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Palm Hills to Go Public

February 2008
With strong growth in its land bank and plans to go public in the first half of 2008, the Mansour Group 's Palm Hills Developments is positioning itself to become Egypt's largest real estate developer
From his tastefully understated Zamalek offices, Yassin Mansour, chairman and CEO of Palm Hills Developments ( PHD ), exudes a quiet poise and confidence that, to an outsider, might seem a bit unusual for a top real estate player with plans to go public.

With both global and regional markets reeling from the impact of the US sub-prime mortgage crisis --and local shares taking a pounding in mid-to-late January -- Mansour nonetheless proclaims that his company is moving full speed ahead with plans for both a local and international offering of its shares during the first half of 2008.

"We will be listing our shares on the Cairo and Alexandria Stock Exchange and as GDRs on the London Stock Exchange," says Mansour. "I believe the market can handle our IPO as well as other offerings that are due to come up within the same general time frame."

Mansour's confidence comes from his firm belief in the future of the Egyptian real estate sector and the lead role he says PHD will play in the sector's growth.

PHD , the company that originated in 1997 as a small 250 feddan Mansour-Maghraby investment in Sixth of October City has today grown to become one of Egypt's premier real estate development companies. With a 33 million square meter land bank and 14 projects currently in the pipeline, PHD is now the second-largest Egyptian real estate developer after the Talaat Mustafa Group .

It is also the fastest-growing land bank in Egypt, having gone from 3.9 million square meters at the end of 2006 to over 30 million square meters at the end of 2007.

"Our target is to be the biggest real estate developer in Egypt and one of the largest in the region, and to do that we have to get into different segments of the market," Mansour says. "We are no longer focusing exclusively on residential housing, even though this is the segment that gave us our name and created our brand. Today we are investing heavily in retail, office space and, of course, tourism," says Mansour.

"Our land bank is now very well divided and diversified. We have properties in both East and West Cairo, the North Coast, Ain Sokhna and the Red Sea," he adds.

Modest Beginnings
Palm Hills October, PHD 's flagship development, got its start in the late 1990s as an exclusive residential community for the "friends and family" of its owners. Today, it stands as a fully integrated community and the first truly successful West Cairo development.
"When we first started out in real estate in the late 1990s, I didn't expect the company to grow in such huge strides, but I think as early as 2001-2002 I knew that the real estate sector was not only a safe bet but actually a huge growth opportunity for our company," says Mansour.

Mansour Group 's holdings range from Metro supermarkets and General Motors Egypt to McDonald's, Hayat bottled water, Philip Morris cigarettes and other megabrands. Mansour Group also owns 60% of Mansour-Maghraby Investment and Development , a joint venture with holdings ranging from the PR industry to banking, finance and manufacturing.

Despite the recession that left the Egyptian real estate market virtually stagnant between 1999 and 2003, Mansour says his company fared rather well. The real estate division continued to expand, build and sell Palm Hills October, turning it into a brand name that the firm today has extended to new developments in East Cairo.

"During a recession people become very risk averse that's why they go to names that they trust. Although Palm Hills October was our first real estate endeavor, the Mansour-Maghraby name was a familiar one that people have come to generally associate with credibility. We were able to couple our name with the name of one of Egypt's best-known architects, Shehab Mazhar, to create a winning formula.

"One of the main problems that caused the real estate crash in the late '90s was that developers were undercapitalized. They went into some huge projects thinking that they could largely finance their development through the down payments and monthly installments that would come as they sold units. The problem with this model is that when there is a slowdown in the market, the payments cease to exist and then the projects come to a complete halt.

"The projects that succeeded during that time were those that had the right capitalization and the sufficient financial muscle to see things through," he adds.

Then there was the issue of meeting market expectations. Or, put a little less politely, building homes people might actually want to purchase. The fact that Palm Hills October was able to provide their high-end target market with an exclusive, integrated community that had the amenities to support the kind of suburban lifestyle to which they aspired kept sales moving even during the recession.

"We were able to develop a community atmosphere with Palm Hills October not only because we were a smaller-scale project size doesn't really matter," says Mansour. "It had more to do with our approach of not going to the client, but rather having the client come to us."

With the financial resources to build units before they were sold, PHD did not have to fall back on advertising as a sales tool, instead relying on word of mouth and the combined strength of the Mansour-Maghraby and Shehab Mazhar names. By shunning the commercialism that has characterized some of their competition, they have managed to retain their exclusivity, a key selling point with their target customers.

Still, a change in strategy is in the offing now that PHD faces stiff challenges from ambitious Gulf developers that have flooded the Greater Cairo Area with luxury units.

"Today we still don't advertise specific projects. The outdoor ad campaign that we have recently launched is abstract. It is more of a corporate identity/branding campaign. We realize that to move forward we will need to advertise, but it will be tasteful, selective advertising. For now, that means only advertising our brand, but at a later stage we may advertise some specific projects," says Mansour.

The Future of Real Estate
With all signs pointing to a strong economic recovery in 2005, PHD restructured to take advantage of opportunities for growth and in anticipation of new competition.
"The competition has gotten tougher, but I believe that our competitive edge stems from the fact that we understand the Egyptian market better than anyone else. When we buy a plot of land, we look at the needs of our target market and develop according to those needs, and not the other way round," says Mansour.

According to an October 2007 study of the Egyptian real estate sector carried out by HSBC, a total of 635 square kilometers of land is currently being developed in the two new urban developments of East and West Cairo (Kattameya and Sixth of October-Sheikh Zayed). The development includes over 180 residential compounds that cater exclusively to a high-income clientele or about 5% of Cairo's total population.

Although the supply appears ample, the study went on to say that within the higher income segment, demand should continue to sharply outstrip supply until at least 2010.

Prices, which have escalated 200-300% between 2005 and today, are not expected to drop or level off in the near future.

"If you look at other emerging markets with similar per capita incomes, real estate is much more expensive than it is in Egypt. With the current state of inflation, specifically the 20-30% increase in the price of building materials that we have witnessed over the past three months, I don't see real estate prices going down," Mansour agrees. "In fact, one of the best hedges against inflation is real estate. With the volatility of the capital markets today, I think we will be seeing more people invest in the real estate market. Historically, it is an investment vehicle that Egyptians feel very comfortable with."

Cairenes' reluctance to move outside the city's traditional neighborhoods has finally begun to dissipate. In the past 12 months, Palm Hills October has seen its occupancy rate more than double as more and more homeowners relocate to the suburbs. Of the 250 villas that have been delivered inside Palm Hills October, 190 are now occupied.

The compound's burgeoning stand-alone sports club, which currently houses West Cairo's FC Barcelona youth soccer training facilities and a state-of-the-art tennis academy, has become well known in its own right, encouraging more families with young children to move not only to Palm Hills October, but also to surrounding compounds.

"While there are a lot more facilities available in the new communities today, the commute to and from areas like Sixth of October can be unpleasant," says Mansour. "This is why there is such a high demand for retail, entertainment and office space in the new areas."

Palm Parks, a new PHD project in Sixth of October, is a mixed office and retail development that will complement the company's four other West Cairo developments, which include the original Palm Hills October, Palm Hills Golf Club and Resort (a luxurious residential community built on a 27-hole golf course), the upscale apartments of CASA and Downtown Palm Hills (a residential community that caters to a younger clientele).

In East Cairo, PHD has two projects in the pipeline: Palm Hills Kattameya, a replica of Palm Hills October, and The Village, a young community with apartments, studios, retail establishments and a cinema complex strategically located in front of the new American University in Cairo campus.

Adding retail and office space components in the developments will also guarantee PHD a long-term income stream from rentals, helping diversify its revenue sheet.

The Tourist Market
During the past year, PHD has acquired land in some of Egypt's most sought-after tourist destinations including Ain Sokhna, Hurghada and Sahl Hashish. But the company's most talked-about tourism project to date has been Hacienda Bay on Egypt's North Coast, near Sidi Abdel Rahman.
Demand for property in Hacienda Bay was so high that interested buyers were signing up to reserve units a full year in advance of the actual launch date for the project -- and they did so with no final guarantees on price, delivery dates or final designs.

"There has always been demand for property on the North Coast, but there were not enough quality projects available because developers were unable to construct in the Sidi Abdel Rahman area largely due to legal issues concerning building permits. Once Emaar came in and bought the Sidi Abdel Rahman hotel and the land surrounding it, licenses were obtained and the market began to pick up," explains Mansour.

"Hacienda Bay as well as other projects sold extremely well last summer. Due to all the pent-up demand for property in that area, the market reacted very favorably once it was given a product that suited the tastes of a more discerning clientele."

Critics say the seasonality of the location does not justify the astronomically high prices that were being paid for luxury vacation homes that would only be occupied for a month-and-a-half to two months a year.

"I disagree," says Mansour. "The future of this area is very bright. The development that is currently taking place in the Sidi Abdel Rahman area will in effect elongate the season."

Hacienda Bay located on a 3,000 feddan stretch of beach near El-Alamein, will include five hotels (two of them boutique properties), a signature golf course, an international beach club and a holistic spa, in addition to luxury villas and townhouses.

"The more hotels and entertainment you have in the area, the more feasible it will be to have both local and international tourists moving back and forth. This activity will eventually turn the North Coast into a year-round destination," says Mansour.

"The competition that we have now amongst developers in the North Coast has really raised the benchmark for quality. Hacienda Bay and Emaar 's Marasi are two of the biggest integrated developments currently in progress. I think we will be a bit different though. Emaar 's sales will be more in the Gulf while our sales will be more Egyptian," says Mansour.

Hacienda Bay will be completed in two phases starting in summer 2009 with the rest to follow gradually within the next four years. Approximately 80% of phase one, comprising 550 feddans, has already been sold. Hacienda Bay's beach club and entertainment area should launch this summer.

Future Plans
"I see the market becoming much more competitive in the years to come. Developers have to start operating in a much more professional manner. In the past, real estate development meant having a few friends come together to develop a plot of land or build a building. This will not be the case moving forward," says Mansour.
"The mortgage law has yet to kick in with full force," he adds. "In the absence of a mortgage law the market has grown tremendously. Just imagine what things will look like once we have a proper mortgage system in place."

With expansion plans for Egypt well underway, PHD has already set its sights on the regional market. The company is currently looking at opportunities in the Middle East and Africa. Mansour says to expect an announcement on the firm's first foray outside of Egypt within the next couple of months.

A Deal Gone Sour
In late December 2006, two of the biggest names in Egyptian real estate, Palm Hills Developments ( PHD ) and Sixth of October Development and Investment Company (SODIC) , announced that they would be merging. The synergies between their management teams along with their combined land bank would ultimately create a national champion strong enough to stand up to the stiff competition that had recently been posed by Gulf developers and the mega-projects that they were bringing to Egypt.
Less than five months later, the high-profile deal fell apart as an announcement stating that the share swap agreement worth LE 3.65 billion was off took the market completely by surprise.

According to PHD Chairman and CEO Yassin Mansour, the two companies had what both sides believed to be a final agreement, and a contract was drafted on that basis. He goes on to claim, however, that SODIC wanted to change the terms of the deal because PHD had yet to acquire a license to build on the North Coast.

"They decided that they should reduce the price of the share swap because of this issue," Mansour says, "while we, on the other hand, had made it clear from the onset that the license was not there and that would be a risk that they would have to carry as part of the deal. We felt that a renegotiation of the terms was unacceptable at that point and thus we decided to cancel the deal."

At the time of the merger, SODIC was the larger of the two as measured by land bank, with 4.9 million square meters compared with what was then 3.9 million for PHD .

Since then, however, PHD has obtained a license to build on the North Coast and acquired close to 30 million additional square meters of land surpassing SODIC and most other developers in the country.

"The merger with SODIC would have been a good move for us at the time. We have a great deal of respect for the management team at SODIC and have no doubt that they will achieve great things, but I think things have worked out for the best," says Mansour. "We are now strong enough in our own right and plan to proceed on our own. We have a very well diversified land bank and a good management team on the ground that will allow us to grow and fulfill all our objectives."

By Hadia Mostafa

© Business Today Egypt 2008

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