Faced with relentless and ever-increasing congestion in central Cairo, business parks on the outskirts of the city are emerging as one avenue of escape. Whether supply can meet demand remains to be seen.
As crowded as Cairo is, the situation is only likely to get worse. The government's Information and Decision Support Center predicts that Egypt's population could surpass 140 million in the coming 35 years.
With ever-increasing human and vehicle congestion and a growing demand for purpose-built office space in the capital, real estate developers are taking an interest in building business parks in outlying areas. Establishing business parks "needs to be a trend that the entire country follows because the situation in Cairo is reaching an impossible state," says Mohamed Sany, CEO of Engineering Management & Development Company, a subsidiary of Dorra Group Developers.
Developers believe that having business parks integrated with nearby existing and planned investments will lure businesses from the city center, and they see plenty of room for growth. For the past five years, industrial, investment and free zones have driven industrial investment. Attracting non-industrial investment still remains near the bottom of the government's priority list. There are only three fully operational purpose-built business parks in the entire country: Smart Village in Sixth of October governorate, Contact Centers Park in Maadi and Pyramids Park on the Cairo-Alexandria Desert Road near Haram. Only Pyramids Park is a multipurpose park; the other two are designated for the IT sector.
The private sector has been focusing on developing office complexes such as CityStars and Nile City.
"Those two are categorized the same as Pyramids Park, but they are not enclosed in a compound so they are [stand-alone] office buildings," says Nehad Adel, vice president of Coldwell Banker Egypt. Still, most of these office complexes are located in or near central Cairo.
Advocates of relocation outside the city center say that downtown, in particular, leaves much to be desired as a business location. Many buildings are in need of substantial renovation, they say, and residential buildings are not well suited for office space in terms of safety, infrastructure and parking, among other things. "Cairo is a chaotic mess with buildings hosting business and residents," says Sany.
Mohamed Reda Haggag, professor of urban planning at Cairo University, says Egypt lags behind other MENA countries in its ability to support the growth of administrative- and office-oriented businesses. One reason is that a culture of having specialized office areas is non-existent. "When someone talks about business parks, I think of those outside Egypt," says Adel. "Dubai is a prime example of how to have dedicated business areas."
Mohamed Kharma, project development director at Six of October Development & Investment Co. (SODIC), says business parks should be integrated with residential areas, citing Eastown and Westown, currently under construction on the Cairo-Alexandria Desert Road and in New Cairo, respectively. Such models would "anchor residents to the project by negating the need to go into Cairo for everyday needs or work," he says.
Selecting the right type of investment in Sixth of October, Sheikh Zayed and New Cairo is becoming more critical than ever before. Kharma estimates that these suburbs will house 5 million residents within seven years. "These regions are changing from suburbs to cities. New real estate projects need to reflect this fact," he says.
Lucrative opportunity
Statistics prepared by Rooya Group, a domestic real estate development company, when planning for the $1 billion Stone Towers business park indicate a lack of office space in Cairo, where space sells for nearly $300 per square meter, about $100 more than in Dubai. According to Kharma, 3,000 new companies were established in Egypt in 2004 and an additional 31,000 appeared through 2009. "The demand created by these new companies in addition to increased demand from existing businesses for specialized office space to accommodate their growth will ensure sustainable profitability," he says.
Sany, however, is less certain about future demand. "We need to realize that business parks are products, hence they will definitely be affected by economic conditions," he says. "Companies will not pay money to relocate if they are losing money."
Purpose-built, premium office space might hold the greatest potential for developers. "Overall, the shortage of 'Grade A' office space in Cairo, combined with pent-up demand, is expected to result in demand outstripping supply for the near term," says Ehsan Faizy, Palm Hills Development research director.
Only a handful of developers have the resources to build premium projects. "Even among those able to develop such parks, a significant portion of them are not willing to invest," says Hisham Shoukri, Rooya Group CEO. Sany agrees: "The good thing is that now there is more awareness from the business side that being in a specialized office park is necessary for their sustained growth and performance." Kharma says more and more people are choosing to live outside Cairo, and they might prefer working close to their homes. "Because of this growing social trend we, as a business, need to capitalize on the newly arising opportunities," he says.
According to Adel, the government plans to present a draft law requiring that residential buildings be returned to their original purpose. "This means that all the offices located in downtown buildings will be evacuated, forcing them to look to specialized office space," says Adel.
Location, location
"We follow what the market is telling us," says Sany, explaining why Dorra Group decided to build Capital Business Park in Sheikh Zayed overlooking the 26th of July Corridor. The company has fully operational closed-gate residential compounds with a total of about 4,000 units in Sheikh Zayed City. "We know how to navigate our way through the city. Today, it is better for us to invest in a place we know well," says Sany. For him, the 26th of July Corridor is the future, with high traffic and no business parks in the area. Business parks could also prove profitable in Sixth of October City, "but they need to be businesses that support factory operations," says Sany. Sixth of October City was designed as an industrial city with state-built low-income housing for workers and private sector closed-gate compounds for more well-off residents.
For Palm Hills, Sixth of October City is a prime spot for investment in business parks, "Over the last few years, Sixth of October has emerged as a new commercial center to address the shortage of quality office space in the center of the city," says Faizy.
As evidenced by the Stone Towers project in New Cairo, Shoukri approaches the issue from a different perspective. "The problem with Sixth of October City is that it lies to the west of Cairo and most people commute east to west," says Shoukri. The city is connected to Cairo via two main highways, "so if one of them is congested, having access to downtown Cairo would become a nightmare," he says. Future projects to deal with the problem include the planned construction of highways from Rod Al Farag and Helwan. "Not a lot of people know this, but there are two other ring roads being planned. One will encapsulate the current Ring Road, the other will encapsulate both of them," says Adel of Coldwell Banker. Plans call for a 400km stretch connecting five governorates with Cairo.
New Cairo stretches horizontally southeast of Cairo with multiple access points along 12 kilometers of the Ring Road. "Most of the business neighborhoods lie in the southern portion of the city; across from New Cairo. You can access any part of Cairo you need without having to navigate your way through the city itself," Shoukri says.
The government has acquired land and announced that it will relocate 17 ministries from central Cairo to across the street from Stone Towers. A coincidence? "No," says Shoukri, "but the fact that two independent research studies reached the same conclusion means that this is a prime spot for a business park. I think it is because we are 15 minutes from the airport, which is important for government as well as business." The Stone Towers project is near Stone Park, a nearby residential area. "It was never our intention to have both so close to each other. But the piece of land was huge and could accommodate both. The proximity will definitely help with the popularity of the park," he adds.
SODIC, meanwhile, sees opportunities at both ends of the city. Development of Westown is moving ahead with its fully integrated business park, The Polygon, already designed and under construction.
The Polygon also is located close to Allegria, a SODIC high-end residential compound. "Our vision [with Westown and Eastown] is to create two fully integrated, multipurpose cities. Business buildings will not be limited to parks like The Polygon. There are retail spaces in the city itself, there is a site for a hospital and the British International School already has a campus in Westown," says Kharma.
Adel and Kharma agree that the Nile is the dividing line when considering development locations. "People living to the East of the Nile will more likely move to the East and vice versa," says Adel. Kharma adds, "You can't really prefer one location above another."
Making money
Office parks are categorized according to specifications: Grades A and B are purpose-built; Grade C are conversions of residential buildings, and Grade D are multiuse residential and commercial.
For the past seven years, developers focused on luxury office buildings and "this caused prices to spiral out of control, so businesses started looking for cheaper Grade A offices. This was very clear after the 2008 crisis," says Adel. And there are plenty of potential sites for affordable office space projects. New Cairo and Sixth of October have designated sites with infrastructure in place that could be developed into lower-cost office space, says Adel. Business suites are another option in which the developer builds office space to client specifications. "This model requires the developer to sell the plot before construction," says Adel, and obligates the developer to finish the project by an agreed deadline.
Another is for a company to be both developer and contractor, allowing the company to retain ownership while leasing out space. "It depends on your resources. To develop a park and rent out space in it you need a powerful financial position and extensive experience in managing these parks," says Sany.
According to Adel, Grade B office space represents a good opportunity for developers. "Their prices would be significantly lower than Grade A," says Adel, noting that they would appeal to the estimated 70 to 80 percent of businesses in Egypt currently occupying Grade D space. But to be successful, Grade B projects will have to be large-scale projects. "You need economies of scale because profit margins are quite low," Adel says.
Whatever the model, developers need to move quickly after site acquisition to meet government-imposed deadlines for completion of projects.
Long-term investments
According to Shoukri, business park development costs four to six times more per square meter than residential construction. "It is all about the amount of services offered to the park's users," Sany says. "The main principle is to have flexible designs with spaces and layouts that allow companies to tailor them to their needs." To get it right, developers need to take into account such factors as parking facilities, the view from inside offices, proximity to restaurants and other services, and accessibility for workers. "An employee goes in early in the morning and leaves in the afternoon and during this time he eats, holds meetings, works out or just stretches his legs. For the park to be suitable, everything should be within walking distance on a nice route," says Shoukri.
In terms of design, Shoukri sees his Stone Towers project as a future landmark for the area. "To achieve this, we appointed architect Zaha Hadid, one of the best architects in the world, to create for us this unique look," he says.
The Polygon in Westown and Capital Business Park in Sheikh Zayed City represent design based on form following function. Because the sites are an integrated part of fully-fledged cities, a standout structure is not important. Another factor is the height restriction that limits buildings to six stories in Shiekh Zayed and Sixth of October cities. Developers of both projects are attempting to get exemptions from the cap that would allow towers to be built. "I am optimistic regarding attaining the required permits. We are moving in the right direction," says Sany.
Of the three projects, Capital Business Park is expected to open first. "By September 2011, we should be able to relocate Dorra Group headquarters to the park," says Sany. The Polygon "will be operational by 2013, and when the time comes we will relocate SODIC there," says Kharma. Rooya estimates the Stone Towers project could take seven years.
More business parks are likely to mean more opportunities for retail enterprises to take advantage of inexpensive space and a regular supply of potential customers. Witness Dandy Mega Mall and the accompanying strip of restaurants that has flourished since the opening of Smart Village.
Public-private partnerships that focus on improving and expanding infrastructure to Sixth of October, Sheikh Zayed and New Cairo are also expected to get a boost in light of the government's decision earlier this year to allow the private sector to participate in such projects in addition to the forecast increase in the number of business parks.
While the overwhelming majority of domestic real estate developers have focused on residential projects, non-industrial business demand for more specialized office space is expected to present new opportunities. As a result, some developers are likely to take on the additional role of contractor in order to increase efficiency, control costs and decrease execution time.
As private developers recognize the profit potential in building and operating business parks, their challenge will be to meet growing demand. Whether business parks can be a force in relieving urban congestion in Cairo and elsewhere remains to be seen. However, more parks will mean more development in satellite areas and more options for companies seeking quality work environments that areefficient, affordable and convenient for employees and clients.
By Tamer Hafez
© Business Monthly 2010
