Egypt's red hot property market may be cooling

Amid falling currency and struggling economy, Egyptian real estate sector is a lone bright spot.

Image used for illustrative purpose. A general view of residential buildings under construction in El Katameya district of New Cairo March 30, 2013.

Image used for illustrative purpose. A general view of residential buildings under construction in El Katameya district of New Cairo March 30, 2013.

At dawn on May 28, hundreds of Egyptians lined up outside the gates at City Stars Capital 2, an office building in Heliopolis. By 9, more than 1,000 people had gathered, forcing police to reroute traffic around the crowd spilling into the streets. They were hoping to reserve a villa in developer Mountain View's latest New Cairo compound, iCity, which is ultimately set to be an 18,000-unit "integrated urban community" built on 500 acres. The first 2,000 homes went on sale that morning starting at a relatively reasonable LE 700,000 for a 100-square-meter unit. However, by noon, Mountain View had raised prices by LE 1,000 per meter. Phase one sold out on the first day.

Amid a falling currency, anemic tourism and an economy that has yet to bounce back following the turmoil that began in 2011, the Egyptian real estate sector is a lone bright spot. "The real estate sector has become, for the average investor, the only option," says Hossam Mostafa, chairman of the Egyptian Engineering Company, which has significant real estate holdings. In a country of 90 million people--half under the age of 25--and 800,000 annual marriages, demand for housing is high across the board. In recent years, Egypt's biggest developers--the Talaat Mostafa Group, SODIC and Palm Hills Developments, which tend to cater exclusively to the top end of the market--have reported surges in demand. Every year, Egypt needs around half a million new homes to accommodate new families and handle the existing housing deficit.

To address the problem, the government has mapped plans for no fewer than four new cities to be built as part of its Sustainable Development Strategy Egypt Vision 2030 released in March. "The plan depends almost entirely on how fast buildings can be constructed," says Fathallah Fawzy, co-founder of the Mena Group Egypt, a real estate development firm. Of course, more homes require the construction of more hospitals, schools and office buildings. Even commercial real estate, which lagged after 2011, has bounced back recently. Majid Al Futtaim, based in the UAE, for example, announced last year that it was boosting its investments in Egypt to more than LE 22 billion, with plans to add to several shopping malls. The government's 2030 strategy aims to double Egypt's urbanized land, which will mean building a whopping 7.5 million new homes along with the infrastructure, utilities, and commercial and recreational facilities needed to lure residents from overcrowded cities in the Nile Valley like Cairo, Alexandria and Damietta.

However, the private sector, which is responsible for around 95 percent of real estate investment, focuses on the richest 20 percent of Egyptians. And despite long-standing promises to build more affordable housing, the government has a poor track record--according to a 2014 report by the Egyptian Initiative for Personal Rights, national housing projects like Iskan Mubarak and the Million Units Project, which cost billions in public funds--ended up mostly benefiting those in middle and higher income brackets rather than the poor.

Real estate is a pillar of the Egyptian economy, employing around 5 percent of Egypt's labor force and contributing to around 100 feeder industries. However, there are signs that Egypt's economic woes may be gradually catching up to the sector. In fiscal 2011/12, total investment in the industry amounted to LE 39 billion, according to Central Bank figures. In 2014/15, it was down by more than 20 percent to LE 31 billion. Officials have indicated they expect the growth rate to remain flat in 2016 and 2017.

Industry insiders blame the slowdown on a shortage of affordable land. The government is solely responsible for the task of outfitting virgin property with necessary infrastructure like plumbing, power lines and roads, and currently, say experts, the antiquated system simply isn't moving fast enough to keep up with housing demand.

The housing ministry's New Urban Communities Authority decides where infrastructure is built and who buys land for how much, based on criteria that remain opaque. Developers participate in a sealed bid auction, with each submitting their project's technical and financial specs. "This auctioning system was first used to promote real estate development in 6 October and 10 Ramadan Cities," says Ahmed Shalaby, managing director and board member of Tatweer Masr.

Since last year, NUCA has been steadily increasing the price of land. An official at the agency who wished to remain anonymous because he was not authorized to speak to the media says NUCA is under pressure to cover its costs and generate profits, which are supposed to fund the cost of building more infrastructure as well as subsidize affordable housing. According to the source, land prices have increased by an average of 50 percent since the beginning of 2015. As a result, developers have become more choosy about pursuing projects, with some shying away from costlier areas in Cairo's suburbs in favor of cheaper ones outside the major cities. "We are seeing prime plots in New Cairo or Sheikh Zayed get almost no bidders," says Maged Sherif, the managing director at SODIC. "Policies and regulations as applied in the current business environment are no longer attractive to developers."  

Industry members suggest that Egypt might adopt a system used by some other countries, where rather than selling the land to developers outright, the government operates under a usufruct model, in which developers effectively sign a long-term lease on plots, or a partnership model in which the government agrees to sell land at a reduced cost in exchange for a portion of units or profits down the line.

Developers are also calling for a more transparent land pricing system. They have pushed for a national property database, with upper and lower price limits for plots across the country. Earlier this year, an official from the Ministry of Investment was quoted at a real estate conference saying that a central land registry would indeed be ready sometime in 2016. AmCham Egypt Inc.

The housing ministry also says it has plenty of viable real estate investment opportunities in the pipeline. New Toshka in Upper Egypt is partially built and is expected to be ready for developers within months, but infrastructure has yet to be laid in the future municipalities of New Alamein City, New Port Said City and the so-called new administrative capital. According to Khaled Abbas, a technical affairs aide to the minister of housing, there are long-term plans to auction off land for some 20 new cities, once the infrastructure is laid. 

But those opportunities are unlikely to be borne out if Egypt doesn't adopt a more "flexible" system of preparing and allocating property for development, says Mamdouh Badr el-Din, chairman of Badreldin for Real Estate and the head of the Real Estate Investment Division at the Federation of the Egyptian Chambers of Commerce. "I am not against building megacities," he says, but he believes that officials should give developers a bigger say earlier in the process. The lack of private sector input has hampered large-scale public development efforts in the past, he says. The satellite megacities 6 October City and New Cairo, which were originally supposed to house a quarter of Cairenes by 2020, have fallen far short of that goal, largely because the government provided vast amounts of housing without adequately developing the businesses and services that are key to attracting people to new communities. If the government doesn't adopt a system that looks to developers to help pay for crucial infrastructure, says Fawzy, of the Mena Group, new projects will stall. "With all due respect to the Ministry of Housing, the private sector has more money."

The government's plans for a slew of new megacities are vague at best. In March, the state-owned MENA news agency reported that construction would begin in April on the first phase of the new capital in the desert between Cairo and the Suez Canal. It is set to include a national meeting center, a building for parliament, conference and exhibition halls and office premises for 12 government offices, all to be finished in about three years, according to the China State Construction Engineering Corp., which is reportedly taking on a major role in the project.

Egypt Vision 2030 also outlines a new law that is supposed to ensure coordination among government agencies, as well as legislation that will set a unified set of construction standards. The laws are to be implemented by the housing ministry's High Council for Planning and Development, which will be given new authority to set land development policies and strategies, including how plots are priced, used and supervised. Rather than auctioning land to the (presumed) highest bidder, land will be priced according to the nature of the development, which experts say is crucial for encouraging new low-income housing, schools, hospitals, utilities and other relatively low-margin but critical real estate investments. Developers call it a step in right direction, but the devil is in the details.

But even if and when the new measures are enacted, they don't address the crucial issue of paying for infrastructure. Industry insiders suggest a scenario in which private companies take the responsibility and cost burden of readying plots for development. But Abbas, the housing ministry aide, argues that turning over that job to the private sector risks compromising the public interest. "We want to expand development to distant locations which are not so convenient for private developers," says Abbas. "The only way to ensure balanced development is to do it ourselves."

In 2007, the government did exactly what developers are suggesting: It allowed private companies to build infrastructure to develop industrial zones. Tatweer Masr's Shalaby acknowledges that program ended badly. With zero regulation by the government, firms began charging exorbitant prices for plots or deliberately sitting on them to get a higher price. This happened because the state stepped too far back, says Shalaby; even in public-private partnerships, it's still up to the government to enforce rules ensuring that the process stays above board.

Currently, real estate prices are rising across all housing segments. According to research firm 8 Gates for Real Estate Marketing, prices could spike by as much as 30 percent this year alone. "Luxury housing already has a very healthy profit margin," says Darwish Hassanien, CEO of the Saudi Egyptian Development Company. But with prices set to rise in the middle- and low-income markets, the current shortage of affordable housing for so-called middle-income Egyptians is set to get worse. "Fifty-two percent of Cairo residents can afford residential units priced between $26,000 (about LE 230,000) and $35,000 (LE 310,000). However, there are next to no new residential developments by the private sector being offered at these prices," reported Colliers International, a global commercial real estate firm, in April.

The shortage of affordable land has made it less viable for developers to make money on lower-end developments, says Hassanien. Saudi Egyptian has invested around LE 10 billion for three mixed residential and commercial projects planned to target a market beneath luxury but above middle-income, though final housing prices will be dictated by costs. Wadi Degla Developments "has middle income housing plans until 2025," says Chairman Maged Helmy. "We are just waiting for the government to give us plots at a suitable price."

© Business Monthly 2016

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