While Saudi Arabia is estimated to have an annual shortage of 150,000 low-cost houses, Egypt requires 280,000 units, says the report by AT Kearney, one of the world’s leading management consulting firms.

Separately, HSBC predicted in an earlier report that with a growing population of more than 25 million, 70 percent of which is under the age of 30, Saudi Arabia will need to build one million new houses by 2014.

Abu Dhabi’s Urban Planning Council (UPC) recently said that more than 73,000 new houses are scheduled to be built in Abu Dhabi by 2013, meaning almost 15,000 apartments would be ring-fenced for middle-income earners.

At least 20 percent of new residential property in Abu Dhabi is to be set aside for affordable housing and the rent for a studio would be as low as Dh25,200 a year, said UPC.

To serve the middle-income segment, developers will be required not only to change their master plans but also revise their current business models to maximize volume and optimize margins, added the report.

“To succeed in the middle-income markets in the Gulf, 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. However, in many Middle East locations, such as Saudi Arabia, land speculation has driven up prices and made middle-income housing difficult to pursue, the report said.

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 added.

“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 regional developers are already revising their plans for high-end mixed-use projects to incorporate more affordable residential space.

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.

Yet another report revealed that Bahrain is unlikely to be able to cope with demand for government housing as the waiting list has now hit a new high of around 53,000 applications.

The Market Review report, issued by US-based CB Richard Ellis’ Bahrain branch, said the situation might worsen as the growth rate of demand exceeds the government’s capability for dealing with the problem.