High-rise demand for Egypt’s property developers

“Modern, moderate and a beacon for freedom in the Arab world,” is the future that Nobel Peace laureate Mohamed El Baredi envisages for Egypt one day.

Meanwhile, Egypt remains a “developing country” in terms of its efforts to meet the urgent needs of its 90 million inhabitants.

“The private sector, whether locally, regionally or internationally anchored, will take the lead in driving the economy forward. The government, being the regulator, will maintain an environment that makes doing business easier”  mohamed el alfy,  Managing Director of Engineering and Investment, Housing and Development Bank

Roughly half are young and either at or approaching an age in which the usual thing is to get married and set up a household.

The result is a yearly shortfall of 500,000 to 800,000 residential housing units in the major urban areas, affecting all price categories and giving rise to a situation that makes Egypt’s real estate and construction sector an extremely promising target for internal and foreign investment.  

Residential property is the primary focus of Egyptians’ relentless hunger for real estate, with prices increasing across the board for apartments and villas at a rate of 20% per year.

How could prices not be shooting up in a country where 96% of the people live on roughly 4% of the land?  But on a per capita basis, Cairo remains one of the most underserved capitals in the world, says Alsherif Wahdan, a Harvard trained civil engineer who manages the Egyptian portfolios at Capstone Advisory Services.

That fact duly noted, other types of property have posted extremely positive results for the first quarter of 2015.

In the commercial category, turnover in new office space has been particularly brisk in the satellite towns on the outer periphery of the capital where digital connectivity, parking, housing and services are easy to come by. Developers have promised to deliver another 37,000 square meters of offices at the New Cairo City complex, to cite just one example.

In the center of the capital, government dependencies occupy virtually all the existing office space, making it not uncommon to see older apartments reconverted for use as office complexes.

Meanwhile, the scramble for retail space has been eased somewhat by a number of newly-built in-town and out-of-town shopping malls. 

14% sector growth in 2015

In uncertain times, owning property is seen as the fail-safe fallback option. It will still be there when things return to normal and very likely to have increased in value.

“Real estate gets sick, but it never dies,” the saying goes. Timing matters greatly, though. That’s why it should be emphasized that all evidence suggests that the current government has succeeded in winning the confidence of Egyptians and foreigners alike, as is evident from the upgrade it received at the beginning of the year from all the international ratings agencies.

That is the confidence that explains why it took all of eight working days to finance the $8.5 billon Suez Canal Expansion Project, with many small-time investors and everyday Egyptians purchasing low denomination bonds issued by the government.

Housing and construction is expected to attract some $7.3 billion in direct investment over 2015 and continues to generate a 20-30% Internal Rate of Return  (IRR).  Demographic indicators suggest that up to eight million more units still need to be built just to catch up with the demand curve.  

In short, the climate could hardly be more favorable than it is now in a sector poised to maintain growth of 14% a year, while at the same time providing employment (through related sectors like cement, utilities, infrastructure, furniture and household goods) to an estimated 8% of the workforce.

Beating bureaucracy 

Given those numbers, an optimistic view of the market seems neither perfunctory nor undue. However, that is not to suggest that the path ahead is smooth and uniform.

One major obstacle to doing business is a bloated bureaucracy that feeds on a plethora of outdated laws and niggling regulations. It is a situation that Hassan Dorra, Chairman of the Dorra Group, says that the government is now acknowledging needs change.  

“At the top levels of the current government, officials are doing all they can within the available resources and time frame.

The improvement has to be at lower levels where civil servants should move projects forward rather than wrapping them with red tape,” says Mr. Dorra, whose company also has a strong presence in the United Arab Emirates.  
“The government now realizes it has to make many legislative and administrative upgrades and modifications. Some have already been completed, like the latest investment law, and other reforms are in the pipeline,” adds the chairman of the 70-year-old firm that has signed on to build elements for the Suez Canal Expansion project and preparing for the second phase of the Capital Business Park in the Cairo suburb of Sheikh Zayed City, where the outer walls are sheathed in shimmering panels of Belgian glass. 

Mr. Dorra does not regret the fact that the playing field, as it was known to his father, the group’s founder, has changed its contours. He sees it not as change for its own sake but change for the better.

“We have hope,” he says. “The government is open to ideas. In the past, we could not suggest anything. Now they will listen.

This is one of the most important things that must be kept in mind. They are very receptive to ideas and suggestions.”  

Social Housing Project

Architectural showpieces like the Capital Business Park are not the solution to Egypt’s housing crunch.

It is unfortunate that in a country where half the population meets the UNESCO criteria for “poor,” most new construction is designed and priced for upper middle to upper income buyers.

The middle class is poorly served, and low income families all but shut out of the market. This is where the Egyptian government has stepped in with a series of initiatives mostly aimed at encouraging developers to take a more active role at the lower end so as to attract families that would otherwise remain outside it.     

“We have launched the Social Housing Project and established a national fund with the goal of creating one million housing units over the next five years,” says Egypt’s housing minister,  Mostafa Madbouly.

“Right now we have 240,000 units under construction and expect to finalize 170,000 of them by the end of this year. I used to work for the UN Habitat program so I know this is one of the world’s largest projects of its kind.”

As one would expect, an initiative on this scale has an immediate impact on the larger economy, since the authorities have made a point of contracting out the work to local, mainly small businesses.

At least 250,000 direct jobs have been created under the project, according to Mr. Madbouly who notes “When you are in a recession, the best thing you can do is invest heavily in infrastructure and big projects like this one.” 

At the same time, the government is reaching out to low-income families by drawing on a special fund in which 10 billion Egyptian pounds ($1.3 billion) provided by the country’s Central Bank has been earmarked for mortgage financing and guarantees.

That may sound fairly routine, but the fact is mortgages are not at all common as a means of home financing in Egypt, where transactions involving property are almost always off the books and in cash.

Mr. Madbouly believes this is going to change, and the uptick in mortgage lending will be apparent when the numbers are in for this year.

“Prior to the action of the Central Bank, no one benefitted from mortgages except the very affluent who could prove their income and pay very high interest rates of 14%. Under this initiative, though, low income families will be eligible for 40-50% of the mortgages written.” 

Housing & Development 

One bank that supports the government’s interest in expanding the market and thinks that good social policy can also be good business is the state-owned Housing and Development Bank.

Managing Director for Engineering and Investment at the bank, Mohamed El Alfy, was very much encouraged by the attitudes he observed at the Egypt Economic Development Conference (EEDC) held in March at the Red Sea resort of Sharm el Sheikh. 

“The EEDC restored confidence and pushed a reset button that lined up the entire international community alongside Egypt to support  reforms in the investment, business, economic and political spheres,” says Mr. El Alfy, whose bank posted exceptional results that last year earned it a place on the country’s top ten banking list. 

“The private sector, whether locally, regionally or internationally anchored, will take the lead in driving the economy forward,” underscores Mr El Alfy.

“The government, being the regulator, will maintain an environment that makes doing business easier, rather than overcrowding the market or competing in it.”  

The Housing and Development Bank itself plays an important role in driving socio-economic development. Many people who apply through the bank for social housing benefits become first-time bank customers – no small matter in a country with only 10 million bank accounts for a population of 90 million. 

“We welcome our social housing clients, and we are probably the first bank they will have had any dealings with. We encourage them to open accounts, even if just for a small sum, inform them about the products we offer and show them how the system works,” he adds.     

Under legislation that took effect at the beginning of the year, property developers can take advantage of a new mechanism that allows the government to swap land it owns for a stake in the equity or in the revenues generated by whatever is constructed on it. 

Granted, disputes will inevitably rise over the assessed value of the land in question, but both sides have too much at stake to let that become a deal breaker.

Land in Egypt is almost as hard to obtain as is the permission to build on it. Cairo visitors have commented on the unseemly vacant lots and weed-tangled parcels of neglected land at intervals along the banks of the Nile.

That is just land being held as part of the family patrimony, often untouched from one generation to the next.  

The Government-owned Housing and Development Bank is a special case in that  projects in need of financing come to them from developers and the bank itself directly intervenes in the  market to see them carried out through a number of affiliated, subsidiary or sister companies that are active players in the sector.

“The only way to go is up,” Mr. EL Alfy assures us. “The support we received showed unanimous international support for Egypt which was translated into the mega-projects that were recently announced.”

Indeed fueling the surge in new housing developments are the mega-projects unveiled at the EEDC  in  March, where public officials, foreign investors and local private sector decision-makers conferred over how to get the best return on their money, exchange know-how and sign memorandums of understanding.

The government made the scope of its ambitions clear when it unveiled its Suez Canal enlargement and development plan. It is to be structured around a special economic zone 100 kilometers wide that will include custom built logistics and handling facilities buffered by a 400 square kilometer industrial zone. 

Megacities

However, arguably the true show stopper at the EEDC conference was when Housing Minister Mostafa Madbouly unveiled a mock-up new city that will be spawned out of the existing Egyptian capital known as “New Cairo”.

The city will increase hugely in size as it develops in a rational, ecologically sound and sustainable manner until it becomes a fully mixed community of 70 million inhabitants, eventually replacing Cairo as Egypt’s capital.

But why should Cairo have to be replaced, you may ponder.  It’s crowded, chaotic and beloved by the many who live there, and that means one in every four Egyptians. So what’s not to love about noisy, lively, and colorful Cairo?

For its 18 million inhabitants (who make it Africa’s largest unitary urban space) life is still articulated around the local mosque, yet living space is pricey, pollution out of control, workplace access complicated, and traffic beyond congested.      

These drawbacks were serious enough for the authorities to start building “satellite cities” out in the desert as long ago as the early 1980s. But completion of the prototype high rises brought no big rush to relocate.

Only a few people were initially willing to trade up to running water, sewage treatment, schools, hospitals and a reliable supply of electricity, plus access to global consumer brands that never would have made it to the family-run shops and suqs in the heart of the old city.

Little by little, that has been changing over the years. By now some one million Cairo residents are said to have moved out of town to resettle in 6th of October City, located about 45 km west of Cairo.

By now there are over 20 hybrid developments not yet overtaken by Cairo’s metastasizing sprawl. Shopping malls? Of course they have shopping malls. 6th of October City also has several universities, a couple of tech start-ups and (you guessed right) Starbucks. 

The question is whether these multiple-use residential-commercial-leisure complexes are no more than a haven for the seriously well-to-do. Actually, the government has been at pains to include a substantial percentage of low-income units in new developments such as Al Obour and Al Shorouk, scheduled for completion in 2017.     

Regulating real estate 

Mamdouh Badr El Dine is chairman of the Badreldine for Real Estate company, which came to occupy a secure share of the market in the post-1995 bonanza years when it won fame for ensuring that the mostly high-end buildings reflected and enhanced the cultural specifics of the community they were built for.  

This includes pioneering developments in Sheikh Zayed in the suburbs of Cairo, as well as the 6th of October City. 

His idea now – indeed, his priority – is to help organize an independent Federation of Realtors that would act as an intermediary mechanism for resolving disputes should they arise between developer and buyer.

Since almost all transactions in Egypt are in cash, unregistered and unreported,  today’s homebuyer has little recourse if delivery dates are not met or the faucets fall off the bathtub, other than taking his complaint to Egypt’s jammed-to-the rafters and borderline dysfunctional court system. 

Similarly, proponents of the Federation would like to see it create an administrative body to assume some basic regulatory functions such as assessing and approving plans and specifications for new construction, issuing habitability certificates, appraising pre-owned properties and verifying land title.

Mr. Badr El Dine, who is supported by other important industry executives in this venture, says “Establishing the federation will improve the performance and benefits for all the players.”

Financing for Egypt’s extreme makeover as well as the know-how required to make it happen has been directed at Egypt from many countries in the region, particularly members of the Gulf Cooperation Council.

The same consortium of UAE investors that helped put up the emblematic Burj Khalifa tower, are involved in the planning for substantial parts of Egypt’s new capital city.

SECON, a Saudi-Egyptian joint stock company has been active in Egypt since 1975. The CEO, Darwish Hassanein, is pleased to think he will still be at the helm when the firm enters its newly-acquired niche in the hotel and hospitality sector.

“Two out of three current projects are in hotels and tourism area, including a hotel with 256 rooms and suites in Maadi, an affluent Cairo suburb with privileged views of the Nile, and also at New Damietta, on the Mediterranean, where we are building a 90-room hotel.”

Asked if he could disclose the secret that has kept a business with two equal partners representing different cultures and national interests thriving for four decades, Mr. Hassanein said, “the company is focused on  the details that matter to its customers  by choosing sites very carefully and taking into account the technical and environmental aspects of the place. You could probably say that it all comes down to location, location and location.”