GCC countries have been facing a rapidly growing population and increasing housing demand, which has not been met by government developed projects.

Over the past decade, expanding economies and high oil prices have led to a construction boom across the GCC. Most real estate developers focused on high-end luxury projects, which offer higher returns. Such projects increased real estate prices and made housing more unaffordable for large sections of the population with limited income.

It has been difficult for the public sector to cater to the high demand for housing, leading various governments to work towards involving private sector in delivering affordable or social housing projects. Governments in the Middle East and North Africa (MENA) region have started to take steps to develop housing projects through public-private partnerships (PPP).

Recent activity for housing PPP in the Mena region

Bahrain is a successful example. Slightly more than 25,000 housing units are in the pipeline - 14,000-15,000 units, under construction, 6,000 units in the pipeline, and about 5,000 units that have been either occupied by or allocated to citizens.

Saudi Arabia has the toughest challenge, with a population of over 30 million of which 65 per cent are below the age of 30. According to government statistics, 750,000 families are eligible for public housing across the kingdom’s urban areas.

The government of Saudi Arabia has made the provision of sufficient housing for lower income segments of the population a priority. It intends to involve private sector to develop more affordable housing projects in the country. The Ministry of Housing recently announced its intention to invite local developers for partnership deals to develop up to 1.5 million homes over the next eight years. Saudi Arabia’s National Transformation Plan states that SR59.2bn ($15.8bn) will be spent on developing close to 400,000 housing units over next five years, to ease shortage of affordable homes.

In April 2016, government signed a $20bn agreement with a consortium led by South Korean Hanwha Engineering & Construction to build 100,000 homes in Saudi Arabia over the next 10 years.

Egypt has also stated its intent to develop housing projects using the PPP approach. The government will offer land deals for developers interested in partnering for housing projects, since high land prices and low returns are considered one of the key constraints on the participation of private real estate developers in social housing. Egypt has set a target of delivering about 300,000 housing units in 2016, and an additional 750,000 units by the end of 2018.

Salient features for PPP in housing

The success of a PPP model depends on the allocation of risk to the party best suited to handle it. Many risks in a housing project would be similar to those of other infrastructure projects such as power and water projects. The risk framework for utilities projects been accepted by lenders and developers, and can be used as a starting point for risk allocation in a housing project. Sector-specific aspects, such as market risk in housing projects would need to be considered and included while finalizing agreements.

• Land: Land is key for development of any real estate project. It can be procured by a private developer or provided by government at a subsidized price. The plethora of real estate development has led to limited availability of land in high catchment areas at a reasonable price. This causes increased prices for any new housing projects developed by the private sector, as the cost of land is passed on to end-users in the form of higher house prices or lease rents. Government can provide land to a developer, either as a grant or as a long term lease at a subsidized rate. This would help reduce the cost of the project and the ultimate cost for completed units, increasing affordability.
• Common Infrastructure: The cost of developing common infrastructure such as electricity and water networks, and sewage treatment can be high. This can lead to increased costs for end-users, especially for smaller projects where there are fewer units to spread common costs. Governments can develop these facilities, bear the cost of common infrastructure through a capital subsidy or pay the developer long-term tariffs for the facilities provided, in the form of network connection fees, or capacity charges.
• Government Approvals and Permits: Private developers could need a range of governmental approvals, permits and licenses to complete projects within a short timeline. Governments should reduce delays at their end and provide suitable incentives such as waiving fees and charges to reduce the project cost. Fast tracking the approval process is an option to reduce the lead-time for housing units.
• Offtake Risk: This risk should not be entirely passed on to the developer as it reduces bankability and increases the cost of the project. Lenders would prefer the risk to be with the government, which takes responsibility for the units of the affordable housing developed by private developer and bought by end-users at the pre-agreed price. The government can agree to buy all housing units from developer at a pre-determined price and then sell (lease) the units to eligible buyers (lessees). Since this increases initial capital outlay, the government can alternatively agree a medium-term concession to allow the developer to sell units within a specified period of time, and a risk sharing mechanism for unsold units at the end of the concession period. This reduces initial capital outlay and risk for developers and lenders.
• Financing for Developers: Access to low-cost financing would reduce overall project costs and increase affordability. Government might need to provide suitable guarantees to lenders, which would also help lower financing costs. Government support can also be through structural changes to housing finance. Aiding and enabling securitization would help free up capital with banks and allow them to increase lending to real estate. Developers having access to a bond market would be beneficial in the medium to long run as it might help them access lower-cost long-term financing for their projects.
• Financing for Homeowners: Ability to pay is one of the key constraints of the target market for social housing projects. Availability of long-term home loans will decrease individuals’ commitments to make upfront payments for the houses purchased. An example of government support is in Saudi Arabia, where citizens are eligible for loans of up to SR500,000 provided by Real Estate Development Fund (REDF) to each eligible buyer.

Considering the large requirements for affordable housing units in various countries and the intention of their governments to engage private sector for project development, creating an environment benefiting all stakeholders is important. The PPP framework has to balance between providing economic housing at the lowest possible cost, and government support required to make investment returns attractive enough for private developers, providing them suitable incentives to develop a greater number of low-cost housing units at a faster rate.