affordable housing delivery feb 2016

Development Advisory and Real Estate ResearchAffordable Housing Delivery

United Arab Emirates 2016

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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.

IntroductionAffordable 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 OptionsThe 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



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 LandDelivery 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 timingLong LeaseholdAlready 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 PaymentsLandowner 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 DeveloperInfrastructure 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 stockAn 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 modelSimilar 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


developer• Land prices may not be

affected• Significant lead in time• Appetite to create new entity


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

Affordablehousing

Funding

Agreed sales price

Ownership and management of

stock

Developer Lessee

Affordablehousing

Funding

Lease payment

Ownership and management of

stock



Taking on developer roleWithin 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 riskEssentially 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 guaranteeThe 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 projectsInstead 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 likelyReward

Risk

Regulatory environment

Favourable funding environment

Mitigate development risk

Developer-Landowner-Government-Institution

partnership

Reduce upfront expenditure

Sponsor

Lender

Publicsector

SPV

PropertyUnitary charge

Housing management

Govt/Institutional

body

External Funder

NewCo

FundingGuarantee



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affordable housing delivery feb 2016

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