The growing crisis of affordable housing

in MENA

ii The growing crisis of affordable housing in MENA

Contents

1The growing crisis of affordable housing in MENA

Understanding the crisis of affordable housing in the MENA region 04Presenting the challenge 06The crisis introduced 07Why now? 08Tackling the crisis 10Engaging the private sector 11Moving forward in partnership 14

2 The growing crisis of affordable housing in MENA

Understanding the crisis of affordable housing in the MENA region

3The growing crisis of affordable housing in MENA

In July 2012, Ernst & Young Middle East and the Affordable Housing Institute1 organized and co-hosted the inaugural Housing Markets and Policy Design in the Gulf Region workshop as part of the third Gulf Research Meeting (GRM)2. Over the course of two days, housing policy-makers, public and private sector developers, heads of financial institutions and housing specialists discussed in depth how best to address the crisis of affordable housing in MENA generally, and the Gulf particularly.

This workshop is the first of its kind, a neutral forum to present evidence-based MENA research, so that decision-makers in the region can have greater confidence in future housing policy design and implementation. The participants

actively debated the benchmarking of global best practice in a MENA-specific context, with the goal of creating a platform of empirical knowledge of the region’s housing systems. The resulting knowledge and insights provide a valuable overview of housing systems and their outcomes that can be readily used by policy-makers and business leaders concerned with affordable housing in MENA.

This paper is a result of those discussions.

1 AffordableHousingInstituteisaglobalnon-profitorganizationprovidinghousingfinanceexpertiseandthoughtleadershiptomakehousingaccessibletolow-incomehouseholds.

2 TheworkshopwaspartofthethirdGulfResearchMeetingorganizedbytheGulfResearchCentreattheUniversityofCambridge. AvolumeofeightpaperspresentedattheworkshopisbeingpublishedbytheGulfResearchCentre.

4 The growing crisis of affordable housing in MENA

Throughout history, cities that fail to house their people have risked urban unrest: poor-quality housing outputs contributed to rioting in Rome in 75 BC, Paris in 1848, several US cities in 1967, and Morocco in 2003. In fact, social scientists Valerie Karn and Harold Wolman have observed that one key way to evaluate a nation’s housing system delivery is whether, and how much, it contributes to social stability.

Their statement is especially prophetic in the context of the MENA region today. MENA cities, like most of the world, are urbanizing rapidly. The people who come in search of a better life for themselves and their children expect to have decent places to live. So their sense of social cohesion is directly connected to the delivery of sufficient housing they can afford.

Housing is what creates and defines cities. Affordable housing is what makes successful and scalable cities. As such, affordable housing is essential to the continued success, growth and competitiveness of all MENA cities.

As Rakesh Mohan, Deputy Governor of the Reserve Bank of India, suggested in 2007, future national competitiveness and economic success will depend on the comparative efficiency of cities. Because housing is where jobs go to sleep at night, the quantity, quality, availability and affordability of housing becomes a key component in national economic competitiveness.

Despite many MENA nations’ efforts so far, the supply of affordable housing is falling far short of demand, and demand is rising. Thus, the GRM workshop has acted as a clarion call to innovation by both the public and private sectors, to work together to deliver the housing their countries need and their citizens can afford.

Housing is what creates and defines cities. Affordable housing is what makes successful and scalable cities. As such, affordable housing is essential to the continued success, growth and competitiveness of all MENA cities.

Presenting the challenge

5The growing crisis of affordable housing in MENA

The crisis introduced

Unless MENA’s public and private sector leaders change their strategies, the growing crisis of affordable housing will become a major long-term problem that leads to widespread social dissatisfaction.

Affordable housing has always been part of the Gulf nations’ housing policy statements. “A good home for every citizen” has been part of the national social contracts and until roughly 15 years ago that was a promise governments could keep. In the last

decade and a half, however, governments have been falling behind: the systems in place, which used to be effective, cannot keep up with growing and diversifying economies and the long-predicted boom in urban population.

There is an increasingly marked imbalance between rising wealth creation, on the one hand, and delivery of new homes and desirable living environment on the other.

The systems in place, which used to be effective, cannot keep up with growing and diversifying economies and the long-predicted boom in urban population.

% Satisfied % Neutral% Totally satisfied % Unsatisfied

Figure 1 Level of satisfaction with housing services provided

Qatar

25.0

75.0

Bahrain

22.2

11.1

33.3

33.3

Kuwait 50.050.0 Iraq 60.020.0

20.0

SaudiArabia

21.4

57.1

21.4 14.3

28.6

42.9

14.3

YemenUAE66.7

13.3

20.0Oman 50.0

16.7

25.0

8.3

Source: Evaluation of housing policies in Gulf countries, survey data, 2012

Total 44.3

29.1

17.7

8.9

Figure 1 Level of satisfaction with housing services provided

Gulf citizens are noticing, as Egypt’s Maha Ismail Mahmoud showed at the GRM, according to her survey only 44% of nationals from eight countries around the Gulf region were totally satisfied with the quality of the delivered housing services (Figure 1). These findings were echoed by Ernst & Young’s Director of Economic Research in MENA, Gus Freeman, whose analysis of housing affordability, as measured by “residual income” (household budget available after providing housing) shows wide variation, with UAE and Qatar achieving higher levels of housing affordability for nationals, while citizens of Saudi Arabia and Yemen have very low residual incomes (Figure 2).

1,758

2,454

2,818

7,499

13,073

0 2,000 4,000 6,000 8,000 10,000 12,000 14,000

Yemen

KSA

Bahrain

Qatar

UAE

Residual income (PPP International $)

Figure 2 Residual income for five Gulf countries, 2005 to 2007

6 The growing crisis of affordable housing in MENA

Why now?

The time for policy action in MENA is now, because the region’s countries are entering what the United Nations calls the “demographic window of opportunity,” representing an unprecedented period of new household formation. It is measured by the ratio of prime-earning adults (people between 16 and 64) to housing dependents (children under 16 and the elderly of 65 and over). When a nation has a “worker’s bulge,” it will rapidly form new households, and those households will want to consume more and better housing. The timing of the demographic window for countries in MENA is shown graphically in Figure 3.

Figure 3 The timing of the demographic window for the countries of MENAFigure 4 The Timing of the Demographic Window for the Countries of MENA

1970-80 1980-90 1990-2000 2000-10 2010-20 2020-30 2030-40 2040-50 2050-60 2060-70 2070-80 2080-90 2090-2100

30 Years

1995 35 Years 2030

35 Years1995 2030

2000 40 Years 2040

2005 30 Years 203540 Years2005 2045

40 Years2005 2045

30 Years2005 2035

35 Years2010 2045

35 Years2010 2045

30 Years2020 2050

30 Years2020 2050

30 Years2020 2050

35 Years2025 2060

35 Years2030 2065

2035 2065

25 Years2045 2070

35 Years2045 2080

35 Years2060 2090

1975UAE

Start date End date

Qatar

Kuwait

Israel

Bahrain

TunisiaLibya

Iran

Lebanon

Morocco

Algeria

Syria

Jordan

Egypt

KSA

Oman

Iraq

Palestine

Mauritania

Yemen

Source: United Nations, (2004) World Population to 2100

202550 Years

1985 202540 Years

Any individual country’s demographic window will typically last for about 35 years; that is the moment of opportunity that MENA countries will have to move beyond emerging market status.

Any individual country’s demographic window will typically last for about 35 years; that is the moment of opportunity that MENA countries will have to move beyond emerging market status. To do this, they will require large numbers of quality, urban, affordable homes for people to own or rent.

This is especially urgent in MENA now, because their populations are growing at two or three times global averages. By 2050,2 the populations of Bahrain, Egypt, Iraq, Jordan, Kuwait, Mauritania, Oman, Saudi Arabia, Syria and Yemen are projected to more than double — and all of this net growth will be in cities, because people in these countries are moving, rural-to-urban.

As these economies shift from being exclusively resource-based to having an increasing portion of information-based employment, the region is seeing large-scale job creation occur. In Gulf countries, this has led to an influx of expatriate workers. Although expatriates are expected to fend for themselves in the housing marketplace, their money and their use of land competes with nationals’ money and land use, which drives up the price of all housing.

2 UnitedNations,(2004)WorldPopulationto2300

7The growing crisis of affordable housing in MENA

In the face of this pressure, the housing systems these nations put in place until 1990 are not keeping pace. Bahrain’s waiting list of nationals for affordable housing runs to more than 50,000 families. In Kuwait, the list is 95,000 long, and growing at 6,000 names a year.

The widening gap of effective demand over affordable housing (Figure 4) is not arising because governments do not care; rather, it is proof that governments’ existing frameworks are being asked to do much more than they were ever designed to deliver.

It is time for governments to make step changes in their delivery models and, in particular, to shift into a more outsourced, public-private partnership-oriented approach on both the supply side (new homes) and the demand side (financing products).

In some countries, the challenge is even greater because private landowners have vast holdings, which further reduces the supply of land available for affordable housing.

Supply

Figure 3 Schematic Diagram of the Factors Causing a Shortfall in Affordable Housing

Private land not beingdeveloped for housing-speculative land holding

Housing finance not readilyaccessible to all householdsor property developers

Housing and planning lawsnot in place

Unprecedented level of housingdemand as demographic bulgereaches economically active age

Affodability declinePr

ice

incr

ease

Supply

Demand

Figure 4 Schematic diagram of the factors causing a shortfall in affordable housing

8 The growing crisis of affordable housing in MENA

Tackling the crisis

Affordable housing requires some elements of subsidy or government contribution, but governments can never solve the problem simply by pledging large sums: too much money will drive up prices, not create more affordability.

Land allocationBecause of the most basic principles of land use economics, cities will not create quality affordable housing if the task is left purely to the private market. Any given plot of urban land that comes up for auction will go to the highest bidder, and that bid will reflect high density and commercial or luxury residential use. Housing for low-income households will never be such a use.

Because of this, it is vital that MENA governments that need more affordable housing must take charge of land allocation and make sure that some urban land, or some portion of all urban land, is reserved for that purpose.

Land taxation and releaseIn some countries, the challenge is even greater because private landowners have vast holdings, which further reduces the supply of land available for affordable housing. Land banking of this sort can be strongly influenced by land taxation; for example, in February 2008, the Kuwaiti Parliament passed a law taxing large undeveloped land plots, to take effect at a specified future date. GRM participants heard anecdotal evidence that several developers holding large inventories sold some of their land just before the tax was due to become effective.

Streamlining of approvalsLand development generally crosses multiple national or city agencies, such as the bodies in charge of roads, utilities, zoning and building construction, in addition to the natural entities of housing and finance. Each non-housing department sees many different types of real estate uses, and treats them all the same. This makes perfect sense if all the uses are purely market, but if affordable housing is involved, developers can experience the frustration of having one agency exhorting them to produce faster, while another agency of the same government is obstructing their development at every turn.

Streamlining and coordinating of approvals requires an over-arching national urban strategy, backed by policy or resource commitments from the highest levels of government. Without such commitment, coordination becomes pleasant enough in theory and non-existent in practice.

Modernize planning and building regulationsMany Gulf region governments have adopted generous standards for their citizens’ affordable housing: large homes, often villas, and minimal repayments or householder contributions.

Combine these high standards with typical subdivision regulations relating to minimum plot size, street setback requirements and building regulations prohibiting technologies that did not exist 20 years ago, and the result is per-home costs that are 30% higher than they need to be, according to the GRM paper presented by Naseej CEO Christopher Sims. These changes, all within the control of government, could drop the sale price of an affordable home to something lower-income households could, in fact, afford.

Managing expectationsAt the same time, policy-makers should consider how to recalibrate citizens’ concepts of what constitutes acceptable standards of government-subsidized housing. Everyone may dream of the villa, but the townhouse or the flat can be cheaper, greener and better for young families just starting out. Everyone imagines being an owner, but for some, renting is the right place to start. If citizens can be given alternatives without losing their chance for the ultimate home, they will show by their actions that more configurations and tenures are possible.

These changes, all within the control of government, could drop the sale price of an affordable home to something lower-income households could, in fact, afford.

9The growing crisis of affordable housing in MENA

Affordable housing delivery requires government contribution, but governments can not tackle the crisis on their own. Both supply-side and demand-side strategies can mobilize the private sector and hence make government resources go further.

Housing affordability lies at the intersection of supply side (more homes) and demand side (more financing), and to tackle the growing crisis, MENA governments need to engage the private sector on both sides simultaneously.

In fact, most public sector initiatives to date have been on the supply side – the direct creation of affordable homes – but increasingly, forward-thinkers in MENA are looking for demand-side innovations, which can not only help citizens find ways to secure affordable housing, but also reduce public sector administration and costs.

Supply-side interventionOn the supply side, governments can directly provide the input of land, and it can choose to be its own direct builder, but Gulf experience shows that, sooner or later, the government builder is unable to keep up with the pace of demand. Then it makes sense to utilize private sector know-how and dynamism, in a joint venture or public-private partnership (PPP).

When bringing in the private sector partner, however, it is critical for the government to give the developer clear rules and a coordinated process, such as in planning permission. The same development that could be approved in one month in London and two months in Morocco, in one Gulf country took more than eight months, according to Sims, and in the absence of a “one-stop shop,” necessitated visits to 11 separate government ministries.

Added to time costs are processing costs. Private sector developers in the Gulf often pay import duties of around 5%, while public sector developers pay nothing for identical materials needed for affordable housing. Private sector developers are often charged up to 15 of the cost of land for registration, while public sector developers are charged no fee. Governments could readily address these costs by decreeing that PPPs for affordable housing are considered public sector, because they are serving the public interest. Similar reasoning should allow developers to use more modern building techniques when they can be shown to have worked in other MENA regional countries.

Demand-side interventionOn the demand side, housing is more affordable when finance is cheaper, and that benefits from increased diversity of product types, breadth of private sector participants in finance and depth of market activity (Figures 5a and 5b) — and all of these, according to Olivier Hassler, formerly of the World Bank, are challenges in MENA today.

Figure 5a Housing loans as a percentage of gross domestic product (GDP)Figure 5aHousing loans as a percentage of Gross Domestic Product (GDP)

End 2009 figures (2008 for Egypt, Oman)18%

16%

14%

12%

10%

8%

6%

4%

2%

0%

Egyp

tAlge

ria

WBG*

KSA

OmanLe

bano

nJo

rdan

Tunis

iaKu

waitUAE*

*Mor

occo

*World Bank estimation for West Bank and Gaza **All mortgage lending Figure 5b Relative size of residential and commercial real estate finance as a share of total bank lending

60%

50%

40%

30%

20%

10%

0%

Tota

l res

iden

tial a

nd c

omm

erci

al re

al e

stat

e pe

rcen

tage

Saud

i Ara

bia

Algeria UAE

Leba

non

Residential estate Commercial estate

Tunis

ia

Jord

an

Moroc

co

Kuwait

The data for the United Arab Emirates (2009) could not be broken down between residential and commercial real estate.

MENA lags behind other regions in delivering financing innovation. Long-term fixed rate lending for housing is not readily abundant. Some countries’ mortgage laws are still in development. Issues of Sharia-compliant products, and customer acceptance of sharia-compliant interest rate arrangements, are still less than optimal.

Both supply-side and demand-side strategies can mobilize the private sector and hence make government resources go further.

Engaging the private sector

10 The growing crisis of affordable housing in MENA

In this space, government can play a strong role by creating the enabling environment and acting as the “tent pole” around which other activities can be built up. According to Maysa Sabah and Mohamad Al Marri, Dubai’s Mohammed bin Rashid Housing Establishment (MRHE) is a good example of a public sector institution innovating to leverage private sector expertise to improve the service it offers. Set up in 2006, MRHE has been active on both the supply and demand side. It has been responsible for building 3,115 homes and is in the process of constructing a further 1,215.

On the demand side, the MRHE administers government’s housing grants, up to US$82,000 for home maintenance or renovation, and interest-free loans (repayable over 25 years) of up to US$205,000.

In addition, the Establishment is readying a demand-side financial innovation: the anticipated October 2012 launch of the Yusor initiative, which will see the servicing of all future grants, loans and mortgages outsourced to private sector banks in Dubai. Yusor will provide chosen banks with all liquidity needed to make loans to Emiratis, plus cover the subsidy gap between market interest rates and the customer’s 0% repayments of principal.

Yusor is attractive to the MRHE because it will enable the outsourcing of all administrative responsibility for grants and long-term loans to private sector experts, thereby drastically reducing the time and money spent on administering the loans internally. It appeals to Dubai partner banks because it facilitates the building of long-term relationships with young Emiratis — traditionally a low-risk demographic for them.

Affordable innovationWhen government shifts into the mode of partnering with private sector entities, it often needs to create a government corporation: owned by the state, yet acting like a market participant to intervene on both the supply and demand side, in order to facilitate access to affordable housing to as many people as possible. The potential leverage of this strategy is shown in Bahrain’s Eskan Bank.

Established in 1979, Eskan Bank has taken extraordinary measures since 2005 to pursue its mandated aims of providing affordable mortgages, lending to developers of affordable housing and offering banking services consistent with the first two goals, according to its General Manager Sabah Al Moayyed.

Historically, the Bahrain Government’s goal has been to alleviate the financial burden on citizens receiving social housing through a combination of heavily subsidising the mortgage profit rates and repeated waivers of repayment on both the principal and profit. The result was that by 2005, only 20% of Eskan Bank’s US$1b loan book was being serviced, the rest were non-performing. A management turnaround, begun then, has had dramatic effects. It started with a rigorous restructuring, not only to ensure that loans are being properly serviced, but also to make it an attractive partner to private sector institutions, such as developers and other banks.

11The growing crisis of affordable housing in MENA

Eskan Bank has succeeded. It launched the first residential mortgage-backed securities in the Middle East (with implicit government support of a promise to replicate cash flow in case of default). It has also been able to attract private sector banks into the affordable housing mortgage market in Bahrain, both by changing regulation to allow buying and selling of debt, and by persuading the Central Bank to apply zero-risk rating on Eskan-related securities. Zero rating means partner banks do not have to hold liquidity in reserve to match related mortgages or loans, making the proposition highly attractive.

Eskan Bank has also intervened on the supply side, by working closely with the Government to put in place a tangible framework for developers wishing to build affordable homes in Bahrain. The framework not only promises government finance, but also schedules exits and defines profit schedules.

All these measures have improved the commercial environment for private sector affordable housing developers and lenders, and have proved popular with both customers and contracting parties.

Also on the supply side, Eskan Bank has begun to use its own land for the construction of affordable housing, often as part of mixed-use developments. On some sites, it has taken the step of acting as co-developer, while on others, it has navigated laws preventing the sale of government land by assigning the benefits of the use of the land and cashflow received from development to trusts.

Now the bank will play an active role in the creation of 2,500 homes by 2016, and is considering plans to act as an inventory bank for completed affordable homes – buying them and then selling them on to appropriate buyers.

The growing crisis in Gulf affordable housing is dynamic and requires governments to be equally dynamic in their development and adaptation of solutions.

12 The growing crisis of affordable housing in MENA

Housing lasts for decades, yet markets move quickly, so governments must act quickly and decisively. Failure to act will hurt MENA nations and their citizens, whereas successful implementation now will enable MENA countries to continue to grow and to thrive for generations to come.

The growing crisis in MENA affordable housing is dynamic, and requires governments to be equally dynamic in their development and adaptation of solutions.

A government has limited power to address the crisis on its own–both the scale and speed of urbanization are too much for any one actor. Instead, governments

can dramatically increase their effectiveness in this field by harnessing the creativity and resources of the private sector. To do so, governments in MENA should consider processes and policy frameworks that not only make the financing and construction of affordable housing an attractive proposition for the private sector, but also make private sector institutions compete to win contracts.

Dubai’s MRHE and Bahrain’s Eskan Bank each demonstrates what can be achieved by creative public sector thinking, and particular means by which the Government can induce the private sector to be a willing and effective partner.

Moving forward in partnership

Defining affordable housingAffordable housing is market-quality accommodation that can be afforded by people of lower incomes, usually measured as a society’s bottom income quartile. Affordability is reached, according to Freeman, when households’ residual income, which is the amount of cash left in a household’s pocket after paying for housing and related expenditure, is sufficient

to pay for a basic basket of non-housing goods and services. To be successful, this affordable housing must not make inhabitants feel second class, or isolate them in enclaves or ghettoes in the making. As a result, urban affordable housing always requires government subsidy inputs, either direct or indirect, in any of the 16 forms enumerated by David Smith, Founder of the Affordable Housing Institute, in his GRM paper.

13The growing crisis of affordable housing in MENA

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Contacts

Gus Freeman Director of Economic Research, MENA Tel: + 971 4 312 9339 Email: gus.freeman@ae.ey.com

Walid Assal Marketing Director, MENA Tel: + 971 4 701 0505 Email: walid.assal@ae.ey.com

Rianna Khan Marketing Manager, MENA Tel: + 971 4 312 9358 Email: rianna.khan@ae.ey.com

Lamice Murshid Director of Communications, MENA Tel: + 971 4 312 9149 Email: lamice.murshid@ae.ey.com