Legally Bound

Social housing needs careful planning

NICK CLAYSON* examines some of the issues arising from the focus on social housing development in Bahrain.

September 2011

SOCIAL housing is typically defined as housing built for those who would not otherwise be in a position to rent or buy property in a given location. Social housing may also include affordable and key worker housing.

Regional governments within the Middle East have been looking closely at their policies. And regional landowners, developers and investors, have all been taking steps to fit social housing into their strategy.

There has been a well acknowledged undersupply of social housing units in Bahrain. The waiting list for social housing now extends to more than 50,000 units. This has been caused in part by difficulties in obtaining financing and resources for such developments and in part by the focus on other sectors, such as the luxury residential sector.

There is no general social housing policy in Bahrain which provides that a specific number of social housing units will be developed as part of a larger development. As such, the responsibility for the procurement of social housing in Bahrain rests with the government, which recently allocated more than BD2 billion ($5.29 billion) towards the development of social housing and aims to build over 50,000 units over the next five years.

The issue of how best to structure the development of social housing is important. One form of public procurement is the public private partnership (PPP). The PPP structure is suitable for the design, build, financing and operation of either new-build social housing or the refurbishment of existing public sector housing stock.

Most PPP structures seek to take advantage of private sector expertise and access to private capital, removing the up-front capital costs from the public sector’s balance sheet. The public sector pays the private sector company an annual service payment for the services provided. This annual payment includes the cost of repaying the debt incurred to fund construction, an agreed equity return and the costs of providing operation and maintenance services.

If the private sector company fails to make the housing stock available or otherwise fails to meet agreed key performance indicators for the provision of the services, the public sector will make monetary deductions against the annual service payment.

However, PPPs can still give rise to affordability issues from the public sector’s perspective. As a result, more advanced PPP structures have been developed where the public sector grants the private sector rights over additional land for residential development, which is used to subsidise the cost of the housing.

Under this model, the public sector enters into a development agreement for residential development and transfers land to a special purpose vehicle (SPV) to develop. The SPV develops the land, sells or lets residential property, and gives a return to the public sector. The return effectively subsidises the cost of developing and operating the project and generates profit for the public sector.

Aside from structuring issues, a number of points should be considered before embarking on a social housing project such as:

In a mixed residential development, comprising both market housing and social housing:

– Should all social housing be located in one geographical area, or spread throughout the development?

– Is the social housing incorporated in buildings or purpose built?

– Should the social element be introduced in stages? If the development is being completed in phases, should the social element be provided pro rata, that is, to the provision of market housing?

How will the development be structured? Will the common parts be designated as common property, and would unit purchasers (including owners of social housing) acquire a share in such parts?

Who is responsible for managing the units?

What community facilities are required? For example, should healthcare, religious, retail, and education facilities be provided within the development?

Are there specific conditions that could affect the economic viability of a project? Restrictions may be imposed on the government in relation to disposing of freehold ownership or foreign ownership restrictions may apply – either of which is likely to impact on the development of social housing (and any private development proposed under a hybrid structure) at both the developer and end-user level.

The provision of social housing may come with a requirement to provide inhabitants with access to the property (roads, pavements, parking, etc) plus access to drinking and sewage water, electricity, and other utilities. Consequently, issues relating to the provision of primary and secondary infrastructure will also need to be considered.

Typically, infrastructure within a master development is procured either by the master developer or by private companies under concession agreements. The capital expenditure in relation to the required infrastructure can be recovered from either the sub-developers (calculated as a percentage of the total cost based on the size of the plot) or from end- users over the period of the concession. The cost of maintenance of such infrastructure over the long term will also need to be taken into account.

The social housing sector is likely to see increased levels of activity over the next few years in Bahrain. As there are many stakeholders involved in a social housing project, ensuring that all issues are considered and the needs of each stakeholder are balanced will be critical to ensure the success of a social housing project.

*Nick Clayson is a partner at Norton Rose (Middle East) LLP and is head of the real estate practice in the Middle East. Legal queries related to the real estate and construction sectors can be addressed to Norton Rose (Middle East) LLP through Gulf Construction magazine at
Norton Rose Group has had a presence in the Middle East for 30 years and has advised developers, lenders, and contractors in relation to the legal aspects of a wide variety of real estate, construction and infrastructure projects in the region.
With a combined team located in the Abu Dhabi, Bahrain and Dubai offices, Norton Rose (Middle East) LLP is able to provide both contentious and non-contentious support to financiers, developers, contractors and specialist contractors in the region.

More Stories