Business & Finacne Club - Dubai : Affordable housing market in the Mena region is worth $125 million annually, according to a new report.

A T Kearney, one of the world’s leading management consulting firms, sees affordable housing as the new frontier for the Mena real estate industry.

In Saudi Arabia alone, it is estimated that there is an annual shortage of 150,000 units and in Egypt of 280,000 units, it said.

However, to serve the middle-income segment, developers will be required not only to change their master plans— but it will require them to revise their current business models to maximise volume and optimise margins, according to A T  Kearney.

“To succeed in the middle-income markets in the Gulf region, government agencies and developers must shift their business models and views on, particularly land prices and profitability,” said Olivier Laroche, principal in the real estate practice, A T Kearney Middle East.

Most developers agree that land prices should represent no more than 30 percent of total development costs, in order to avoid jeopardising projects, but in many Middle East locations, such as Saudi Arabia, land speculation has driven up prices and made middle-income housing difficult to pursue.

Governments and municipalities will have to get involved to ensure balanced urban development, by monitoring short-term private interests and supporting the development of the middle-income market, it said.

“In terms of profitability, investors and shareholders must take a more realistic approach to market demand. Given that there are millions of people to satisfy, volume is the goal; developers of adequately managed properties should plan on project returns in the 10 percent range, not the 20-plus margins of high-end projects,” said Laroche.

According to A T Kearney many developers regionally are already revising their plans for high-end mixed-use projects to incorporate more affordable residential space, and more can be expected in this area regionally.

The challenge for local developers is to meet not only current needs and the demand for affordable housing but doing so with an eye to consolidation opportunities and diversification strategies, the report said.