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Developers eye low income market

April 2009
As the world economy plunges into recession and economic growth slows in Egypt, the country's once-booming market for luxury villas and high-end residential units has recently begun to decline. Industry analysts say the pent-up demand for low- and middle-income housing will define the real estate sector's future. But what is truly being done on all sides to meet the growing need for affordable housing in Egypt?
Scanning the capital's hazy skyline, punctuated by half-finished and overcrowded concrete monstrosities that house some of the city's nearly 20 million inhabitants, Egypt's twin problems of rapid population growth and lack of adequate housing to match it are difficult to deny. Rooftops have become the only space for some of Cairo's residents; others, with nowhere else to go, continue to live in shantytowns that lie under unsound cliffs parts of which have fallen with devastating results.

According to the Overseas Private Investment Corporation (OPIC), a US government body, at least 90 percent of housing in Egypt is part of the informal sector, or without a formal title. That is a result, says the director of the Egyptian Mortgage Refinance Company (EMRC), Iman Ismail, of the vast shortage of affordable housing in the country. According to EMRC figures, a deficit of 2.4 million housing units plagues Egypt's real estate market, while the Ministry of Housing, Utilities & Urban Communities says that this figure increases by 300,000 each year. At least half of these are needed by low-income families, or families with a monthly income of less than LE 2,500.

Despite the long-term presence of demand for low-income housing, it seems major real estate companies are only now, in light of the poor economic climate, considering addressing it.

With Orascom Housing Communities (OHC) leading the way it was the first major developer to carry out a substantial low-income housing project, in Sixth of October City other primary real estate companies, including Six of October Development & Investment Co. (SODIC) and Palm Hills , say they are now looking at sustainable ways to address the demand for low-income units after watching their share prices plummet over the past year.

Just last month, 33 companies requested project license adjustments from the Ministry of Housing in order to build less high-end and more middle-income units.

But are private sector developers really serious about tackling the low-income housing problem in the country, or have they only been forced to consider it after having saturated the high-end market in the midst of a financial crisis? Some local analysts are convinced low- and middle-income demand will transform the real estate market in the coming years.

Housing boom
The economic boom of recent years, fueled by surging export revenues and record levels of foreign investment, has breathed life into Egypt's somewhat stagnant but recently liberalized real estate sector.

Propelled by 6- and 7-percent growth rates over the past few years, investment in the industry soared and construction boomed. Increased liquidity, coupled with growth-induced inflation and the high cost of building materials, caused property prices to skyrocket. According to Colliers International, a global real estate consulting company, prices in Sixth of October City jumped nearly fivefold from $150 per square meter in 2004 to $800 per square meter in 2008.

High-income Egyptians, benefiting from the new economic prosperity, were aching to flee the trials of cramped, urban life. Real estate developers, buoyed by this demand, rushed to capitalize on the desire for a better quality of living away from the noxious congestion of the city.

Originally designed to house just 3-5 million people, Cairo has a population that now hovers around the 20 million mark, according to official estimates. As a result, much of the city's growth has taken place haphazardly and often dangerously. Smog-inducing taxis choke the capital's narrow streets, while certain areas of Cairo now rank among some of the most densely populated in the world.

"There were a lot of people making a lot of money in Egypt and they aspired for a better life," says Youssef Hammad, chief commercial officer of SODIC , the company responsible for developing Eastown and Westown, two satellite communities on either side of Cairo, in collaboration with Lebanese real estate developer Solidere. "They had fantastic apartments downtown and suddenly they realized they could live outside of the congestion, outside of the pollution, that their kids could play in a garden and that they could have more space. That definitely fueled a lot of growth."

Gated communities built on expensive signature golf courses and all-inclusive artificial cities subsequently popped up on the periphery of Cairo's chaos, boasting names such as Beverly Hills, Palm Hills and Uptown Cairo. And because wealthier Egyptians were the only segment of the population that could access the capital needed to purchase these luxury homes, little or no attention was paid by private sector developers to the housing needs of the majority of the population. This was an issue to be addressed by the government, they argued.

"It was quite profitable for the real estate companies to sell to those with high income," says Ashraf Kamel, deputy minister of housing. "They were willing to pay and capable of paying. One-hundred-square-meter flats were reaching LE 400,000. A townhouse of 200 square meters was going for at least LE 1.6 million, and mansions were selling for LE 10 million."

But with a target market that makes up just 1-2 percent of the population at least 40 percent of Egyptians live on less than $2 (LE 11) a day, according to the United Nations Development Program's (UNDP) 2007-08 "Human Development Report" the days of gratuitous building and selling couldn't last forever.

While Egypt's cash-based economy was to some extent shielded from the mortgage-induced collapses wrought on other markets around the world, global financial woes eventually caused the share prices of some of Egypt's major developers to drop significantly. Would-be homebuyers were reconsidering the purchase of LE 10 million villas on the fringes of the city, while industry analysts warned of saturation at the luxury end of the market.

"[Companies] were targeting a very small portion of the population, perhaps 1-2 percent," says Kamel. "By the time several years of this had passed, [they] had already purchased all of their needs. You can't sell them another house for LE 4 million."

As a result, with high-income buyers retreating, earnings on the decline and the industry hitting near-market capacity, demand for low-income housing is now emerging as a defining factor for the future of Egypt's real estate market.

Assessing the demand
As the population rises by 1.2 million people per year, more and more families and young couples require proper but affordable homes in and around Egypt's metropolitan areas. Estimates put the amount of the country's population living in urban areas at between 65 and 75 percent.

Kamel traces the beginning of Egypt's current, pent-up need for low-income developments back to the era of President Gamel Abdel Nasser.

"Demand is huge because it has accumulated over 40 years," Kamel says. "Before the 1980s, we had two wars in '67 and '73 and all of the national income was directed toward military investments. But once the wars were finished and we began the peace process in the region, people began to invest in real estate."

Despite the onset of more investment, the total amount of units constructed and delivered from 1981 to 2005 was just 3.2 million, according to Kamel. This number includes houses built by both the public and private sector. In 2007, 280,000 units were constructed, but less than half of them were for low- and middle-income families.

In 2005, the government launched an ambitious program to supply low-income housing units through the National Housing Project (NHP). Over a period of six years, ending in 2011, the program aims to construct 500,000 low-priced dwellings. Spanning Sixth of October City, Sadat City, Borg Al Arab and the outskirts of Aswan, the neighborhoods will be fully equipped with convenience stores, hospitals, schools, mosques, churches and police stations, along with necessary infrastructure such as water, electricity, sewage systems and roads. Kamel says 126 private real estate companies are involved in the NHP project.

Each 63-square-meter low-income unit costs LE 50,000 under the NHP, with LE 15,000 contributed by the government through a non-refundable grant, and the remainder paid by the buyer in monthly installments of LE 160 over 20 years.

To qualify as a buyer, one must make less than LE 1,700 per month as an individual or less than LE 2,500 as a family. An applicant cannot have previously received any subsidy or land grant from the government, and the annual interest rate is 7.5 percent.

Yet while the projects are ambitious and Kamel says the government is "dedicated to continuing to work for low-income clients in the future," 500,000 units over six years is still just a drop in the ocean.

If the country's housing needs are going to be fully met, Kamel says, the government cannot be the sole investor. With a trunk full of incentives, the government is hoping private companies will be persuaded to construct 20 percent of the NHP's total 500,000 units and eventually embark on low-income housing projects of their own.

The next steps
Even before the financial crash that prompted Egypt's luxury developers to run "back to their drawing boards," as SODIC 's Hammad puts it, a handful of local real estate companies entering the market with dreams of profiting off the high-end boom have been forced to alter their strategies to address the needs of the market. In some cases that has meant transforming large-scale plans for opulent communities into more modest proposals for low- to middle-income housing developments.

Nasr City Housing & Development, for example, was a developer of what it dubs "mega-plots" for middle-income Egyptians for over 40 years. Now, after a recent acquisition and change in management, the company is focusing on "providing the housing units Egyptians most want, which will begin to close the gap between the demand and inadequate supply, which currently satisfies less than half of the national demand for homes," according to its website.

OHC, however, the low-income flagship project of a joint venture between Orascom Housing & Development (OHD) and Mexico-based low-income builder Homex, has received the most attention from both international and local developers. Built on a mammoth 8.4 million square meters in Sixth of October City, OHC's development initially aims to deliver 50,000 low-income units over a period of six years in cooperation with the NHP.

The fully integrated communities are designed, under NHP specifications, to include schools, supermarkets, cinemas, mosques, churches, hospitals and clinics much like their higher-end counterparts in the same areas and each unit will come with a monthly installment of LE 70. By July 2008, 6,000 units had been constructed and sold, while another 10,000 were still being built.

So why aren't more well-known developers opting to do the same?

While SODIC 's current focus is to develop urban communities with high-end and middle-income residential units, Hammad says that the OHC model is an interesting one, and that his company sees huge potential in the low-cost housing market

"We are very intrigued by the Orascom model, and we would love to see it work," Hammad says. "But how can we apply it to our land today? We wouldn't be able to do it because we got [the land] at a certain price. It would probably require purchasing entirely new land."

If companies purchase land at some LE 300 per square meter the average market price, according to Kamel a monthly installment of LE 160 or less hardly makes for a profitable enterprise. Hammad says some of the land SODIC purchased was as high as LE 800-900 per square meter.

Hibba Bilal, public relations director at Palm Hills , agrees that building low-income housing in Egypt with her company's current land bank simply wouldn't be profitable, but that the widespread construction of low-income units will have to happen sooner rather than later. Right now, Palm Hills is focusing on making its homes "more affordable," she says.

"We will definitely do it," Bilal says of venturing into the low to middle-income housing market. "But right now, everything is on hold. External factors, things like the world economic crisis, really made us think: Why don't we make things more affordable?"

Palm Hills was in the process of launching a low-income housing scheme as part of a corporate social responsibility project last year, but that was postponed after global markets took a dive.

While some companies are prepared to develop low-income units or entire low-income communities on land they have already purchased, the government is also offering private sector developers land from its own bank at a marginal price in order to encourage profitable housing construction for the lower- and middle-income groups.

"Although some in the private sector have directed their investments toward low-income [housing], it does not make a real profit for them," Kamel says. "So, here at the Ministry of Housing, we decided to try to attract private developers to provide some of these units to the market. We give them incentives in the form of cheap land, so it will be quite profitable for them."

The government will sell land to private real estate companies for LE 70 per square meter to be paid over 10 installments with no interest, according to Kamel, while allowing them to use just 50 percent of the land for low-income units and the remainder for middle-income dwellings.

He also says private companies will be required to use more ingenuity in developing their own engineering and financial models to turn low-income unit construction into a money-making investment.

"We haven't got the equation right," says Hammad of SODIC 's assessment of how it can profitably cater to the low-cost housing segment, which it considers a high-volume, low-margin business. "So you really need to look at the government and say: 'How much land can you get if it's for low-income housing? What are the prices of the land [and will they enable us] to create products that are competitive and that add value to development on an economic scale?'... To date, our current land bank is not suitable to develop low-cost housing developments."

Limited access
Aside from the low investment returns for private developers in the low-income market, inadequate access to capital on the part of the low-income buyer has been a thorn in everyone's side, despite the recent boom. For years, Egypt's real estate market was rooted in and based on cash-only purchases, and even now homes bought by wealthier buyers with an initial down payment are paid off in installments over 4-5 years.

In other countries, both developed and developing, low-, middle- and even high-end buyers are given regular access to funds for home purchases through mortgages that allow people to pay for property in installments over a period of time. While Egypt's extremely low mortgage activity - mortgages make up less than 1 percent of the country's GDP, as opposed to 14 percent in the UAE - allowed it to weather the storm of the recent mortgage crisis that battered other countries, analysts say its underdevelopment is hindering growth in the sector.

In 2001, the government established the Mortgage Finance Authority (MFA), as well as the Mortgage Law, to lay the foundation for mortgage-friendly infrastructure in Egypt, and thereby open up the system of home buying to other segments of the population. Eight years after this legislation was passed, however, not much progress has been made, and interest rates on mortgages remain painfully high, Kamel says.

"The [mortgage] market is very underdeveloped, even if you compare it to other emerging markets," says Iman Ismail, director of the Egyptian Mortgage Refinance Company (EMRC), which provides liquidity to its shareholders among them 18 private and public sector banks against their mortgage portfolios. "It's still very difficult for low-income clients to obtain a mortgage; they can only borrow 25 percent of the down payment for a house. The government should change that."

OHC established its own mortgage company, Tamweel, to facilitate the purchase of its units in Sixth of October City. The NHP, for its part, is linked with the government-funded Guarantee Subsidy Fund (GSF), which guarantees a single free installment to the banks if the low-income client defaults, Ismail says.

Nevertheless, according to OPIC, the biggest problem the market faces is the lack of financing options for lower-income clients options it claims would aid in closing the massive gap between supply and demand, and ultimately contribute to greater economic development. But as long as these restrictions are in place, Kamel says, there is not much either the developers or low-income buyers can do on their own to solve the problem.

An ideal sector, Kamel says, is one where financing is available to low-income buyers who, as a result, turn their need for housing into real demand, which then prompts developers to view low-income unit construction as something that does and will continue to turn a profit.

According to Ismail, the anecdotal steps now being taken by large-scale developers toward this ideal market are only the beginning. Real estate companies can no longer afford to turn their backs on the pent-up demand for affordable, low-cost units in Egypt, she says. The risks in the current economic environment are too great.

"The only way to go is up," Ismail says. "It's happening, and maybe we want it to happen a bit faster, but it takes time to put something out in the market."

Hammad says he cannot envision the future of the country's real estate market without low-income housing playing a major role and without large-scale developers eventually catering to it.

"I think the demand for low-income housing has always been there," Hammad says. "That's a fact. And it will be there for a long time."

By Erin Cunningham

© Business Monthly 2009