Interview: Christopher Sims
What incentives are private developers requiring to enter into public-private partnerships (PPPs) in the affordable housing segment?
CHRISTOPHER SIMS: Currently, there is little evidence of any wholesale desire by the private sector to enter the regional affordable housing market, since the financial rewards in terms of profit relative to market risks are not conducive to entry in this segment. The primary issue for private sector developers remains the small margins involved in developing affordable housing, which means that profits can only be achieved through volume. Improving the efficiency of urban planning regulations, and reducing the cost of land and development, are therefore major imperatives. For example, a developer in Bahrain can only develop around 60% of a plot of land, compared to 80% in the US. Building more units per plot would make individual units cheaper, and hence increase margins for developers.
The private sector would also benefit from the streamlining of development approval procedures – along the lines of the successful “one-stop-shop” administration process adopted in the UK and US – and minimising “soft” costs such as permitting, fees and delays. Equally important is the promotion of fast-track construction methodologies. Labour in Bahrain is much less expensive than in the West, but the industry uses labour-intensive technology, causing inefficiency. The adoption of systems such as sacrificial foundations, modular construction, pre-fabrication and design-and-build processes could reduce building costs by at least 15%. Such measures would help to lower the risks of property developers in the low-cost segment.
Does land price speculation need to be regulated to stabilise the market and enhance competition?
SIMS: Realistically, speculation will always remain part of the real estate market. However, the adoption of a recognisable international system of valuation would help to enhance stability and improve confidence in the system. Currently, the smallest plot of land one can register in Bahrain is in the range of 200 to 300 sq metres, which is quite large compared with other countries. Given that the value of land is measured by its usefulness, the relaxation of land registration rules would benefit the development of affordable housing; the government has stated that it will review the kingdom’s real estate laws, which is encouraging.
How can Bahrain address its affordable housing shortages more effectively?
SIMS: From a regional perspective, Bahrain is not alone in seeing pent-up demand by citizens in the low-to-middle income bracket for quality, affordable homes. Recent independent research points to a total affordable housing shortfall in excess of four million units across the MENA region. Generally, housing is deemed to be “affordable” if it costs occupants no more than 35-40% of their disposable income. Governments in the region now recognise that they need to enlist the private sector to help solve the problem. This has proved to be successful in many Western countries, to the extent where the government is no longer the provider of affordable housing, but instead adopts a purely regulatory role. With the exception of Morocco, MENA governments have yet to fully engage the private sector in addressing the issue of affordable housing construction.
In the GCC, Bahrain has taken the lead with its groundbreaking $500m social and affordable housing PPP project with Naseej. The government is also exploring a range of other innovative initiatives, including a mortgage guarantee system that incorporates a secondary mortgage market, housing bonds and real estate investment trusts, housing cooperative societies and environmentally friendly fast-track construction methods.
However, the successful implementation of such growth initiatives will only be achieved by the government and the private sector working together in a meaningful partnership based on mutual trust and understanding. This is vital if we are to address the kingdom’s affordable housing challenges successfully.
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