Bargains in Dubai

Since the beginning of Dubai's construction boom, the affordable housing sector has often been overlooked. But as the luxury market looks set for a correction, middle-income housing could replace yesterday's extravagance. By Sonal Rupani

Present-day Dubai tells a tale of two cities. One is an image of extravagance, from the gold-plated interior of the renowned Burj Al Arab hotel to the 400-meter long ski slope nestled comfortably in the desert. Ever since the beginning of the frenzied construction boom in 2002, luxurious and elaborate residential real estate developments have been catering to the needs of wealthy nationals and expatriates looking to live or invest in well-known projects like the Palm Jumeirah and Dubai Marina.

Flip the page and there's another story to be told. Amidst the city's burgeoning skyline, a significant working class toils to sustain the region's economic growth and vibrant real estate market. A startling percentage of Dubai's 1.3 million people are blue-collar construction workers. While exact figures are not available, gender breakdowns are indicative of the number of single male laborers in the emirate. Despite the approximately equal gender breakdown of nationals, the overall population is dominated by men, who account for 74.7 percent of the total, according to the Dubai Statistics Center. The reason for the disparity is the increased number of unskilled male workers brought in to the emirate to maintain the rapid pace of construction.

Forget owning beachside residences on man-made islands— for the 25 percent of the population making under $10,000 a year, simply finding an affordable place to rent is a struggle. High demand has driven rents up by 40 percent in 2006, according to a report by EFG-Hermes, an investment banking firm based in Cairo. Well-intentioned rental caps set by the government have provided some relief, but that has not stopped low- to middle-income expatriates from moving to more affordable emirates nearby, like Sharjah and Ajman. Commuter traffic has now stretched Dubai's infrastructure to its limit, with residents complaining that gridlock is having a major affect on quality of life.

The high demand for affordable housing in Dubai has thus far continued to push prices further out of reach for middleincome earners. Marcelle Zaher, director of business development at Better Homes, a Dubai-based brokerage firm, explains that the supply problem will not be solved until more residential units are built and time allows for supply to catch up to demand. “Every time there is a good affordable project announced, by the time the building is finished, the developer puts the prices higher,” she says. “They get greedy.”

Greed, as is often the case, may just mean having practical business sense. Rising construction costs and the high price of land make luxury units the logical choice for developers trying to maximize their profit margins. Andy McTiernan, a Middle East-based property commentator and editor-in-chief of Property World Middle East magazine, says that the price of land has skyrocketed in recent years, with the lowest per square foot rate in a residential tower selling at 600 to 650 dirhams ($164 to $178 per square foot). But, he adds, rising land costs are just one part of the equation; expensive specialized labor is another major component. “Salaries for good quality project managers, quality surveyors, civil engineers, et cetera, have risen by at least 150 percent in the last 30 months,” he says. “There are not enough developers who have been sufficiently motivated in an inflationary economic climate to build budget accommodation.”

One of the most notable attempts at a middle-income-focused development, International City, comes from local developer Nakheel, the only major company to venture into the affordable property market. The mammoth 800-hectare, 22,235-apartment project comprises nine residential districts that are divided by country-specific architectural styles, including Persia, Russia and China, to name a few. The development, which is moving into its second phase of construction, began handing over finished units in October. The next month, the developer opened up more than 6,500 units for lease at an annual rent of less than $8,500, considerably less than current market prices. Rashid Al Helli, general manager of International City, said in a recent press release, “Nakheel realizes that the middle-income real estate market segment is witnessing pent-up demand. There is need to offer options for middle-income families and individuals looking to rent residential property.”

Smaller developers attempting to cater to the same need have recognized that high land costs in Dubai make Sharjah, Ajman and Umm Al-Quwain more appropriate locations for affordable housing. FuGen, a UK-based international project management and investment company, is currently developing Rainbow Towers, a 1,000-unit complex in Umm Al-Quwain, which aims to cater to low-income earners who have been forced out of the market in Dubai, Sharjah and Ajman due to escalating rental rates.

Back in Dubai, Nakheel may be ahead of the game, as the general consensus among industry insiders seems to be that middle-income housing will return to more affordable levels once there is a correction in the overall market. The 2006 EFG-Hermes real estate market report predicts that the city's residential units will double by 2010 with a temporary oversupply hitting the market in 2008 when the bulk of currently announced projects will be delivered. “We believe that the middle-income expatriates will be the main group driving demand in the coming few years and thus have a major contribution in shaping the property life cycle,” wrote the authors of the report, Mai Attia and Sana Kapadia.

“Every time there is a good affordable project announced, by the time the building is finished, the developer puts the prices higher. They get greedy.”

Another indication that middle-income consumers may be the new driving force in residential demand is the property price index developed by Standard Chartered. House prices have dropped rather drastically from their peaks, most significantly in apartments targeting the high-end market. In the middle-income sector, the drops have been relatively slight.

Angela Lyall, a sales manager at property developer Union Properties, says the first step in catering to the middle-income sector is a better understanding of the gap in the market. “What would need to happen is a lot of research in terms of classifying and defining affordability,” she explains. “A lot of people are not looking to buy; they could only be in the country for a couple of years so it's not clear if there is a niche market for them.”

Although the tide is expected to turn in favor of the middle-income market in the near future, the predicament of low-income housing persists as only government-sponsored projects seem to be able to bear the construction costs. The Mohammed bin Rashid Housing Program is one affordable government-planned community, but it is intended exclusively for the benefit of UAE nationals, who make up only 20 percent of Dubai's population. And expatriates, including those born in the UAE, are presently not allowed to apply for citizenship.

One possible solution to the lack of affordable housing has been undertaken by companies such as ENOC and Dubai World Trade Center, which have developed staff accommodation complexes. These units, once developed, provide regulated and affordable housing, usually in more isolated and inexpensive areas. While several companies have taken this route, it is not the norm. In November, Human Rights Watch issued a report that said the UAE should crack down on employers who are abusing the rights of migrant workers in the region. Many of them live in impoverished conditions far away from the bright lights of the towers they are building. “One of two things needs to happen,” Lyall says. “More property needs to be provided for a certain salary level, or companies have to adjust salaries.”

Daniela Giannetti, a manager at Ernst & Young in Dubai, adds that companies who provide accomodations for their workers may bolster their position in the marketplace. “It certainly is perceived as a benefit to mid- to low-income employees and is a means to attract and retain manpower, a challenge voiced by many companies in Dubai,” she says.

That challenge looks likely to continue throughout 2007 and beyond. Yet as the high-end luxury sector remains poised for a correction, middle-income earners and the companies that employ them are expected to gain a growing influence in Dubai's maturing residential market.