The Gulf property sector has been going through a tough time in recent months, with prices dropping by up to 40 per cent in the worst hit market, the UAE, since their peak in the summer of 2008. The systemic shock to the Gulf's real estate sector caused by the global financial downturn is no better illustrated than in the recent mergers and restructurings announced in Dubai.

On 28 June, the region's largest developer, Emaar Properties, announced it was in advanced talks about a potential merger with real estate companies Dubai Properties, Sama Dubai and Tatweer, which are owned by state-owned investment company Dubai Holding.

Another effect of the Gulf's real estate downturn has been to force developers to rethink who they are building for. Affordability has become the watchword across the Middle East for developers planning new housing schemes.

Affordable housing

The government of Abu Dhabi is encouraging the emirate's developers to cater to consumers outside the luxury residential sector by earmarking land specifically for developers willing to build affordable housing units.

And developers and buyers' interests are no longer at odds, as blueprints are redrawn to build affordable housing for middle and lower-income families. Abu Dhabi's largest developer by market value, Aldar Properties, is responding to the new market dynamic by building more affordable units at its Al-Raha Beach and Yas Island developments.

But it is Saudi Arabia that has the Middle East's largest demand for affordable housing. US-based real estate services company Jones Lang LaSalle estimates that within three years, there will be a shortfall of 1 million housing units in the kingdom, presenting a major opportunity for the region's developers.

The focus on the luxury real estate market has arguably worsened the kingdom's affordable housing shortage in recent years. Following a stock market slump in 2004, many Saudi retail investors moved their cash into real estate, triggering a surge in land prices but little building activity. As a result, developers seeking to meet the pent-up demand for new housing will be playing catch-up for years to come.

Riyadh now needs more than 12,000 new housing units to be built every year to keep up with growth in demand, according to government estimates, yet only 5,000 units are being built each year by major developers. Until Saudi Arabia approves its long-awaited mortgage law - which has been in draft form for the past decade - the Saudi real estate market will not reach its full potential. Only 25 per cent of families in the kingdom own their home, and banks remain reluctant to lend due to the lack of security that would come with mortgages guaranteed by law.

In neighbouring Bahrain, there is also huge demand for affordable housing, albeit on a smaller scale. Private developers in Bahrain estimate that the kingdom needs about 80,000 new low-income and social housing units by 2020.

In June, Naseej, a $4.8bn investment company, was set up with a specific focus on "addressing the growing challenges of providing affordable housing for the people of Bahrain", according to Sheikh Abdullah bin Khalifa al-Khalifa, vice-chairman of the company.

The kingdom's flagship Diyar al-Muharraq mixed-used commercial, leisure and residential real estate project will house 120,000 people in 30,000 units. The first residents are expected to move in next year.

In Lebanon, the government has earmarked several zones for affordable housing projects throughout the country, particularly in areas that were destroyed in the Israeli bombing campaign in 2006. But it is the Lebanese private sector that has responded most effectively to the demand for affordable housing. While no official figures are available on the number of houses being built, construction permits were issued for 970,000 square metres of space in April 2009, up from 250,000 sq m in January.

"It is private entrepreneurs who have done their homework, and the result of their studies has shown there is an awful lot of demand in these areas, so they buy the land and set to work," says Fadi Moussalli, Dubai-based regional director at Jones Lang LaSalle.

The region's developers are all responding to the message that luxury developments are not what the market needs. Their pragmatic response to the credit crunch is set to benefit middle-income families, and address the historic imbalance between rich homeowners and those who rely on state housing.

For real estate companies, building lower-value homes does not mean the end of profits. The region's residential real estate is estimated to be worth $27 trillion, spread across 83 million homes in 22 countries.

With Saudi Arabia alone in need of 1 million homes, the dismal real estate crash headlines belie the major house-building opportunities in the region.