What are the main growth drivers of the residential market in Egypt?
ASHRAF DOWIDAR: There are three main things that are currently pushing growth in real estate and development. The first is that the government is pushing for investment in a lot of land in order to help develop infrastructure. Second, Egypt is a country with a large and fast-growing population, so there is significant demand for housing driven by this growth. And third, there are many investors in the current market that see real estate as a more secure location for their savings than the banks because of the instability of the local currency. These three separate driving forces are resulting in a very good environment for real estate development. The government is pushing for investment in real estate at the same time that we are seeing a need for 500,000 additional units per year, with this demand weighted towards lower-cost housing. Those going into real estate as an investment are oriented towards higher-cost housing in the A to maybe B+ range, so there is increasing demand across the spectrum.
To what extent have you seen demand for upper- and upper-middle-income housing evolve?
DOWIDAR: People have been using the term “bubble”, but I am not sure this is the same kind of bubble that formed in Dubai in 2011. The bubble here is due to the increased prices of the land that the government is selling, together with the depreciation of the Egyptian pound against the dollar. In Dubai it was valuation and pricing of the property itself, whereas here it is the high cost of building that the price represents, rather than speculation, yet people are not able to afford this. The cost of 1 sq metre is around LE10,000 ($1180), meaning that a 100-sq-metre apartment will cost LE1m ($118,000). The person happy with this size apartment will be unable to afford that price, while the person who can afford that price will not find the size acceptable. This raises the question for developers of what the market is for any given project. Depreciation will only exacerbate this challenge by emphasising the forces already at play.
What could be done to help incentivise the participation of private developers in housing projects?
DOWIDAR: Developers are looking for more improvement, greater flexibility and a shortening of the time taken for approvals. Despite this, regulation is not an issue that will keep a local investor from investing in the market. The real question is how we are going to pay the government for the land. Mortgage penetration in the OECD is much higher, and this is an area where the government can play a role in helping to change the banking sector so that it supports the real estate sector, helping with the initial investment by supporting the buyers with favourable mortgages. If the mortgages are too expensive, then the buyers must come to the developer directly, thereby reducing the number of buildings the developer can work on because of the risk they are taking on. This increases the housing shortage and drives up the price. There is huge room for growth and many opportunities for new developers looking to enter the sector, but it is all about the price of land. The lack of infrastructure is also partly responsible because the government is selling the land at a high cost in order to fund the infrastructure development.
One possible solution is for the government to offer land that will be used for low-cost housing at much lower prices, while land used for higher-cost housing could be sold at a much higher rate so that it becomes feasible to build lower-cost housing. As a developer of lower-cost housing you would then be competing on a lower cost per sq metre, so that it is the cost of construction itself rather than the price of land which is determining the final unit cost. The government does have a programme through which it offers developers 12.6 ha for low-cost housing, which we develop for the government in return for 42 ha on which we can build higher-cost housing, meaning that the price of land will be around LE1000-1100 ($118-130) per sq metre, compared to the current price of around LE3000 ($354) per sq metre. This kind of programme is something we have been pushing for, because developers have a role to play in supporting the government and contributing to the country’s economic growth.
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