With a growing youthful population demographic and a rapid drive towards modernization, Affordable Housing is a key real estate development policy issue facing the Kingdom of Saudi Arabia. An examination of international best-practices along with a keen understanding of the local market can lend insights towards a successful affordable housing policy.

WHAT IS AFFORDABLE HOUSING?
In general, the term ‘’affordable housing’’ refers to housing provided to a domestic population with restrictions on the price of rent or sale. The restriction, typically represented by a ‘’cap’’ on the price, is meant to allow households at the lower end of the income spectrum access to the unit. The ‘’affordability level’’ is determined by what category of the population can access the housing – e.g. low-income, very low-income, etc. A project affordable to households making the equivalent of USD $2,000 per month in total household income, is different from a project affordable to households making under USD $500 per month in total household income. The affordability level is typically determined by a regional or national ‘’housing affordability index’’ which is set and then updated by a Ministry of Housing or government equivalent agency.

OVERVIEW OF DEVELOPMENT MODELS FOR AFFORDABLE HOUSING PROJECTS
The earliest examples of affordable housing – which is the simplest development model and is still the most common worldwide – are government built and managed projects. In this scenario, the government invests the entirety of the CAPEX necessary to develop the project, and owns the project after completion. Units are then offered to low-income households for-rent through an application and qualification program. However, this development model in many cases has led to unintended negative consequences:

Due to the mixed results, international standards have been shifting away from this model and towards private-sector collaboration models, in order to harness the initiative and efficiency of the private sector. These development models can broadly be divided into two categories:

• The government provides a subsidy directly to the private sector developer.
The intention is to offset the loss in revenue that the developer will experience by providing the units at a lower than market-rate price point. Subsidies paid to the developer can be through direct CAPEX investments, tax credits, offsets on government fees, and in-kind government infrastructure investment.

• The government provides a subsidy directly to the end-user.
In this model, the project can be built mostly along a market-rate model, and then the rental payment or mortgage payments (in case of for-sale projects) made by the end-user to the developer is subsidized by government funds, allowing the lower-income segments of the population to access the project.

Our next blog will elaborate on private-sector collaboration models which were introduced after government built and managed projects yielded mixed results.