Saudi Arabia: Affordable Housing Challenge
Introduction:
With a growing youthful population demographic and a rapid drive towards modernization, Affordable Housing is a key real estate development policy issue facing the Kingdom of Saudi Arabia. An examination of international best-practices along with a keen understanding of the local market can lend insights towards a successful affordable housing policy.
What Is Affordable Housing?
In general, the term affordable housing refers to housing provided to a domestic population with restrictions on the price of rent or sale. The restriction, typically represented by a cap on the price, is meant to allow households at the lower end of the income spectrum access to the unit. Affordable housing is housing that is deemed affordable to those with a median household income at or below an established threshold as rated by a national government or a local government housing affordability index.
Overview Of Development Models For Affordable Housing Projects:
The earliest examples of affordable housing – which is the simplest development model and is still the most common worldwide – are government built and managed projects. In this scenario, the government invests the entirety of the CAPEX necessary to develop the project, and owns the project after completion. Units are then offered to low-income households for-rent through an application and qualification program.
Model #1: Price Cap:
Known in the United States as ‘’Section 8’’ housing, housing projects with price cap stipulations are private-sector built and managed housing which provides units at a lower than market rate to low-income individuals. The government in return pays a subsidy directly to the developer/ property owner often amounting to the difference between what the low-income individuals can afford, and the true market value of the unit.
Model #2: PPP:
In the PPP development model, a private sector developer partners with a government agency specifically to develop affordable housing projects which are subsidized through government investment directly into the project. The government investment can take different forms – including tax credits, direct equity investment, subsidized development and construction loans, etc. The basic idea of this development model is to entice private sector developers to build affordable housing projects through government investment which offsets for the developer, the difference in projected profits from a market-rate project versus an affordable housing project.
Model #3: For-sale Housing:
A development model which has been gaining popularity in recent years including in Saudi Arabia is to offer affordable housing along a for-sale business model. The key advantage to this development model is that it allows low income individuals to actually participate in home ownership and all the associated benefits, rather than simply for-rent housing options.
Model #4: Mixed-income:
One of the most popular development models for affordable housing internationally is the mixed-income project model. The premise of this development model is to incorporate affordable housing within market-rate projects; this approach has several advantages:
• Allows low-income individuals to live within a market-rate environment which has positive social consequences for the low-income individual
• By incorporating affordable housing within a market-rate project, the financial burden is somewhat reduced as the units which are market-rate generate profit which can then be used to subsidize the percentage set-aside of affordable units
• The approach requires the least amount of government bureaucracy to administer and the least amount of direct government investment and thus is the most sustainable model from a budget perspective.
Model #5: Purpose-built:
The most recent trend in the affordable housing paradigm is private sector developers initiating, on their own and without any government program, projects which target mid-low-income households and individuals. However, this development model has only taken-hold in certain markets where conditions are specifically aligned. In addition, to-date this development model has only been seen in cases where the target is mid low-income individuals and households, and not low-income or very-low-income households.
Conclusion:
While the profit margins on such projects for the developer are lower, this is offset by positive factors – such as higher occupancy rates (due to a supply/demand mismatch between available housing options for this population segment), lower overall project costs which lowers financing costs, more basic construction styles and methodologies which lowers soft costs, and the ability to sell-off the completed asset to funds or REITs due to the more stable nature of the rental dynamics as compared to luxury or high-end housing projects.
Also Read: Strategies for the Promotion of Affordable Rural Housing