Analysis

The Mid-Range Housing Approach

It’s no secret that one of the biggest challenges facing governments in the Gulf is finding enough housing for their residents. Demand for mid-range housing, specifically, in many parts of the region has now reached a critical level. Governments are taking steps to address this need – in Dubai, local authorities recently announced that they will consider enacting legislation to enable the provision of middle-income housing in certain core areas of the city – but the onus is also on developers to be ready and capable of taking on these kinds of projects.

How do we define mid-range housing? Consultant JLL defines “middle-income” housing as property provided by the market which is affordable to the middle tranche (40-60%) of households, on the assumption that they spend no more than 30% of their gross household income. The consultant says that in the UAE, an affordable sales price is about AED 790,000, with an affordable annual rate of AED 72,000 (around AED 6,000 a month).

The first issue developers should be aware of is that the demand is certainly there. Historically, there has been a tendency to focus on luxury property among some developers and in certain parts of the Gulf, as the returns tend to be higher. However, a different approach is needed. At ARADA, for instance, we believed there was significant unmet demand for well-designed master communities in Sharjah priced at an accessible price point. We launched our first project, Nasma Residences, in March 2017, and it quickly became Sharjah’s fastest-selling community.

We followed that up with Aljada, the emirate’s largest mixed-use mega project, in September 2017. Again, we’ve ensured that a significant proportion of the homes we have on offer in Aljada are priced at what JLL would term a middle-income level, and this has ensured an outstanding response from the market. Our experience with both projects therefore tells us there is strong demand for this type of housing.

But like other developers working in this field, we need to work harder than ever to ensure successful delivery. There are a number of challenges companies face while building mid-range projects, starting right from the outset with the cost of the land. That is only the beginning, however; our experience tells us efficiency is the watchword. Everything, from finishes to design processes, from procurement processes to planning, needs to be that much tighter.

I would argue that one of the most important issues in this context is the relationship between developer and contractor. In many markets around the world, the mentality on the part of developers and consultants is to squeeze the price down to the lowest possible level before putting pen to paper. However, this approach often leaves contractors nowhere to go. In a perfect world, where projects run smoothly and on time, this policy is arguably viable. However, as everyone reading this article knows, there are very few projects unaffected by delays, snags or other issues, many outside the contractor’s control.

Developers and consultants should understand that contractors need to price in some risk, or the risk you run is that if the contractor hits a snag, it may walk off. It’s a case of looking at how to incentivise the contractor to meet both your targets and your project objectives. Money is the primary consideration here; some developers may promise more work in later phases in an attempt to drive the price down, but we all know contractors can’t necessarily take account of that. Contractors also need to be allowed to price as best they can and leave some room, especially if matters are left to the last minute and the delivery schedule is tight. In addition, if the price has been driven down too far and the project runs into problems, the contractor has no room to accelerate, due to cashflow issues.

Another key concern is that of payment. Payments for me are critical; if developers have agreed to a contract and the contractor is performing, then they should be paid. We are all aware that the issue of late payments has become more and more prevalent in recent years, with some contractors even forced to rely on debt financing to make ends meet. Our position is simple: we look to create partnerships with our contractors. You’ve got to make sure that connection is made and it must be a win-win for both parties, otherwise you’re already on the back foot before the project is even off the ground. While these are important considerations for any type of project, they are especially vital when it comes to developing mid-range developments, where margins are inevitably tighter.

The coming year promises to be exceptionally busy. At ARADA, we have already begun construction at Nasma Residences and will start enabling work on the Aljada site towards the end of Q1 2018. The onus is on us to ensure that we carry out our work efficiently and quickly, while incentivising our partners to perform at their best. That way we can ensure that we are all able to work towards meeting our delivery schedules on time, fulfilling our promise to provide our buyers with the keys to their homes at the right time.

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