Builders in the Middle East are shelving luxury housing projects and racing to develop affordable homes, the industry's hottest growth sector.
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More than 3.5 million homes are needed in the Middle East and North Africa to satisfy current demand, according to the consultancy Jones Lang LaSalle. The shortfall in affordable housing is expected to grow over the next five years as youthful populations strive for homeownership.
"Delivering sufficient product to meet this growing need constitutes one of the major opportunities for the real-estate industry in the region over the next few years," Jones Lang LaSalle said in a study.
But there are huge obstacles to overcome before the industry can meet that demand. Although definitions vary, affordable housing typically refers to homes that require occupants to spend less than 30 per cent of their annual gross income.
Land prices in Saudi Arabia and other countries remain high, making it difficult for builders to make money on low-priced homes. In Riyadh, the price of land constitutes half the price of a villa in some neighbourhoods, according to a study by NCB Capital.
And housing projects in remote areas where land prices are lowerface high infrastructure costs. Construction of roads and provision of utility services to support developments will require huge capital expenditures that the private sector is unlikely to provide.
Without government involvement, the numbers do not add up.
"The market left on its own cannot provide housing which is affordable for the lower-income segment of society without government support," said Farouk Miah, the acting head of equity research at NCB Capital.
Even if the homes are built, there is no guarantee that the target audience will be able to buy them, unless more financing is made available. Mortgages are used only in a small percentage of purchases in many of the countries with the greatest need for housing.
Saudi Arabia has been discussing reforms to its mortgage laws for years, without result. Egypt revamped housing legislation a decade ago, but mortgages still represent only a small percentage of the market, with interest rates often more than 13 per cent.
Finance companies are reluctant to lend on homes in Islamic countries unless there is a clear path for foreclosures, which are often restricted by Sharia.
The social and cultural issues are often as daunting to the market as the economic challenges.
Planners worry that affordable housing projects may quickly develop into slums if they are not properly designed with attractive amenities such as parks and shopping malls. Building towers with inexpensive apartments is not enough.
"It's well and good to build affordable housing, but unless you put infrastructure around it, it won't be an environment for people to be happily living in," said Jonathan Herps, an adviser to SBK Capital and an affordable housing consultant to Atkins,an engineering and design company.
Some developers have tried to build lower-cost homes in the region only to discover that selling them is difficult.
Buyers in the region have specific tastes. Traditionally they tend to prefer villas over apartments. They buy homes for the long term and want properties that they can expand to accommodate their growing families.
The Saudi builder Dar Al Arkan has been "basically unable to sell" low-cost apartments in Al Qasr, a new development in Riyadh, says Mike Williams, a senior director with CB Richard Ellis.
Financing issues and the high-density style of the apartments are likely to have dampened interest, he says.
No one doubts the need for more affordable housing in the region. In Egypt, 1.5 million homes are needed, according to Jones Lang LaSalle research. Population growth in Saudi Arabia will create an additional 1 million households by 2015, the consultancy estimates.
In October, the luxury-home specialist Emaar, the builder of the Burj Khalifa, the world's tallest building, announced plans to create a new division, Dawahi Developments, focused on "value housing" for the region's growing middle class.
The number of families in the region with annual incomes of more than Dh100,000 (US$27,200) is expected to double to 28 million by 2025, Emaar says.
"The public sector alone cannot bridge the gap for value housing across the wider region," said Mohamed Alabbar, the Emaar chairman, in a statement released on Sunday.
With social unrest percolating in various parts of the region, governments have made affordable housing a priority.
In March, Saudi Arabia's King Abdullah pledged 250 billion riyals (Dh245bn) to build 500,000 homes. Bahrain's government has committed $6.6bn for housing.
But progress has been slow, as governments and the private sector look for ways to make affordable housing work.
"There has been a lot of hand wringing, but not much action," Mr Williams says. "There is going to be increasing pressure, and governments are going to have to step up to the plate."
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