Dubai's Roadmap for Sustainable, Affordable Housing

Roadmap for addressing Dubai’s growing demand for sustainable, affordable housing

A multi-pronged approach involving key stakeholders is crucial to address the rising demand for affordable housing in Dubai.

While Dubai’s economy is on an upward trajectory, a few challenges like affordable housing continue to exist. Currently, there isn't adequate real estate supply in Dubai to cater to lower and middle-income families. Moreover, the rising cost of living along with a steady influx of expats seeking budget-friendly accommodations are exacerbating this challenge.

Some developers have introduced affordable housing projects in locations like Dubailand, Dubai Production City and Dubai International City, among other areas. But even if more mid-range residences are built in the future, the retention is poor due to rising inflation. This leaves the concerned population with no choice but to rent unsatisfactory homes, primarily because of a lack of support from lenders due to low credit scores to purchase homes. There is also a portion of the population that commutes to Sharjah and Northern Emirates for more affordable options.

The start of 2020 saw a sharp increase in rental rates in Dubai by almost 42%. Assuming that the expense toward housing accounts for 30% of the total household income (<=AED 20,000), the costs go up to a staggering AED 72,000 per annum on rent alone.

Currently, there aren't enough bright spots for the private sector to make an impact, while government projects lack a robust vetting mechanism to ensure the right people continue getting them.

Addressing the housing needs of middle—to low-income families, who play a pivotal role in Dubai's success, is critical for the economy to thrive and sustain growth.

A look at affordable housing globally

Housing affordability is a crucial economic driver, affecting factors like labour mobility, consumer spending, and business investment. When housing is affordable, people are more likely to move to areas with job opportunities, spend more disposable income, and businesses are more likely to invest in local communities.

By definition, affordable housing caters to individuals or families whose needs are unfulfilled by the private market. Consequently, the government needs to step up and provide a solution to the crisis.

For example, the Government of the United Kingdom’s National Planning Policy Framework has bifurcated affordable housing—there’s affordable housing for rent and affordable housing for sale. In New Zealand, the government has launched funding schemes to the tune of NZ$ 3.8bn to help build more infrastructure, in tandem with the Infrastructure Funding and Financing Act 2020. This enactment helps developers with sustainable financing to build affordable housing.

Finding a strategic approach

The Dubai 2040 Urban Master Plan “outlines a comprehensive strategy for sustainable urban growth which includes the provision of housing for citizens on the basis of social and familial stability.”

The primary stakeholders involved in the web of affordable accommodation include:

the population with a household income of less than or equal to AED 20,000 who expect housing at a certain rent; the government that aims to provide housing by spending the least amount of funds; and developers who seek profitability as the end goal.

Building a long-term sustainable strategy, involving all the parties, is crucial. Here are a few potential solutions to explore:
 

• Developers
  


The first step in our solution involves incentivizing private developers to create affordable housing projects. To ensure greater participation, incentives must be provided to enable them to earn a guaranteed target return. At present, higher margins in the luxury housing segment continue to attract more developers.

Here, the government's role is crucial in readjusting the lens of private players, through the provision of benefits like subsidized land, tax breaks, and guaranteed buyback. Other measures include inclusionary zoning and incentivizing small developers with financial benefits, ensuring they make better margins.

• Sales of units


Once the units are developed, they are sold to investors with a mandatory long-term leaseback agreement (over 10 years). This helps in providing them with a guaranteed return on investment for that period. At the same time, offering an option to extend the lease for an additional period can be considered, albeit with an inflation increase clause to protect investor interest and refurbishment contribution from owners at specified intervals to maintain quality.

The owners could be private investors or real estate investment trusts (REITs) who have no apprehensions about investing in these units at a lower guaranteed rate (but also at much lower risk).

In addition, the government can include a buyback option to gain from the potential upside and recover the land subsidy.

Management

A crucial component of this solution is the establishment of a government agency or department dedicated to managing these affordable housing units. The foremost task would be to vet the applicants and conduct periodic reviews, reinforcing the message that only deserving candidates will get subsidized units. Rent collection, maintenance, and making periodic payments to the owner of the units will be another area to look at.

Also, the lease of units can be offered at a certain rate plus inflation provided the refurbishment is taken care of by developers for longer-term leases.

Conclusion

This sustainable affordable housing solution for Dubai addresses the core issues of insufficient stock, affordability, and long-term viability. By engaging private developers, investors, and the government in a structured, mutually beneficial system, this integrated approach ensures all stakeholders are equally involved. Moreover, the government must take the lead in developing a long-term land usage plan, keeping housing for all as one of its primary goals.

The Dubai 2040 Plan prioritizes the development of key areas like Deira and Bur Dubai, Downtown and Business Bay, Dubai Marina and JBR, and two new centres - Expo 2020 Centre and Dubai Silicon Oasis Centre. While these areas will be in focus for overall development, the Plan specifically targets areas with high demand for affordable housing, such as overcrowded areas in the historic core, to ensure the provision of affordable housing closer to employment, transit, and other key amenities.

The key to success lies in the balance it strikes between investor and developer profitability, minimizing the financial burden on the government, and providing affordable, high-quality housing for residents. With effective implementation and ongoing management, this solution has the potential to significantly alleviate Dubai's affordable housing shortage while creating a sustainable, long-term housing ecosystem.

As Dubai continues to grow and evolve, this innovative approach to affordable housing can serve as a model for other rapidly developing cities facing similar challenges, showcasing Dubai's commitment to inclusive and sustainable urban development.