Open opportunities: Demographics will ensure housing remains in high demand

The Egyptian real estate market continues to exhibit potential, despite facing many challenges in the near term. Some of these, such as uncertainty, are the result of the turbulence following the 2011 revolution, while others, such as issues relating to the availability of land, date back several decades and will require sustained government action to resolve. Nevertheless, with extremely positive long-term indicators, the outlook is encouraging although, in comparison to other major regional markets, residential segments may be more cost-sensitive and there is a sizable push for affordable housing projects. Overall, the sector has managed to register solid growth over the course of 2012 and, in spite of the broader turmoil, it looks likely that develops will continue to post positive results for 2013.

DRIVERS: For the real estate sector, Egypt’s demographics are very favourable. The country has a large and growing population; 92m people, according to the latest estimates from the Central Agency for Public Mobilisation and Statistics (CAPMAS), which is growing at an estimated rate of around 1.7% a year, according to World Bank figures. The population profile is also very young, with 31.2% under the age of 15.

These demographics suggest that Egypt has a more promising medium to long-term outlook than other similar countries in the region. For example, although Turkey has a comparable total population (at 74m in 2012), both population growth and the country’s population profile are less favourable, at 1.28% growth and 26% of the population under the age of 15. Saudi Arabia, by comparison, has nearly 30% of the population under the age of 15 and has a faster growing population than Egypt, at 1.88%; however, this is on a base population of only 28.3m people.

Egypt also registers a large number of marriages a year, more than 933,000 in 2012, translating into high demand for housing as new couples move out of their parents’ homes. Moreover, the Egyptian middle class is growing, with the African Development Bank estimating it accounted for 31.6% of the population in 2010.

SHORTAGES: Although the Egyptian government does run a housing programme, for decades this has struggled to keep pace with population growth, and the country’s housing shortfall is estimated at between 1m and 3m units, depending whose figures are used. This excess housing demand is considerably higher than for other regional countries facing a similar issue. For example, for 2012, Saudi Arabia was estimated to have a shortage of 1m homes, and Morocco was estimated to be missing about 840,000 units. About half of the Egyptian population – 43.7% according to the World Bank – lives in urban areas, of which the capital, Cairo, is by far the largest, with a population of up to 11m or more according to some estimates. The city measures just 50 km by 30 km, resulting in an average population density of about 46,000 people per sq km.

However, with the congestion in central Cairo becoming increasingly worse – even before the 2011 revolution – suburban developments have become ever more popular with first-time buyers, leading to a much larger and less concentrated urban footprint.

OPPORTUNITIES: The long-term drivers of the market have helped developers ride out the worst of the post-2011 turbulence. Darwish Ahmed Hassnin, CEO of the Saudi Egyptian Construction Company, told OBG, “The real estate sector was extremely resilient and saw only minor setbacks – overall the sector did not shut down as one would expect.” In fact, the revolution may have benefitted the sector in tangential ways, due to the increase in uncertainty. A lack of clarity regarding government policy has contributed to the falling value of the Egyptian pound, which dropped from LE6.2 per US dollar to LE6.8 per dollar over the first four months of 2013. The drop in the value of the currency has helped increase the rate of inflation in the country, which was running at a rate of around 10% in July 2013, according to government figures. Capital controls, which were introduced in tandem with the devaluation of the pound, make it difficult to take money out of the country, with a maximum of $10,000 a day permitted. Under these circumstances, a shift from cash to assets makes financial sense and, as an asset class, property is both fairly straightforward and relatively liquid.

As such, many Egyptians with money to spare have put money into real estate over the last few years, primarily residential, but also to a much smaller degree into commercial property, where there is a shortage of high quality space. Ahmad Labib, chief commercial officer at Sixth of October Development and Investment Company (SODIC), told OBG, “Currently, there are three main factors driving the market. Firstly, concerns over security mean many people are looking to move out of the city centre to the suburbs. Secondly, we have a very young population, which translates into lots of people getting married and looking to set up a new home. Thirdly, the devaluation of the Egyptian pound means that people are looking to shift from cash into assets, and real estate, particularly prime real estate, has been a major beneficiary of this trend.”

PLAYERS: Egypt has several large real estate developers, a number of whom are public companies listed on the Cairo bourse. Of these perhaps the biggest is Talaat Mustafa Group (TMG). For 2012, the company reported revenues of LE4.6bn ($654.6m) compared to LE5.1bn ($725.7m) in 2011, and profits of LE545.7m ($77.7m) compared to LE577.5m ($82.2m) in 2011. Madinaty, TMG’s flagship development, is a self-contained mixed-use development featuring both residential and office components, in addition to a number of hotels and a golf course. Located in New Cairo, the site will eventually house 600,000 people in 120,000 housing units. According to a report by property consultants Jones Lang LaSalle, Madinaty delivered almost 2000 apartments over the course of the second quarter of 2013.

SODIC was founded to develop the new town of 6th of October City, about 32 km west of Cairo. In 2012, the company reported revenues of LE1.4bn ($199.2m), and net income of LE257.4m ($36.6m), compared to revenues of LE542.3m ($77.2m) and a net loss of LE193.2m ($27.5m) over 2011. In terms of major developments, SODIC has Westown, located on 1.2m sq metres of land off the Cairo-Alexandria desert road, which features residential, leisure and office complexes, and Eastown, which covers 860,000 sq metres in New Cairo. Over the second quarter of 2013, SODIC sold out the first phase of its Eastown project, selling a total of 608 apartments at the development.

Palm Hills Developments (PHD), also a listed company, registered turnover of LE392m ($55.8m) and a net loss of LE134.6m ($19.2m) for 2012. PHD’s principal properties include CASA, a residential complex on the Cairo-Alexandria desert road; Palm Hills Katameya, a 1msq-metre residential complex; and The Village, a mixed use complex near the American University Campus in New Cairo, which is aimed at students. PHD delivered 365 apartments in the second quarter of 2013 at CASA.

In terms of other developers, some of the bigger companies include Mountain View (which has the Mountain View and Hyde Park projects) and Amer Group (which is behind the Porto chain of real estate developments). Additionally, there are a multitude of smaller private developers in the country.

FOREIGN PARTICIPATION: A number of regional real estate developers also have a presence in the Egyptian market. Among the bigger players is the Emaar Group, which hails from the UAE, and is building the LE12bn ($1.7bn) Uptown Cairo site, the LE10bn ($1.4bn) Marassi project, the LE6bn ($853.8m) Mivida development (all residential) and the LE4bn ($569.2m) Cairo Gate retail and mixed-use development off the CairoAlexandria desert road. The latter, which is being developed in conjunction with Majid al Futtaim Properties, also a UAE-based company that specialises in commercial real estate, features office parks, hotel and residential areas, together with 120,000 sq metres of retail, with flagship tenants including Swedish furniture giant IKEA and UK food and home chain Marks & Spencer. Total investment in Cairo Gate is around LE5bn ($711.5m). Majid al Futtaim already has the 28,600-sqmetre Maadi City Centre, a shopping mall in the south of the capital, and is constructing the Mall of Egypt, which, upon opening in 2015, will feature a gross leasable area (GLA) of 162,500 sq metres, with total investment of LE4.9bn ($697.3m).

Qatari Diar, a property development group from Qatar, is developing a 197,000-sq-metre hotel, retail and office complex, known as the Nile Corniche, in Cairo and also a 437,000-sq-metre tourism complex at the resort of Sharm el Sheikh. Cost estimates for the project were not available at the time of writing.

RESIDENTIAL: The residential market is split between a relatively small high and middle end segment, in which demand is met by large developers and financed through off-plan sales, and a fairly large low-income segment in which demand is met by a combination of family support and informal construction. A 2011 Jones Lang LaSalle study of affordable housing in the MENA region put around 84% of Egyptians in the low-income segment. This is compared to 55% of total households in Morocco and 58% of total households in Saudi Arabia.

In rural areas, and among the urban poor, it is fairly common to build one’s own house, either brand new or by extending the building outwards or adding a new floor. Since work can be done informally, as and when the buyer has the cash, this works out as an affordable way to build a house over a number of years, and allows even Egyptians with fairly modest incomes to provide their children a place to live when they get married.

Rent control laws pose another complication for the real estate market, as these have frozen rents in many buildings constructed before 1996. Given inflation rates since the laws were enacted, many tenants now find themselves paying only a nominal rent, but landlords have no money for maintenance and improvements, leading to the deterioration of many older buildings.

According to Aqarmap, a local real estate consultancy, the majority of current demand is for suburban residential housing, with some 26% of buyers looking for new build homes in New Cairo, followed by 22% looking in 6th of October City, 14% aiming to settle in Sheikh Zayed City and 10% wishing to purchase in Shorouk City. For resale properties, demand was estimated to be highest in Medinet Nasr, which was forecast to account for 18% of resale demand, followed by Heliopolis (12%), Maadi (11%) and Haram (6%).

In terms of high-end residential developments, the main projects are in Cairo, and to an extent, resort areas on the Red and Mediterranean Sea coasts, with little development in the provinces, or even Alexandria. According to Jan Pawel Hasman, vice-president of research with EFG-Hermes, a local investment bank, “The real estate market is off-plan based. This helps make things more affordable for the buyer, as they can schedule payment over a number of years, while for the developers, the ability to sell off-plan means that there are relatively few capital and start-up costs involved, thus leading to an essentially self-financing model.”

At the height of the 2011 revolution, around 30% of off-plan buyers found themselves forced to default on payments, although the incidence of late payments has receded over 2012. As such, developers have preferred to accommodate them by offering more generous terms and extending the payment schedule, which now typically runs at around seven years compared to an average of about four years prior to the revolution. From the buyer’s point of view, while off-plan sales involve a certain amount of risk, in the present economic situation, the risk involved in buying into off-plan real estate developments now looks less than the risk of keeping cash in the bank or in securities.

RESPONSE TO CRISIS: Although a number of developers did suspend work during the revolution, many managed to sustain construction and bring projects to market on schedule. According to Mohamed El Banany, vice-president of business development at Coldwell Banker Egypt, sales volumes (although not prices) dropped in the immediate aftermath of the revolution by as much as two thirds, but volumes have since recovered and now stand at around 70% of the pre-revolutionary level. Khalid Bahig, vice-president and CEO of local real estate broker, New Homes, told OBG, “Because of the revolution people took the ‘wait and see’ attitude and resisted spending on real estate. Now, as a result of the relative stability, buyers are coming back to the market and we expect this trend to continue.”

In the new circumstances, developers have preferred to shrink the size of their units and reconfigure layouts as a means to render their properties more affordable rather than drop prices outright. “Generally, developers are responding to changing market conditions. They’ve not reduced prices, but have reduced unit sizes and offered more flexible payment terms. We managed to keep constructing during the revolution, and this has paid off for us as we have a track record of delivering and our credibility on the market has been enhanced,” SODIC’s Labib told OBG. This shift to smaller, cheaper units suggests that the large builders are moving to a more volume-based model. However, some developers who suspended work during the revolution now find themselves in a less favourable position, having sold units at fixed prices and suffering from a backlog that they now have to deliver during a period of inflation, rising materials costs and wage demands.

LAND ISSUES: Although most of the specific cases are largely resolved, one of the main issues for many developers is that, since the revolution, a number of land deals have been subject to judicial review, with a number of high profile cases currently in the courts as a result of allegations over malfeasance (see analysis). At the time of writing, TMG is due to face a court hearing over its Madinaty land bank in January 2014, while PHD returned land to the government in 2011. As such, developers are running through their land banks quite quickly, and supply is likely to tighten in a few years unless more supply comes to the market.

SOCIAL HOUSING: Since the advent of the republic in 1952, the government has charged a number of agencies with building public housing either for rent or sale, or provided land for trade unions and professional syndicates to develop housing for their members. However, there is currently a sizable shortfall in the segment, estimated anywhere between 1m and 3m units, depending whose figures one uses. Compounding this issue is the fact that up to 1m units in Egypt are not fit for human habitation, and stand in urgent need of replacement, according to a 2012 report by the UK’s Royal Institute of Chartered Surveyors. Moreover, housing constitutes a major item of expense for Egyptian households, with figures from the Housing and Building National Research Centre showing that on average 34.5% of household income goes towards housing.

Currently, the main agencies working in the field of social housing, under the Ministry of Housing, Utilities & Urban Communities, are the General Building and Housing Cooperative Authority and the NUCA.

According to Jones Lang LaSalle, affordable housing programmes in Egypt have often suffered from a combination of poor design (which makes then difficult and thus expensive to build), a lack of incentives for large-volume builders to involve themselves and a lack of finance, both in the form of direct government subvention and in terms of credit available to much of the population. Under the Supreme Council of the Armed Forces, the government pledged to build 1m new homes, but upon the transfer of power to the civilian government, the pledge had proved difficult to implement.

Sherif Shaker, chairman at engineering and contracting firm Watania, told OBG, “Due to pressure from the public deficit, government projects will be less of a driver for construction and engineering activity, which means firms will be more reliant on private sector developments.” Over the medium to long term however, the industry and many in the government are aware of the much-needed fillip that a well-designed and adequately capitalised public housing programme could give to the economy. Hassan Dorra, chairman of Dorra Group, told OBG, “The market is huge but people in the lowincome segment cannot pay cash. The only way that social housing can be made affordable is for the state to tackle the issues with mortgage finance.”

MORTGAGES: Another way of meeting housing demand, especially for the middle-income segment, is through mortgages, but up to now the mortgage sector has remained underdeveloped for a variety of reasons (see analysis). As such, the volume of mortgage lending in 2012 stood at less than 1% of GDP, according to most banks’ estimates, compared to levels of between 30% and 90% in most OECD economies.

COMMERCIAL: There is a dearth of AAA office space in central Cairo, the main commercial centre for the country. But while the commercial property segment has been holding up less well than residential in recent months, rentals are still on the increase. According to Jones Lang LaSalle, prime office rents in central Cairo were more or less flat, standing at around $40 per sq metre in the first quarter of 2013, compared to around $45 per sq metre in the same period of the previous year. By the second quarter of 2013, total office GLA had reached 819,000 sq metres, with Jones Lang LaSalle projecting an additional 127,000 sq metres would be added to the country’s stock by the end of 2013 In line with the broader shift to encourage development to the east and west of Cairo, new commercial property is being built in the suburban areas concentrated around the ring road – areas where congestion is less of an issue and parking is more accessible. For instance, the Smart Village, an office development just before the main tollgate on the Cairo-Alexandria desert road, opened in 2003 and is home to companies such as Dell, Microsoft and many of Egypt’s banks, such as Beltone and EFG-Hermes. This trend to office construction is continuing, with new developments being built such as the Polygon, part of SODIC’s Westown, which features 86,000 sq metres of premium office space, divided into around 200 units.

RETAIL: While Cairo continues to have a lively and diversified retail scene, encompassing everything from street traders to traditional souqsto upscale boutiques, there has been marked growth over the past decade in contemporary shopping malls and hypermarkets (see Retail chapter). The continued growth of the middle class means that, despite the country’s current political transition, the retail segment continues to post healthy growth. According to Jones Lang LaSalle, total GLA in Cairo’s organised malls stood at 773,000 sq metres at the start of 2013. Of this, 58% was in centres more than 30,000 sq metres in size (so-called regional or super malls). Typical rents at super malls ranged between $920 and $1410 per sq metre in Cairo.

A number of new shopping centres are also due to open over the course of the next two years, adding an extra 715,000 sq metres of space, bringing the total to 1.49m sq metres in 2014. Of the new malls, among the largest is Cairo Festival City, with a GLA of 168,000 sq metres and The District, with 72,000 sq metres of retail space. Although many new malls are in the works, there are fewer than originally planned. “Because of the revolution, a number of mall projects, including some of ours, have been postponed,” Mohamed Abo El Yazid, managing director of Citystars Properties, told OBG.

HOTELS: Tourism is one of Egypt’s largest sectors, contributing some 6.9% of GDP directly in 2012 and 15.1% indirectly, according to the World Travel and Tourism Council. CAPMAS figures show visitor numbers rose 17% from 9.8m in 2011 to 11.5m in 2012. Hotel occupancy rates in Cairo were at 58% for the year to the end of April 2013, up 8% year-on-year, according to Jones Lang LaSalle. No new hotels were completed over 2012. However, figures from the Egyptian Hotels Association show 29 hotels under construction currently, with a total capacity just shy of 8000 rooms.

One of the larger hotels in the pipeline is the 292-bed St. Regis Cairo hotel, part of Qatari Diar’s Nile Corniche project, which features suites, serviced apartments and 2155 sq metres of meeting space, and is due to open in 2015. The Nile Ritz-Carlton, which is being built on the site of the old 431-bed Nile Hilton in downtown Cairo, is due to open in 2014. In addition to hotel developments, Egypt has also seen a boom over the past decade in building villas and dedicated resorts on its coasts, many catering to winter tourists from Europe and Russia. However, interest from overseas buyers in purchasing a holiday home in Egypt has fallen sharply since 2011, and seems unlikely to recover until greater political stability is achieved.

FOREIGN DEMAND: This said, Egyptian buyers living overseas do constitute a modest but significant tranche of real estate customers in Egypt, especially in the residential segment. According to figures from Aqarmap, Egyptian expatriates constitute the leading source of demand after local buyers, surpassing foreign buyers of other nationalities. The high number of Egyptians living abroad (8m people according to CAPMAS estimates) represents a significant market, especially in relation to expatriates in the Gulf countries and Europe, where individuals often have larger disposable incomes.

According to Aqarmap, Saudi Arabia accounted for some 43% of total demand for real estate from outside the country, with a large portion of these purchases made by Egyptians who planned to return to their home country. The next largest source of overseas buyers came from Kuwait (11%), followed by the UAE (10%) and the US (8%). In 2012, there was also a significant rise in demand from other Arab countries, especially Syria, Yemen and Libya, as many nationals of these countries sought to take refuge in Egypt, which, despite its political transition, remains fairly stable and has a long tradition of accommodating fellow Arabs.

Demand from Libya and Yemen started to decline at the start of 2012, but Syria-sourced interest (which constituted over 1% of total offers from outside Egypt) continues to rise. Demand from these countries, which historically have been home to relatively few overseas Egyptians, is likely to be made up primarily of refugees fleeing political instability and a lack of security.

NEW PROPERTY TAXES: In 2008, the government announced reforms to the country’s property tax system that were due to take effect in January 2013. However, in December 2012, the new cabinet voted to postpone introduction of the tax until July 2013 and to raise the exemptions threshold. Many had criticised the fairness and effectiveness of the new tax (see analysis), prompting the government to revise it. At the end of July however, the government announced it would proceed with implementing the tax.

OUTLOOK: In spite of an uncertain macro environment, the Egyptian real estate industry has managed to thrive over the past year and looks set to continue doing so. This is thanks to very propitious demographic fundamentals and a trend towards using property as a safe haven investment. Developers are moving more towards volume sales than has been the case for some time, but demand for units at the top end of the market looks set to hold up despite concerns over liveability in central Cairo. The absence of measures to increase the affordability of housing is likely to have repercussions over the long term provided demand remains high; however, in the present political climate, this issue is unlikely to emerge as a priority.

Egypt’s growing middle class is likely to demand a larger potion of the country’s housing stock, as has been witnessed in other regional countries such as Saudi Arabia and Morocco. Thankfully, real estate developers’ move towards higher-volume sites may correspond with new middle class preferences. Mohamed Hassan Allam, managing director at Hassan Allam Properties, told OBG, “The upper-middle class are no longer buying villas and are now looking to spend less but still receive quality housing in return.” In the new climate of caution regarding the allocation of land to developers, a shortage (for all segments) could develop over the medium term, driving property prices still higher.