Affordable Housing, Too Much Housing, Investing, and International Investors in Abu Dhabi

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(ABU DHABI, UAE) -- During the enormous expansion in apartments and villas available for rent in Abu Dhabi the past few years, little attention has been paid to anything below the luxury market. This month for the first time the Abu Dhabi government announced two significant initiatives to reserve housing for middle income residents.

Yesterday the Urban Planning Council (UPC) announced that at least 20 percent of some new residential developments is to be set aside for middle income users. The developments involved must be contain at least 75,000 square meters of housing and do not include villas or townhouses.

Michael White, senior planning manager at UPC, told Gulf News, a daily UAE English language newspaper, "The plan is applicable to developer-driven planned districts" and named Yas, Reem, Lulu, and Saadiyat islands as some of the locations.

Rents will be set at 35 percent of total household income and run annually from $6866 - $24,033 for studios to three or more bedrooms from 40-90 square meters. Each developer will decide how the affordable units are apportioned in a project. The UPC estimates that studios would make up 10 percent; one bedrooms 30 percent; two bedrooms 50 percent; and three or more bedrooms 10 percent out of the pool of affordable apartments in one project.

Units will be designated as affordable for at least 10 years. The designation is independent of the tenants. If the first tenant moves, the apartment remains in the affordable category and will become available to the next qualified tenant.

"The master developer and management company must initially verify the income to determine eligibility," explained White. UPC and the Abu Dhabi Municipality will monitor and enforce the program. According to White, they are now figuring out how that will work.

A report in today's The National newspaper, another English daily, quoted White as estimating that the first affordable apartments will be available "probably within the next year or two." Since the UPC expects 73,000 new homes to be built in Abu Dhabi by 2013, that means 14,600 or 20 percent would be reserved for middle income residents.

It's not yet clear whether the developers who target 20 percent of their projects for middle income residents will be able to count on funds or guarantees or otherwise benefit from the joint venture announced last week between Mubadala Development and Pramerica Real Estate Investors, a subsidiary of Prudential Financial.

The partnership is to invest an unspecified amount from Mubadala into middle income housing in Abu Dhabi through the Mubadala Pramerica Real Estate Investors fund. Chairman Khaled al Qubaisi who was interviewed by The National said the new companies growing in Abu Dhabi "will be employing a lot of middle income employees" who will need housing they can afford or rather that their employer can afford since many employees receive an annual compensation package that includes housing and other allowances.

Mubadala Pramerica's managing director Charles Pardoe said the fund will help bring developers who focus on middle income projects together with the new companies who might lease properties for their employees.

Pardoe explained that the fund will own properties and lease them. "We'll exit through a sale if the opportunity arises, but that's not the primary concern." He added, "We're largely decoupled from the sales market."

The new interest in affordable housing in Abu Dhabi came up today at the Cityscape Connect business breakfast. Mansoor Ahmed from developer Manazel said that affordable housing is relatively low risk for the developer "if the land is affordable." He said that the Al Reef project  outside the city of Abu Dhabi which falls into the affordable category has a default rate on payments of 2 percent, acceptable anywhere and amazing in the UAE where many owners have walked away from properties due to inability to come up with monthly payments.

 Ahmed also explained why little affordable housing has been produced in Abu Dhabi so far. It is because of very high land costs for waterfront acreage. For some reason, he said, in Abu Dhabi developers decided that they had to offer beaches which makes apartments and villas in those areas expensive.

The panel members agreed that there is oversupply of housing stock in Abu Dhabi today and that will increase in the next few years with some many new projects coming online. But a lot of that stock will be outdated in UAE terms where 15 year old 10-story buildings are knocked down to make space for new 40 or 50-story towers.

In another country, affordable housing might be created by refurbishing some of the current up market housing that will look old when the new up market projects become available. But no one takes that approach here, one reason being, as Ahmed pointed out, the lack of parking.

Until very recently, builders were not required to provide parking, and so they didn't. Everyone parked on the street, often two and three deep with a phone number left on the windshield, and police unconcerned.  Now there are too many cars, and it's impossible for a city to play in the big leagues to attract major investors and major companies with a third world parking situation.

Belatedly, Abu Dhabi is beginning to worry about parking, and there isn't enough space for over or under ground garages to be built. Easier to start again in new spaces outside the central island and begin to move government, embassies, major companies, outside and restrict car dealers, for examples, to designated areas outside the center.

Oversupply of housing in the next few years, affordable housing too, and a legal regime that is still not certain enough to attract some major international investors: Michael Katounas, director, MENA Investment Banking, Credit Suisse, pointed out that while regional investors consider Abu Dhabi reasonably safe and "are comfortable with lack of concreteness in the legal environment," international investors are unwilling to face legal risk. "They accept market risk," he explained, "not any other kind."

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