This will be through the developer taking ‘a view’ on reduced profit
a public sector or financial institution led body could be deployed to
develop or purchase affordable housing. Other options could include
public sector or company funded development, such as Housing
Private Finance Initiatives (PFI) that were historically used in the
UK. Examples of how these entities/projects could be funded are
described below:
targets or significant reduction in upfront capital expenditure.
The more risk that can be taken on by a landowner, 3rd party
(e.g. forward funder) or government entity, the more control can be
potentially gained to direct development of affordable housing.
Government Risk Reward
1. Government/institution guarantee
The UAE government could act as guarantor to a new organization
tasked with developing affordable housing. This can be funded by
external developers.
2. Government/corporate
funded projects
Instead of providing developer subsidies or cheaper funding a project
finance route could be utilised. This is where the government or
company procures a developer/investor to develop affordable housing
in return for a fixed annual payment, which can be linked to a growth
index.
Pros
• NewCo has flexible funding
strategy
• NewCo has flexible mandate
to purchase existing stock
• Government mitigates
development risk
Pros
• Procurement of an investor/
developer with a direct
mandate
• Maintain control through
penalties
• Procure expertise
• Can be simplified to
build-to-suit
• Utilised for staff
accommodation
Cons
• Significant lead in time
• Potential low appetite to lend
to NewCo
• Sharing of role as developer/
property manager
Cons
• Perceived as an expensive
funding option
• Procurement-time consuming
• Significant procurement costs
• Need to re-designate land
uses likely
Reward
Risk
Regulatory
environment
Favourable funding
environment
Mitigate
development risk
Developer-Landowner-
Government-Institution
partnership
Reduce upfront
expenditure
Sponsor
Lender
Public
sector
SPV
Property
Unitary
charge
Housing management
Govt/
Institutional
body
External
Funder
NewCo
FundingGuarantee
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Development Advisory and Real Estate Research
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