October 20, 2014

As large shortage looms, GCC Governments Need to Pursue More Holistic Housing Strategies, Says Strategy&

Surge in housing demand could lead to a shortage in excess of one million units by 2018

Sustainable development, public-private-partnerships, prudent real estate laws and greater access to financing critical to sector’s development

With the GCC region set to face a massive shortage of housing, governments need to pursue more holistic policies in order to better meet the housing needs of the region’s populations, according to a study by management consultancy Strategy&, formerly Booz & Company. Governments should drive sustainable development, promote public-private-partnerships, establish prudent real estate laws and facilitate greater access to housing finance in order to revitalise the sector, the study said.

Factors Behind Housing Shortage

The countries of the GCC are currently experiencing a shortage of housing, particularly for their large and growing population of low-income residents. Several factors are contributing to the problem, according to Strategy&. The first is rapid local population growth.

“From 2000 to 2013, the total population of the GCC rose by over 67 percent, from 29.4 million to more than 49 million, and it continues to grow 2 to 3 percent each year,” says Samer Bohsali, Partner with Strategy&. “The relatively young demographic structure of the region is creating a surge in demand that could lead to a shortage in excess of one million units by 2018.”

High unemployment means that an increasingly larger portion of the regional population is unable to purchase or even rent homes. Despite growing demand, residential real estate development in the GCC region is slow with buildable land scarce and expensive, particularly in urban environments.

Furthermore, difficulties securing mortgage financing is a key constraint for potential home buyers. These are primarily due to the lack of a legal framework for banks to offer such financing or because of strict requirements that render many potential buyers ineligible for lending. The result is that the GCC has home ownership rates far lower than those of comparable countries. Only 35 percent of Saudi households own their homes, according to estimates. In the UAE, home ownership rates are roughly 48 percent.
Another factor is a major shift in housing preferences in the region. People, especially the aspiring younger generation, now want apartments rather than houses, in part because of affordability. Many young citizens of GCC countries are also interested in a higher standard of living, with more services and less pollution.

Several GCC governments are trying to address the housing shortage by spending billions of dollars on mega-housing programs, often aimed at low-income residents. However, without sustainability and community factors embedded in the design and construction of these units, they often do not retain their value over the long term.

“Given the severity of the housing shortage — and the current efforts of GCC governments to achieve other socioeconomic goals, such as reducing unemployment and weaning residents from their dependence on the state — a better approach to the provision of housing is needed,” points out Ramy Sfeir, Partner, Strategy&. “Rather than focusing simply on bricks and mortar, GCC housing policies should aim to build vibrant communities, create jobs, enhance social welfare, and ensure a healthy environment,” he adds.

According to Strategy&, five factors are critical to making GCC public housing policy more effective.

  1. Apply sustainable urban planning and design principles: Integrating principles of sustainable urban planning and design, including mixed-use developments can foster a sense of physical and social community. Financially, the right design can retain or increase the value of properties. It also creates a range of employment opportunities, which help advance the socioeconomic status of residents. Sustainable design can also potentially deliver a range of environmental benefits like reducing electricity consumption, limiting air pollution and CO2 emissions, and fostering biodiversity and a vibrant ecosystem
  2. Leverage public–private partnerships: Public-private partnerships can enable faster and more sustainable development of housing projects. Structured correctly, such partnerships can combine the investment funds and expertise needed to execute and manage housing projects. They allow government assets to be allocated across more projects. They can also build public-sector capabilities by transferring know-how and expertise to relevant government agencies, thus helping streamline the delivery process. However, as with other areas where the public and private sectors intersect, this will require mechanisms to ensure transparency and efficiency.
  3. Strengthen housing finance: “Another structural limitation facing the region’s housing sector is weak access to home financing”, says Principal Karim Abdallah, Strategy&. “Underdeveloped financial markets and regulations limit the appetite of banks to extend mortgages. Governments seek to remedy the situation through soft loans through local banks or government agencies. However, few governments have any kind of equitable distribution mechanism, which means that households that are most in need may not have access to financing,” he adds.

Addressing these challenges requires a two-part solution. Firstly, governments must develop financing schemes that more effectively target low-income households, allowing them to purchase adequate and affordable housing. Secondly, mortgage laws must be revamped to offer protection to low-income households, while still preserving the rights of lenders.

  1. Diversify housing programs: Most GCC governments’ housing programs offer limited types of assistance - either land, direct financial support, or a housing unit. However, there is often a mismatch between assistance and need. Many applicants may already have access to existing housing units. This mismatch may lead to the waste of valuable resources, and missed opportunities to renovate existing units. Access to existing programs is also often limited. Most of these programs require the beneficiaries to repay over time the value of the benefit. In some circumstances, the applicant’s income does not allow the person to be a homeowner, leading to a denial of assistance. A large menu of programs can be used by governments to ensure proper targeting and efficient use of resources.
  2. Implement efficient management: Governments also need to create specialized agencies to deal with the supply, maintenance, and management of public housing. A specialized agency can evaluate housing applicants to ensure that those who best meet the eligibility requirements actually receive housing. In addition, these agencies can ensure the adequate maintenance of facilities, to establish a consistent and equal standard of housing over the years.

Furthermore, in order to maintain the stability of the real estate sector and attract investments for its development and growth, governments must ensure the rights and responsibilities of landlords, tenants, investors, and property service providers. A real estate regulatory agency, similar to the Real Estate Regulatory Agency in Dubai, is one approach to efficiently carry out this task. In addition, laws that guide the actions of both tenants and owners are essential to ensuring the maintenance of housing units, as well as overall real estate market mechanisms.

The housing challenges in the region are profound. However, with the right approach governments can transform these challenges into opportunities to develop a vibrant and more affordable GCC housing market, and so better meet the needs of the current and future populations of the region.