Covering the bases: While suburbs are growing, low-cost housing remains a concern

Large-scale demand and a shortage of supply in most segments has been the recent story of Egypt’s real estate sector. However, the disruptive impacts of the revolution in early 2011 led to delayed projects, cancelled bookings for off-plan purchases and quashed or downsized expansion plans.

Some of the decrease in activity by developers was mitigated by a surge in informal construction, a qualitative indicator of how strong demand is for housing in Egypt, with this helping to keep the market for building materials buoyant.

FROM THE CITY TO THE SUBURBS: In Cairo, new suburbs are the trend going forward. The focus now is on New Cairo to the east of the capital and Sixth of October City to its west. These spots appeal in particular to middle- and higher-income buyers looking for space to trade in an apartment for a villa with grounds. However, these are more than just bedroom communities with retail services: office blocks are also being constructed alongside the villas and apartments in these new areas.

The satellite cities also offer the chance to house all workers in one building – one which has sufficient parking, modern systems and other benefits derived from the specially designed space. Purpose-built office space located in a light-traffic area close to neighbourhoods where workers live is proving to be a very alluring proposition for both the businesses’ workers and their management (see analysis).

Major institutions are making the move as well – one of the largest developments in New Cairo is a campus of American University in Cairo. The state is expected to move the offices of its ministries and bureaucracies to suburban cities as well, alongside speciality areas, such as the industrial clusters of the Tenth of Ramadan City.

CAUTIOUS BUYERS: Sales in the planned communities declined in 2011, a largely temporary setback caused by political factors, including cautious buyers and constraints for developers. The outlook in early 2012 was improving, however, with earnings reports from the first quarter confirming that trend. Talaat Mustafa Group, the country’s largest listed property developer with a market capitalisation of around LE11.25bn ($1.88bn) as of late September 2012, reported sales of LE1.08bn ($180.76m) during the first quarter of 2012. This was up 90% from the LE568m ($95.07m) seen in the first quarter of 2011, when the revolution was in progress. The company’s net profits meanwhile rose by 2.5%.

With malls and villas attracting many residents of Cairo to the fringes of the metropolitan area, the next question to ponder is the fate of the historic downtown core. Downtown, gentrification has sprung up in the form of Al Ismaelia, a mixed-use development led by an arm of securities firm Beltone Financial.

Beyond Cairo, much the same factors apply in other urban areas across the country. There is housing demand in Alexandria, the second-largest city in Egypt. Shopping malls, hypermarkets and modern retail space could serve as part of the mix in terms of future needs. The government is also mulling plans to add geographic diversity in industrial activity. This could be accomplished by building factories in medium-sized towns, meaning jumps in demand in places like Port Said and Suez.

TOURISM: Egypt’s tourism sector will see new properties as well. Though central Cairo is still envisioned as the centre of tourism, construction is under way elsewhere. As of mid-2012, for example, hotel construction on the Mediterranean coast is projected to add 47,000 new rooms, said Mansour Amer, the chairman of the real estate developer Amer Group. “Egypt’s tourism sector faced even worse fallout in 1997 during the bombings, but we've proven that we know how to recover from adversity and how to bring people back,’’ Amer said.

The construction of holiday villas is also on the rise. Egypt offers a lower-cost environment than competitor countries such as Morocco and Turkey, said Sameh Habib, the head of business development at property developer Al Ahly for Real Estate. Vacation homes typically sell for approximately $1000 per sq metre.

In future years some developments close to Cairo that are holiday-oriented could even emerge as new exurbs or bedroom communities. Ain Sokhna, on the Gulf of Suez, is developing as a weekend destination that is less than an hour’s drive from Cairo’s eastern suburbs, for example. However, at the moment it lacks the necessary services such as schools and retail outlets. “In the future I could see people living there and working in Cairo, especially in east Cairo,’’ said Marwan Sery, a research manager for Chicago-based international real estate consultancy Jones Lang LaSalle.

MEASURING DEMAND: A precise tally of the country’s real estate needs is difficult because of a lack of transparency and reliable data, but the analysis starts with population growth, which stands at about 2% a year. With 85m people already, the almost universal expectation in Egypt is that young people moving from adolescence into adulthood will define the market for years to come.

Indeed, the marriage rate is generally accepted as a proxy for housing demand in Egypt, because the vast majority of Egyptians continue to live with their families until they are married. “There is a roughly 1m-unit shortage in Egypt and the number increases every year,” Hassan Dorra, the chairman of Dorra Group, told OBG. “With over 500,000 weddings each year, this number continues to grow; after all, married couples need their own housing.”

However, in an example of how data is a challenge to forecasting in Egypt, there is no agreement on the marriage rate. The Central Agency for Public Mobilisation and Statistics has reported there were 864,857 marriages in Egypt in 2010, up 13.9% from the 759,004 it reported in 2009.

That number is widely considered too high, however. “Often you don’t know what you’re looking at with the statistics, and we have to be wary of that,’’ said Erika Wakid, an investor relations specialist at Orascom Construction Industries (OCI), one of the country’s largest contracting companies. Most estimates are between 500,000 to 600,000 marriages annually, enough to validate an investment thesis based on residential demand.

SOURCING THE DEMAND: Housing market demand is considered to be 75% derived from end-users and 25% from speculators. The demand estimate for 2011 was 432,000 units before the revolution, according to market research done by Prime Holdings, a Cairo-based securities company. The revolution likely shrank the total by approximately 25%, roughly equivalent to the percentage of market participants who are not end-users. The company downgraded its estimate for 2012 by that proportion, resulting in a total of some 324,000 units for the year.

New supply, however, was much lower than in previous years. The originally anticipated 168,900 units that were scheduled for delivery for the year shrank to 118,000, according to the securities firm’s research. The drop came as projects were cancelled due to a lack of sales or legal uncertainties, and serves as an indication of the scope of the potential housing problem in Egypt. The housing shortage, which has been built up over multiple years, is pegged at between 1m and 1.5m units.

OFFICE & RETAIL: While supply seems certain to lag demand for the foreseeable future in housing, in both the office and retail segments the shortage of space is expected to be filled much faster. Rents are expected to fall in the near and medium terms as completed projects shift the balance in favour of renters as opposed to property owners.

A shortage of Grade-A office space makes the occupancy rate in Cairo among the highest within the region. Some 80% of demand is fulfilled using residential space, according to research from Cairo-based developer and engineering firm DMG. With the exception of one location, the Nile City Towers in downtown Cairo, all of the city’s approximately 700,000 sq metres of Grade-A office stock is in new buildings in either New Cairo or Sixth of October City.

Rents stood at about $45 per sq metre per month downtown and between $20 and $25 in the satellite cities, according to data from the Chicago-based real estate consultancy Jones Lang LaSalle. Those numbers were down by about 20% from a pre-revolution peak in 2010. About 60,000 sq metres of new supply was expected to be constructed by the end of 2012, which will further tamp down prices.

Egypt’s retailers are also facing a shortage of locations that should be alleviated in the medium term. However, the pace of construction of new hypermarkets has slowed greatly, as the firms driving the market – foreign players such as Carrefour and Spinneys, and potential new entrants such as Tesco – have put on hold or scaled back the extent of their expansion plans until the country’s political climate becomes more favourable. The malls segment has seen less disruption, with the construction of new, large malls such as the Mall of Arabia and the mixed-use Cairo Festival City ongoing.

LAND SOURCES: Roughly 60% of homes in Cairo are built without permits, a rate that drops to 50% outside the capital city. Building on this basis increased after the revolution. Construction in the informal sector is often done on land zoned for agriculture. In that process, a farmer or owner of farmland will break up the asset into small plots to sell to end-users. This typically eliminates involvement of brokerage services or any other middlemen, which helps make land affordable for the buyers.

Typically, buildings in these areas are eventually recognised as legitimate by the government after the fact, and basic utilities such as water pipes and power lines are extended to these developments. For example, the majority of informal houses are connected to Cairo’s municipal water network, according to David Sims, the author of a 2011 book on the history of urban planning in Cairo, Understanding Cairo: The Logic of a City Out of Control. Despite a lack of official deeds or other documentation, ownership of these homes is established via power-of-attorney contracts, creating a secondary-sales market, Sims’s research suggests.

LAND ALLOCATION: Land upon which developers can build is typically allocated by the government. Law 89 of 1998 (the Law of Orderly Auctions and Tenders) mandates that land must be sold via those methods. Normally, according to Habib, the government sets a price and qualifications for a plot’s development, and the first developer to tender and who can meet the criteria generally ends up getting the land. Alternatively, a lottery-like system can be used to select from multiple suitable bidders.

For bigger plots, auctions based on price are more common. The usual terms are a 25% down payment and the rest of the agreed-upon price to be paid within four years. There are currently no interest charges.

Land auctions had ceased after Hosni Mubarak, Egypt’s former president, stepped down until early 2012. At that time the process resumed, and some small plots of about 40,000 sq metres were sold, Prices are not typically announced, but can spread after the fact via word of mouth, said Habib. Land transactions between private citizens are quite uncommon. Developers who end up building on land owned by a non-government entity typically do so through a partnership with that owner. Some developers, such as Emaar Misr, a wholly-owned subsidiary of Dubai-based Emaar, benefitted from such arrangements, which helped stem concerns over land allocation. Virtually all of the developer’s land bank, which is estimated to be one of the largest in the country, was purchased through either private transactions or auctions, minimising overall risk – a contrast with some of its peers (see analysis).

REACHING THE DIASPORA: In what could be a onetime measure, diaspora Egyptians were the target of a programme announced in spring 2012. Those who could pay in foreign currency, of which the government was running short, were offered plots in some of the new suburban cities. The Ministry of Housing hopes to sell some 8000 plots in the greater Cairo area. The average plot size is about 800 sq metres, with prices averaging around $500 per sq metre in New Cairo and $675 in the Sheikh Zayed City.

The government hopes to raise some $3.5bn in foreign currency from sales generated by the scheme. “We don’t expect to hear anything specific about it. However, if the programme is renewed for a second time then we will know it was a success,’’ Monette Doss, the manager of the research department at Prime Holdings, a consulting firm, told OBG.

FURTHER CHALLENGES: Land sales issues are another cause for the supply-demand imbalance as well as for the slowdown in off-plan sales in 2011. One of the biggest economic impacts the revolution of January and February 2011 brought to Egypt has been anti-corruption trials. Some of the country’s most prominent businesses and executives have been taken to court by the office of the public prosecutor on allegations of corruption for activities during the old administration.

Egypt’s biggest developers are a central part in that story, citing the 1998 law on auctions. Some of the largest developers acquired land in direct deals with the government outside of that process, in part based on accepting conditions for their development. Much of that land has been in New Cairo, including a 33.6m-sq-metre plot known as Madinaty. It accounts for almost two-thirds of the 51. 5msq-metre land bank of Talaat Mustafa Group (TMG), the biggest developer in Egypt by sales. The developer Palm Hills decided to return a plot of land to the government, in part because the company’s financial position was deteriorating due to the cancellation of bookings, but also because it saw the action as a way to help reduce future liabilities. Apart from that deal, plots tied up in court cases have not been returned to the government, but instead alternatives have been found, such as developers paying fines intended to adjust the price paid. These settlements have also eased some concerns on behalf of buyers regarding the ability of developers to deliver completed homes. “The main questions are answered,” OCI investor-relations specialist Erika Wakid told OBG. “Now the main risk for developers is access to finance,” she added.

BY THE NUMBERS: Costs are typically LE1000 ($168) per sq metre for residential land zoned for villas, and LE1300 ($218) for plots that will host apartment blocks. Land zoned for retail operations ranges from LE600 ($100) to LE1200 ($200), and for office space between LE4000 ($670) and LE10,000 ($16,740).

In the residential segment, Cairo is among the cheapest cities in the region. For a 120-sq-metre apartment downtown, according to research by domestic developer DMG, the average price per square metre was $569 as of 2010. That compares with $4066 in Dubai, $1261 in Amman and $1237 in Beirut. However, that does not make housing affordable. The average house costs seven times the average annual salary. In OECD member countries that ratio is typically lower, at about four to one.

LOW-COST SHORTAGE: Developers have typically targeted higher-income segments of the market because of the greater margins available, which has left a shortage of low-cost housing. This market imbalance is not uncommon in a developing country, but what separates Egypt is its population size and under-30 demographic bulge, which exacerbates problems but also increases opportunities.

As of early 2012 the high-end housing market was considered saturated. “The demand for the second- and third-home segment has dropped drastically and people are now primarily buying first homes,” Khalid Bahig, the vice-president and CEO of New Homes, told OBG. “This demand for new homeowners has increased throughout 2011-12.” However, the summer of 2013 may see a new uptick, according to some. “The summer months are the most opportune time for Egyptians living abroad to return to Egypt and purchase second homes,” Abdalla Tawfik, the chairman of the MENA Corporation for Touristic and Real Estate Development, told OBG.

The Ministry of Housing announced in early 2012 a plan to build 1m low-cost units in 22 cities across the country within five years, and the Supreme Council of the Armed Forces had declared it planned to construct houses for the poor. In an indication of the degree of difficulty of building 1m units in five years, Jones Lang LaSalle research concluded that, given an average floor plate of 1200 sq metres, meeting this goal would require one 30-storey block of flats to be completed and handed over to residents on a daily basis for the next five years.

It was also unclear whether the state and its public sector contractors would take on the task or the degree to which it would enlist private sector help. The private sector has already begun edging into the traditional low-margin segment. Some major developers will likely to focus on the sector, especially those who have targeted lower- to mid-price-point customers in the past. Orascom Housing Communities is in the midst of construction at Haram City, a multi-phase development in Sixth of October City. Units of about 63 sq metres there sell for about LE100,000 ($16,737), which at a per-square-metre price of about LE1700 ($285) is considered at the high end of the low-income bracket.

The project is profitable in part because the company bought the land at below-market rates from the government in exchange for a pledge to build low-cost houses. “Opportunities in Egypt are still highly abundant, particularly in affordable housing,’’ Mohamed Abdel Monem, the president and CEO of Engineering Consultants Group, told OBG. “Large swathes of units can be sold in a matter of hours by reliable and accountable firms, such as the Development and Housing Bank, without any marketing.”

MORTGAGES: In the middle-income segment, at least 95% of homes are bought without mortgages – there was a total of LE4.5bn ($753.17m) in mortgage lending in 2011, according to a World Bank study. That indicates progress: five years ago, in 2006, the total value of mortgages underwritten was around LE300m ($50.21m).

The average maturity date has expanded over that same period of time from seven years to 12. Government efforts to boost the mortgage market in Egypt have included subsidy programmes and loan backing schemes such as those of the Egyptian Mortgage Refinance Corporation, a state-created liquidity provider that gives mortgage providers financing options to support risk management strategies.

Further legal certainty on the ability to foreclose on mortgages in default in a timely manner would increase banks’ willingness to sell mortgages, said Ahmed Sabbour, the managing director of Al Ahly for Real Estate and Development, one of the country’s main developers. Regardless of legal issues, banks in Egypt are typically loathe to extend credit – loan-to-deposit ratios have been at or around 50% both before and after the revolution.

Until mortgages are ubiquitous, developers are typically the actors providing finance, and that has added to post-revolution risks because delinquency rates have soared. That is in some cases because of the short-term economic hit due to the revolution, but also because in the ensuing chaos some buyers simply have elected not to honour their commitments, said Sabbour, whose company has seen its collection rate slump from 97% to 45% since Mubarak’s presidency ended.

This is further complicating the shortage. “Developers have to play a finance role in Egypt, but they are using their much-needed capital on financing their clients instead of investing in new projects,’’ Al Ahly’s Sabbour told OBG.

“A legislative priority for the government is the need to beef up the mortgage law with strict penalties for defaults which will remove people from their homes. In addition, the Egyptian people need to be further educated about the value of the mortgage system... The government [also] needs to intervene to lower interest rates down from the current 14% range. This would give the much needed attention to low- and middle-income housing which Egypt desperately needs,” he added.

OUTLOOK: At the outset of the second quarter of 2012, the difficult times for developers seemed mostly in the recent past. Outstanding land sale issues appeared to have largely been resolved. The conclusion of a successful presidential election, meanwhile, looks as if it will help to provide a new sense of stability. Outside the housing segment the pace of development suffered far fewer direct impacts from the revolution.

Therefore, while the housing market is looking to have rebounded somewhat from the troubles it experienced in 2011, it seems possible developments in other areas may not have been as negatively impacted by the revolution as had been previously thought.