Middle East faces shortfall of affordable homes

By DAVID ROSENBERG / THE MEDIA LINE
September 19, 2011 21:19

"Lack of access to affordable housing has been identified as one of problems behind Arab Spring," says real estate investment firm director.




Egypt Tahrir Square

Egypt Tahrir Square. (photo credit: REUTERS)

The Middle East and North Africa (MENA) faces a shortfall of some 3.6 million units of affordable housing over the next five years unless the region’s governments and property developers make a combined effort to solve the problem, warns a report by the global real estate investment and advisory firm Jones Lang LaSalle.

Egypt, the region’s most populous country, faces the biggest shortfall of affordable housing, with Jones Lang LaSalle estimating the shortfall between supply and demand would reach 1.5 million units. War-ravaged Iraq is one million units short and Morocco needs 600,000. Even wealthy countries face a shortage, although on a smaller scale: Saudi Arabia needs 400,000 the report forecast.

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The shortage is serious enough that Craig Plumb, director of MENA research at Jones Lang LaSalle, cited it as a factor in the turmoil that has swept the region this year.

“The lack of access to affordable housing has been identified as one of the problems behind the Arab Spring. Social unrest has been linked to lack of jobs and lack of housing,” Plumb told The Media Line. “As a result, there have been fairly bold initiatives by governments [to address it] in Egypt and Saudi Arabia.”

The affordable housing shortage is an example of the problematic economic growth the MENA region has experienced. While many countries saw their gross domestic product expand at relatively high rates, most of the extra wealth accrued to the richest while incomes stagnated and insufficient numbers of new jobs were generated. In the housing market, a parallel trend occurred, with developers focused on building for the top income earners.

But with the region’s population growth outpacing much of the world and a very young population that will be forming families and demanding homes, MENA economies have little time to waste, the report warned.

The report defines affordable housing as any that requires some kind of government intervention to be built either because potential buyers cannot pay the price prevailing on the free market. In much of the MENA region, the report said, prices are way beyond the reach of the average person and even for those who might be able to pay it is difficult to get a mortgage.

In Algeria, average high prices are 30 times the average annual salary, according to the report. Other countries are not as bad – in Tunisia it’s 24.8 times, Egypt 18.4 times and in the UAE 6.4 times. By comparison, in the US a home price is only 2.8 times the average annual salary and in Germany the ratio is 5.1.

Mortgages are hard to obtain even for those who can afford those kinds of prices, Jones Lang LaSalle said. In the UAE, for instance, the minimum monthly salary someone needs to qualify for home and other loans is $5,500 a month, which puts a mortgage beyond the reach of half the country, the report estimated.

Authors Deepak Jain and Bansrelal Goshichand said home prices were inflated by the high cost of land and the tendency to build small numbers of units at a time rather than cheaper, large-scale developments. Nevertheless, they said they see some signs that the shortfall in affordable housing may finally get around to being addressed.

Developers have soured on the luxury real estate market, especially in the United Arab Emirates (UAE), after prices collapsed in 2008. Meanwhile, the region’s governments are paying new attention to the segment as they try to respond to popular grievances over economic issues.

The biggest initiative is coming from Saudi Arabia, whose government has set aside some $130 billion, or around 30% of its annual economic output, on social projects that include building homes. In March, King Abdullah pledged to spend $67 billion on 500,000 new homes and raised the value of mortgages provided by the Real Estate Development Fund to 500,000 riyals ($133,000) from 300,000 riyals. In addition, the country’s Shura Council has approved a much anticipated mortgage law.

More than half of all Saudis rent due to the high prices of land and housing, which have become unaffordable for low- to middle-income families because mortgage lending isn’t an option for financing a home purchase. Ordinary bank loans entail substantial down payments, short terms of no more than 15 years and high interest rates.

Meanwhile, Egypt’s interim military government has ordered the Housing Ministry to supervise construction of one million affordable units by 2015 in 22 cities. However, the task is immense. Egypt’s economy has slowed since President Husni Mubarak was ousted last February and the pace, which works out to completing 550 homes a day, is ambitious, especially for the country’s sluggish bureaucracy.

That’s why Jones Lang LaSalle’s Plumb said the private sector will have to take a role in building the homes.

“It’s a very ambitious goal,” he said. “The private sector would like to help here but at the present it isn’t economically viable to develop affordable housing in most of these markets. In a nutshell; that’s why it hasn’t been built.”

More private sector initiative to lower-cost housing is already underway as property prices and rents in the Gulf continue to fall, Standard and Poor's said in an outlook report on the region last month.

Developers in markets like the UAE, which are oversaturated with top-of-the-line housing, are likely to favor renting their properties. S&P said it expected to see greater emphasis on regenerating urban areas with "a pronounced shift away from high-end residential development toward affordable housing," particularly in Saudi Arabia, analyst Tommy Trask said.

Governments face a challenge in ensuring that the affordable housing they do build doesn’t turn into slums. The lower-cost housing that is built is generally in remote areas where land is cheaper, but developers have often failed to ensure there is adequate public transportation to jobs, schools and shopping or to develop local amenities.

“Governments should get more involved to avoid the high social and economic costs involved in the current piecemeal approach where most sites for affordable housing are located in remote and inaccessible locations,” said Deepak Jain, head of strategic consulting.


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