Hesham Talaat Moustafa discusses real estate, the IPO and his plans for TMG
The year 1971 was a milestone in Egyptian real estate history. That year, an engineer from Mounefaya launched a company that would grow to be one of the most prominent and diverse investment groups in the country. Then 45 years of age, Talaat Moustafa was the sole founder of Talaat Moustafa Group, now known as TMG Holding (bt100 number 24) since a successful initial public offering in November 2007.
In the early days, the company was primarily dedicated to the construction sector, building sewage plants, water plants and subway systems. Talaat moved to Alexandria where he started a family with his wife, Amal. This family was to include three sons who would eventually take over the reins of the business.
Thirty-seven years witnessed the transformation of a simple proprietorship into a large-scale conglomerate with 30 companies and 10,000 employees. Talaat's boys Tarek, Hani and Hisham came to be responsible for three primary divisions of TMG Holding: Tarek, the eldest, oversees the construction arm; Hani handles agricultural projects; and Hisham, the youngest, is the real estate mogul who was responsible for launching the well-known ARE (bt100 number 34) in 1988. Moustafa himself died in early 2005, but his company continues under his sons' management.
ARE, which delivers both real estate and tourism projects on behalf of TMG Holding, includes projects Al-Rehab City, which extends over 2,400 feddans and was the first full-fledged community developed by the private sector in the Middle East. Others include Al-Rabwa, May Fair, and Virginia Beach -- all luxury suburban developments in Egypt. None, however, surpass the LE 80 billion, 8,000 feddan mega-project Madinaty. The "international city on Egyptian land" is the pride and glory of ARE, with 120,000 residential units in the works and a target of 600,000 residents. In addition, TMG has several major tourism projects including Four Seasons Cairo at Nile Plaza, Four Seasons San Stefano, Four Seasons Sharm El-Sheikh and the Nile Hotel. The company's reach beyond Egypt includes plans to build 18 hotels in Eastern Europe as well as potential forays into the United Arab Emirates and Saudi Arabia.
Closer to home, 2007's biggest headline was TMG's IPO, which was oversubscribed 41.4 times, with an order book worth LE 29 billion. The private placement offer of 395 million shares made in November 2007 was also oversubsubscribed 17 times by international institutional investors, with an order book amounting to LE 65 billion.
The company has an aggregate capital of approximately LE 3 billion and has taken over the activities of its sister companies and the four main subsidiaries. It now has operations in various sectors including construction, contracting, property development, tourist projects and building materials. This in addition to land reclamation, agriculture and agricultural industry projects.
Hisham Talaat Moustafa, the youngest son, is the managing director and CEO of TMG Holding. With a bachelor's degree in Commerce from Alexandria University, he began his career as an accountant and is now a member of Egypt's Shura Council and on the board of the Egyptian Federation of Chambers of Commerce. Edited excerpts of his conversation with Business Today Egypt follow.
There has been a tremendous amount of activity in the real estate sector this past year. How do you account for this?
Usually when there's an overall improvement [of a market], there's also an increase in income, and this has a positive effect on the real estate sector. So there is a boost in the average national income providing the population with a larger amount of disposable income, and this of course brings more demand for real estate.
What is the current status of the real estate sector? What are the pressures or obstacles versus the aids and opportunities? Where is it heading?
At the current time, the rising costs of units are causing problems in the real estate market. Purchasing power of people isn't proportionate to the rise in costs of raw materials. So this is the primary problem that the market is currently suffering from. And this is a problem that must be addressed from a bird's eye point of view, by the market as well as the government so as to guarantee the flow of the development of real estate according to the needs of the Egyptian society. There must be high-level action to adjust these differences.
The Egyptian population requires no less than 450,000 units per year so there needs to be deep research and analysis into the capabilities of the market and the conditions in which the market is vulnerable. There needs to be a balance between the supply and demand in this field so we can assure the continuous development of the market.
Do you predict that real estate developers will easily overcome the pressures of rising costs over the next two years?
It depends on the company. Some companies are more prepared and they have the operational know-how so they're able to swallow the problem of price spikes. And some don't have the studies and research to avoid trouble. So you can't really generalize it to the whole market.
Back in October, TMG had a 'roll-up' in which it bought out several of its subsidiary companies and others before launching the roughly LE 3 billion-IPO in late November. What was the strategy there? Why the long wait to form the IPO?
It wasn't really that long. We were working on our own accounting system, with our own methods and delivery schedules in declaring our profits in the balance sheets. There were specific procedures that the company had to take care of in the books, and once all this was done we realized it was the right timing. When we felt that our debt-to-equity ratio had reached a critical level we decided to go public. In addition, there was a slow-down in the market up until 2004. There was a lot of economic pickup in the country in 2005, and in 2006 we made the decision but the process takes around a year or more so we waited for a good 15 months before it finally went through.
Do you think the stock is under performing and if so, why?
Yes, the stock is definitely under performing. There's a depression in the stock market now, the 'ticker' [shares} won't go up. The stocks of the larger companies aren't rising well from December until now. Before there was a lot more escalation. The major exchange increases aren't as high as they used to be. We definitely see the stock as under-valued. We're doing what we promised to investors regarding profitability and turnover, but share prices aren't our job. It is the market and it is out of our hands. We had a turnover from the beginning of the year of LE 5.5 billion, so we are doing very well.
TMG had LE 1.9 billion in property sales during January and February 2008, versus LE 738 million over the same period in 2007, which is 157% growth how do you account for that?
The growth is based on our infrastructure during the past seven to eight years. We've been jumping up from level to level in our investments and this is the result of all that we've done. Our staff and branches are growing and this is the result of 10 years' work. Alhamdullilah, we have a very good name in the market.
Do you think the middle-income residential sector is underdeveloped and under addressed in Egypt?
Yes, that market is underdeveloped and I feel that in the near future there needs to be more attention and focus on the middle class. There is no other solution. The high end is a small percentage; it's very fragmented and highly volatile. The real demand is in the middle class. A society can't be stable without a strong middle class. In any society in the world, the middle class is responsible for giving a foundation for that society. In America, Europe, the Far East, the middle class is what built it from the ground up, so we have to take care of them. Many people in Egypt say that there are only two classes; the high and the low. And I agree with this opinion. There needs to be planning on behalf of the government to help create and protect a new middle class.
The average price of an apartment in TMG projects is nearly LE 1 million; what class would you say these are targeted to?
No, no. Madinaty, for example, has units that start at LE 200,000 upwards. In fact, the units that sell the most are in the LE 300-400,000 range. We have everything, it's a city. It's not a project, it's a city. So it's comprehensive in that it addresses every range, not just one, but different regions or neighborhoods.
As for the units that are sold or pre-sold, is construction facing trouble due to rising costs? Will they be delayed or do you expect to hit the margin?
Madinaty is not behind at all in terms of construction. We're ahead of schedule and plan on delivering one year before our deadlines.
What is the status of the competition? Who is your strongest competitor?
I can't really say that we have competition since we are unique in our category of operations. We cover a whole range of activities and projects. There are competitors in each level, but as a whole we don't have just one competitor. Overall, we don't have a competitor on our scale. We are the leaders in the Egyptian market. You cannot say that company 'A' is the competitor for TMG since our size is huge.
What is your perspective on the suburbanization effect wherein real estate developers like yourself are increasingly pursuing projects on the outskirts of the main city?
Well, there's a huge amount of demand and no other viable solution. You're forced to move into the suburbs since the demand of Cairo's population requires more than 120,000 units annually. So where are you going to build? Everything that's done within the city is done with the wrong urban planning in mind, taking wrong directions in the long run. But Rehab, for example, utilizes a good concept of planning and this is what gives you a chance to succeed. Wide plots of land generate the best ideas and plans.
What effect do loan interest rates have on demand?
As long as there's a high interest rate, it discourages people from purchasing. So whenever there's a high interest rate, there's a definite negative effect on productivity of the real estate sector.
What projects are currently underway here and abroad? What are your future plans?
Our strategy and philosophy stresses a variety of revenue schemes. In terms of real estate, we're working on all of those mentioned projects. Regarding the hotel section, we currently own and operate the Four Seasons chain in Egypt. But we're expanding our tourism sector with a new addition. Four Season's Luxor that's just getting underway. And Four Seasons Madinaty as well. We're now addressing geographical and political expansion of our hotels in the most promising areas, such as the hotels we're working on in Eastern Europe. In real estate, we're looking to expand locally. That's our main objective.
The Saudi Arabia market is probably the most suitable and comparable to the local market. The market there has similar conditions and structure so we decided to invest there. The market there is very fresh and flexible; 60% of the country is under 30 years old. The growth rate there is going to be high for the next 20-25 years so we expect to realize success.
By Hossam Zaater
© Business Today Egypt 2008
