American Chamber Mada Press Ad 41(w) x 28.5(h)+5mm Bleed.pdf 2 12/8/16 2:40 PM
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UNITING ENERGY
TAQA Arabia is the largest private sector energy distribution company in Egypt with over 19 years of experience with diversified sources of energy, investing and operating energy infrastructure including gas transmission and distribution, power generation & distribution and marketing of petroleum products.
Address: 2, Simon Bolivar Square, Garden City, Cairo, Egypt Tel.: (202) 2796 1494 / 2795 4671 Fax: (202) 2796 2821 www.taqa.com.eg Industry Insight (Real estate)_Layout 1 12/14/16 9:02 PM Page 12
Industry Insight
Real Estate’s Filling the Vacation A Commercial Big Picture Housing Gap Venues Break 14 22 34 42
Power of Property
eal estate is without a doubt one of the most resilient sectors of Egypt’s economy, with in- Rvestments and profits on the rise even when the economy as a whole is struggling. The 2016 edi- tion of the Real Estate Industry Insight looks at the success stories, challenges and opportunities this Khaled Sewelam many-faceted sector offers investors. First, we look at Director, Research and Publications how demographics are fueling growth even amid in- Amira Sheha Research Manager flation and economic uncertainty and how the gov- Fadila Noureldin ernment’s new mortgage schemes could expand the Author and Economic Researcher pool of homebuyers even more. Second, we detail Kate Durham the high-end suburban communities that still power Editor and Head of Corporate Publications the market and the ways the government and the pri- Nessim N. Hanna vate sector are exploring to secure land and financ- Senior Art Director ing to meet demand from the vast segment of Emy Emile Graphic Designer middle-income homebuyers. Third, we examine the Amany Kassem role of domestic tourism in expanding international Advertising & Business Development Director hotels across the country and the growing popularity Nada Auf of vacation rentals in the secondary home market. Fi- Advertising & Circulation Coordinator nally, we look at the untapped opportunities in the Aya Enaba market for new office buildings and shopping malls, Design & Administrative Assistant and how tenants and owners are working together to Hani Elias weather the currency crisis. Production Supervisor
© AmCham Egypt’s Business Studies & Analysis Center. All rights reserved. Unauthorized reproduction, copying, re-mailing, storage or website posting is prohibited. All information in this publication is verified to the best of the author’s and the publisher’s ability.
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Real Estate’s Big Picture
n The Resilience of Real Estate The real estate sector in Egypt has proven resilient to demand for properties has stayed strong, and a number economic and political shocks over the past decade, of regional real estate developers have made themselves including the global recession of 2007-08 and two rev- at home in the Egyptian market. To accommodate con- olutions since 2011. And that has been a saving grace sumers during the economic and political uncertainty, for the economy, as the sector employs about 5% of the developers have created more flexible payment terms country’s labor force and feeds into more than 90 in- and extended payment schedules, resulting in today’s dustries. Real estate has been growing tremendously typical seven-to-10-year payment schemes for residen- since 2005, often when the economy as a whole is tial properties, moves that have helped the sector to sluggish, and since FY 2012/13, the sector has consis- thrive. However, today its resilience is being challenged tently accounted for around 9% of total GDP. Despite by the many difficulties slowing down economic activity slackened GDP growth following the 2011 Revolution, across the board in Egypt.
n Real Estate and GDP Growth
Central Bank of Egypt
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Power of Property
Total implemented real estate investments are generally self-contained, mixed-use communities in Cairo’s east dominated by the private sector, which has accounted and west suburbs. Since 2013, public investments for an average of 94% of total investments since 2005. have increased due to a portfolio of government- Investments by the private sector are primarily fixed on planned projects to shrink Egypt’s housing deficit, the high-end consumer market, representing no more which is estimated at 3.5 million units as of 2015. than 15% of the population, due to its lucrative profit However, dwindling foreign currency reserves and a margins. Appealing to consumer aspirations for high-end widening government deficit threaten to curb the level living, real estate developers have invested heavily in of public investment.
n Real Estate Private Investment
Central Bank of Egypt
n Millennials Driving Demand Home ownership is a goal for the majority of Egyp- the population had reached 91 million, increasing by tians, for both cultural and financial reasons. Growth 1 million in only six months. Between 2005 and in real estate has therefore been closely linked to the 2016, the population showed a CAGR of 2.4%. country’s demographics. Egypt’s population is rising Egypt’s population is projected to grow by almost 60% rapidly at a time when population growth is slowing by 2025, according to the global real estate consulting in other global regions, indicating a sustainable and firm Knight Frank. This exploding growth is a boon for stable stream of demand for housing. In June 2016, real estate as it guarantees people will be buying and the state statistics agency CAPMAS announced that selling homes for several generations to come.
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The Big Picture
But it is Generation Y, also known as the Millennials, sheer volume, millennials have a major impact on that is really driving today’s demand. Encompassing consumption and spending, making them an impor- those born between 1980 and 2000, this generation tant engine of the economy. And the first wave of this makes up almost 40% of Egypt’s population and more generation, those in the 25-35 age group, are in their than 90% of the current workforce. Because of their prime home-buying years.
n Egypt’s Population by Age (2015)
Millennial Market
CAPMAS
According to CAPMAS, the average age for marriage in The flip side of that is divorce: if a couple splits up, Egypt is between 25-27 years old; in 2015, there were one of them needs a new residence, especially if there 969,000 marriages registered, a 1.7% increase over the are children involved. The average age for divorce, ac- year before. As societal norms have it, a couple should have cording to CAPMAS, is around 35 years old, with their own home ready to move into by the time they have 199,867 divorces recorded in 2015—a 14% spike over the wedding ceremony. And when they become parents, 2014 divorces. they start looking to their children’s future. “As the main in- Around the world, owning a house is more costly in come providers, men are obligated to provide [a home] for terms of maintenance, financing, insurance and utilities their children and buy houses for them [to provide] security compared to the option of renting. However, Egyptians against anything that might happen,” notes Mostafa still prefer to inject their savings into home ownership Alashiry, program manager of the American University in rather than leasing. According to data from Aqarmap, Cairo’s (AUC) Real Estate Academy. an Egyptian and Saudi real estate online search engine,
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Power of Property
only 20% of transactions on the website are leases in and aren’t very stable at the moment. Accordingly, investing Egypt. Aqarmap CEO Amad Almsaodi posits, “There in real assets at this point preserves [the buyers’] wealth. seems to be some kind of a [minor] stigma around rent- Even if liquidating these properties is difficult, their value is ing and leasing especially for families, therefore most preserved.” of leasing activity is conducted by single professionals That said, the argument of real estate as a hedge or non-Egyptian residents.” against uncertainty underestimates the true magnitude Adding to the sociocultural dimension is the financial of demand in the Egyptian market. Jan P. Hasman, head one. Property offers not just a place to live but also a stable of CI Capital’s real estate sector, notes, “Real demand investment. According to a March 2016 report by real es- continues to play a dominant role in Egyptian real estate tate brokerage firm Colliers International, “The volatility of by virtue of its population demographics and migration the Egyptian pound, together with historically high inflation patterns. Currency and expected inflationary pressures rates, has attracted residents to the property investment should be seen as demand catalysts rather than an im- market in order to secure their money.” In other words, real mediate source of demand.” Faced with more economic estate has become a form of wealth storage for buyers look- uncertainty and rising prices, consumers have greater ing to hedge against economic pressures. Alashiry explains, incentive to buy now rather than wait. As a result, de- “The hedging options are foreign currency, which is cur- mand for real estate continues to outstrip supply, even rently quite impossible; or gold, which requires a precise amid pressures on developers to raise prices further due level of understanding; or conventional financial instru- to foreign exchange shortages, increasing construction ments, which are either in the stock market or bank options costs and a weakening Egyptian pound.
n The Looming Specter of Inflation Ongoing economic challenges are the biggest threat to placed the pound’s value close to EGP 18 to the dollar. the real estate sector’s growth. Since late 2014, the The liquidity crisis spawned softening business senti- country has suffered from a foreign currency shortage, ments, tighter import restrictions and swelling inflation, severely hampering operations for dollar-dependent with headline inflation reaching 19.4% in November businesses. On November 3, 2016, the Central Bank 2016. Under the economic reforms linked with the In- of Egypt floated the Egyptian pound to eliminate a ternational Monetary Fund’s recently approved USD 12 widening gap between official and parallel market billion loan package, more subsidy cuts are inevitable, rates. Before the float, the official bank rate had which will push inflation up even further. Prices are also reached EGP 13 to the dollar, a 71% loss in value since going up under the Value Added Tax (VAT), which took January 2015; at the time of publication, the market effect in early September 2016 and replaced a 10%
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The Big Picture
General Sales Tax. Passed to increase government rev- their wealth to these investment tools as alternatives to enues and shrink the budget deficit, the VAT imposes a real estate. Hasman notes, “Increases to retail deposit 13% tariff on the majority of goods and services, with the rates could put projects with abundant inventory and rate increasing to 14% in FY 2017/18. “[Experts] expect muted price growth at a disadvantage as prospective inflation to rise to 20% by the end of the year,” says buyers delay their purchase decisions and park their Reham ElDesoki, Senior Economist of Arqaam Capital, an savings in bank accounts instead.” emerging markets investment bank. Still, experts anticipate an increase in residential pur- The promise of appreciating property values has chases for both primary and second homes throughout the supported demand for real estate thus far, but spiraling next few years, as Egyptians continue investing in land and inflation will seriously erode consumer affordability property to buffer against the economy’s risks. The sustain- for houses. Buyers also have to consider the cost of able demand for real estate mitigates the constraints on the making the villa or apartment habitable, which in- sector, which is a sigh of relief for real estate developers. cludes labor and (mostly imported) raw materials for personalized renovations, plus all the furnishings. Given the social and cultural pressures toward home ownership, inflation may affect when and what type of property is bought—thus limiting how high developers can raise prices—but it is unlikely to stifle demand. Property’s appeal as an economic hedge could be affected by the banking sector’s efforts to contain inflation. Immediately after floating the pound, the Central Bank raised key interest rates by 300 basis points, and some banks started offering Certificates of Deposit with 20% interest.Theoretically, as financial products become more attractive in the market, consumers could shift
n Upping Supply with Urban Expansion In February 2016, the Egyptian government launched October, the ministries of housing and investment signed its Sustainable Development Strategy – Egypt's Vision a memorandum of understanding with the Chinese state- 2030, setting out national goals for the next 15 years. owned company China Fortune Land Development to At the top of the government’s priorities list is a com- build a 14,000 feddan (58.8 square kilometer) smart city prehensive urban development plan that expands and in the new administrative capital. The USD 20 billion creates new cities across Egypt by developing 80,000 smart city is to be delivered over three phases. feddans (336 square kilometers) a year to contain the Most recently, Housing Minister Moustafa Madbouly an- rapidly growing population. The strategy also features nounced in early November that the auction of 2,500 fed- several national megaprojects and reforms to the real dans (10.5 square kilometers) in the new administrative estate sector’s regulatory framework. Following the capital would be auctioned to the private sector before the Egypt Economic Development Conference in March end of the year, with land prices to be set by a ministry- 2015, the government promised to deliver 656,000 res- formed committee. Investors will be able to buy entire idential units for low- and middle-income citizens as plots or partner with the government on development. part of its EGP 120 billion social housing program, due Progress has been made on the Tahya Misr housing to be completed in April 2017. This program falls under project, with President Abdel Fattah El Sisi officially in- the New Administrative Capital megaproject, meant to augurating 11,000 units in Mokattam in May 2016, ease the pressure on a densely packed Cairo by moving marking the completion of the first two phases of the government services, embassies and many businesses project. The EGP 1.5 billion project was launched in to a massive new city over 700 square kilometers be- early 2015, and the Tahya Misr Fund covered almost tween New Cairo and Ain Sokhna. Construction has al- 50% of the project’s phase. The EGP 500 million third ready started on infrastructure, road works and the first phase was launched in January of this year with completion residential community with up to 25,000 units. In early expected by early 2017.
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Power of Property
n Mortgage Math: Room for Growth The imbalance between supply and demand in Egypt’s long-term mortgage financing is needless. Loans are only property market can be in some measure attributed to granted following the completion of at least 30% of the an unripe financial market. The market is dominated by unit’s construction. Consumers are obliged to pay off-plan off-plan sales, which is an equitable and flexible model until the unit qualifies for a loan, at which point they would for sellers and buyers. Because of the liquidity needed, have paid for more than 70% of the unit’s total value. This however, this model is most practical for high-income leaves only 30% of the price to be financed via mortgages, buyers. Off-plan sales are fully paid in cash over seven crowding out the majority of consumers who cannot afford to 10 years, with at least 10% down payment—making a cash installment plan. Thus, mortgages have failed to gain it cost prohibitive for those in lower income brackets. much momentum over the past decade. Tarek Bahaa, commercial director for real estate de- To improve access to financing for more Egyptians, veloper Abraj Misr, says that at the lowest end of the the Central Bank in February 2016 increased the pool price range in Cairo suburbs, “a 130-square-meter of authorized lenders to include mortgage finance com- apartment can cost about EGP 700,000. Assuming the panies for the first time and issued regulations to allow amount will be paid over six years in monthly install- for long-term financing at low interest rates. Egyptians ments with a 10% down payment, this requires an up- earning up to EGP 1,400 per month qualify for low front capital amount of EGP 70,000 and EGP 8,700 in mortgage interest rates of 5%. Individuals earning up to monthly installments, calling for the household’s EGP 15,000 per month or families earning EGP 20,000 monthly income to at least be EGP 25,000.” per month, considered as “above-average” earners, are Mortgages are a traditional financing option for buy- eligible for mortgages with 10.5% annual interest for ers who have less cash on hand, allowing for a payment units costing up to EGP 950,000. Additionally, banks schedule that extends to up to 30 years. However, de- can now use group insurance policies to cover the mand for mortgages in Egypt is still very low due to an risks of lending to workers in the informal sector. Mort- immature mortgage market. gage values registered positive growth in the wake of One problem is that by law, banks can only issue mort- these changes, growing 30% year on year in the first gages for legally registered properties. However, much of quarter of 2016, according to a report by the Egyptian Egypt’s inhabited property is unregistered, either due to ar- Financial Supervisory Authority. Expanding mortgage duous registration procedures, formal ownership disputes, financing improves the prospects for growing the real or because the residents are in informal settlements. Also, estate industry, raising the population’s living standards for consumers who can afford to cover payments in cash, and developing the financial market. n
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Filling the Housing Gap
The march of residential real estate projects continues migrating outward. They are moving farther away from apace, albeit still focused on Greater Cairo, as private de- the center yet paying more for properties in the outskirts.” velopers continue to invest heavily in the sector given its In early 2016, Idea Verde’s The Waterway launched its more-than-fulfilling returns. Catering mainly to the Egyptian first phase of residential units. The compound is located in elite, the investments have focused almost exclusively on New Cairo on nearly 48,000 feddans, with a projected the suburbs to the west around Sixth of October City and population of 2.5 million people and includes a commer- Sheikh Zayed and to the east with ongoing expansions in cial complex as well. Other partial completions throughout New Cairo, Future City, Shorouk and New Heliopolis. the year include unit deliveries in IGI Real Estate Develop- Nonetheless, the sector is far from reaching its peak, as ment’s Ashgar City, Kuwadico’s Grand Heights, Palm Hills’ there are substantial prospects for growth in residential Village Garden Katameya, Emaar Misr’s Mivida and properties for the lower end of the income spectrum. SODIC’s Eastown. According to real estate services firm Jones Lang LaSalle (JLL), the first three quarters of 2016 saw a completed stock n Still Targeting the Top Tier of residential supply of 118,000 units in Greater Cairo, a High-end properties remain vital to the health of the real year-on-year increase of 9.3%. JLL forecasts an additional estate industry in terms of local and foreign capital flows. 21,000 units by the end of 2016 and estimates total resi- According to Beltone Financial, a security brokerage, dential supply at 143,000 units by 2018. New Cairo saw asset management and financial services firm, the total the most new units followed by Sixth of October City, due value of real estate projects expected to be completed by to the growing availability of schools, universities and ad- 2026 is USD 35 billion. Nearly 40% of that, USD 13.3 ministrative facilities in these areas. Overall, prices in the billion, is directed toward luxury residential developments suburbs have continued to rise, despite how far they are for the upper-middle income segment. The largest is from the city center. Mostafa Alashiry, program manager Newgiza, a mixed-use project with residential proper- for the American University in Cairo’s Real Estate Academy ties, office buildings, recreational services and fitness notes that this is counterintuitive: “Bank headquarters, facilities, as well as a five-star hotel and an international ministries, hospitals and other important [facilities] are still New Giza University. The USD 2.5 billion project is mainly located in the center of Cairo, and people are expected to be delivered by 2026.
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Power of Property
n Leading Residential Developments (by value) Project Budget Expected Target Rank Project Developer Initiation (USD) Completion Segment New Giza For Real Estate Upper to upper- 1 Newgiza 2.5 billion 2009 2026 Development middle income 2 Uptown Cairo Emaar Misr 2.1 billion 2010 2026 Upper income 3 Marassi Emaar Misr 1.7 billion 2007 2024 Upper income Upper to upper- 4 Eastown SODIC 1.6 billion 2010 2019 middle income Upper to upper- 5 Grand Heights Kuwadico 1.2 billion 2011 2018 middle income 6 Degla Palms Degla Group for Investment 1 billion 2012 2016 Middle income Upper to upper- 7 Ashgar City IGI Real Estate Development 914 million 2011 2018 middle income 8 Mivida EMAAR Misr 645 million 2011 2021 Upper income Upper to upper- 9 Capital Gardens Palm Hills 600 million 2016 2025 middle income 10 The Gate Abraj Misr 560 million 2016 2019 Upper income Barons Court Sports & Upper to upper- 11 Alex West 500 million 2011 2016 Leisure Co. middle income Beltone Financial
Mixed-use communities and residential compounds re- to go a bit higher but at a certain point it will plateau ... main the destination of choice for high-end home buyers, Instead of seeing 30% year over year, you may start and these projects have started to target the middle-income seeing 20%." segment as well. While the presence of dining, grocery and Prices are rising also because of the economic conditions retail facilities in mixed-used communities have helped challenging businesses across the board. On one side, for- boost residential unit sales, since the 2011 Revolution eign exchange shortages and import restrictions have in- Egyptians have also been drawn to these gated compounds creased construction costs, driving up the price of finished for their perceived security. units. Building materials such as steel and cement have been particularly susceptible to volatile market forces, as n Property Price Pressures shortages in domestic supply have forced builders to turn The strong demand means prices keep going up. In a to imports. Also, interest rate hikes and other monetary poli- January 2016 research note, CI Capital analysts fore- cies have affected developers’ ability to secure funding and casted a limited 10-15% increase in property prices. Re- control their debt profiles. As such, a large land bank may cent data from Aqarmap, an Egyptian and Saudi real now pose a challenge for financially struggling developers, estate search engine, show prices in the suburbs up by who are finding it difficult to maintain the perception of an average 24.3% since November 2015. Tarek Bahaa, scarcity of supply to consumers—which is a good thing for commercial director for real estate developer Abraj Misr, the cost-conscious consumer. estimates that prices will jump 20-30% by the end of Relative to the early years of the real estate boom, 2016. “The first half of 2016 was slow due to the hype there is now intense competition in the market, and the of investing in dollars when the official exchange rate expanded options for the limited pool of high-end buy- moved from EGP 7.80 to EGP 8.78 to the dollar. Activity ers are keeping prices increases in check and pushing was also slow due to Ramadan, which ended in mid- developers to improve their offerings. Jan P. Hasman, July, but activity is surely picking up and healthy,” says head of the real estate sector at CI Capital, notes, “De- Bahaa. At the Reuters Middle East Investment Summit in velopers now pay increased attention to their architec- October, Palm Hills’ Co-Chief Executive Officer Tarek tural designs, landscaping and facilities offered within Abdel Rahman predicted, “There is still room for prices their project, in order to differentiate them from others.”
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The Housing Gap
n Average Prices in Cairo’s Suburbs
Apartment EGP 5,050 per m2 Change year-on-year: 33.7%
Sheikh Villa EGP 10,000 per m2 Zayed Change year-on-year: 19.9% Cairo
New Giza
Apartment EGP 3,450 per m2 Change year-on-year: 20.4% Sixth of Villa October EGP 8,400 per m2 Change year-on-year: 11.1% West Cairo
Apartment 2 EGP 3,300 per m New Change year-on-year: 33.4% Heliopolis Villa EGP 7,250per m2 Shorouk Change year-on-year: 27.6% City Apartment EGP 4,100 per m2 Change year-on-year: 27.7% Villa EGP 14,950 per m2 Change year-on-year: 24% Cairo Apartment EGP 5,500 per m2 Change year-on-year: 16.3% Mokattam New Villa Cairo EGP 11,900 per m2 Change year-on-year: 28.7%
East Cairo
Aqarmap, December 1, 2016
Industry Insight 25 AmCham
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Power of Property
Even with rising prices and increased supply from com- remains strong as usual,” says Aqarmap CEO Amad petitors, there are no fears of a crash in Egypt’s residen- Almsaodi. Other factors keeping growth sustainable in- tial real estate segment. “The upper-middle segment still clude the low debt profiles of the leading developers, gets a healthy level of demand, and we expect this de- who maintain a steady flow of financing through off- mand to remain strong for the following years. But the plan sales. Also, mortgage reforms are expected to in- middle-low income citizens are all suffering from a se- crease the pool of buyers, driving demand across all vere shortage of supply, and demand for these segments income segments.
n Housing the Missing Middle In terms of volume, the middle-income segment is one Development and Investment Company (SODIC), esti- of the strongest prospects for growth, and developers mated the housing gap at nearly 3 million units. Each are gradually finding their way into this tranche. Mid- year, only 17,000 to 20,000 units usually hit the market dle-income housing is defined as homes affordable to out of the 120,000 to 150,000 units demanded, sup- 40-60% of the population, assuming only up to 30% of porting Palm Hills’ Abdel Rahman’s estimates that mid- a family’s gross monthly household income is spent on dle-income housing supply covers only about 15% of financing the property. In Egypt, that describes house- annual demand. State statistics agency CAPMAS re- holds with combined incomes of EGP 5,000-12,500 per ported that about 60,000 units of middle-income hous- month—around 12 million households, according to ing were delivered in FY 2014/15, boosted by JLL estimates—entailing a property price of EGP 285,000. deliveries from government projects. In a March 2016 Real Estate Market Sentiment sur- Despite its strong potential, private developers have vey by Yougov, an international internet-based market been reluctant to enter the middle-income housing mar- research firm, more than 60% of the Egyptian con- ket for various reasons. Among their concerns are high sumers polled see a shortage in affordable homes. costs of land and building material, unsophisticated Speaking with Oxford Business Group in May 2016, business models, regulatory barriers and limited access Magued Sherif, managing director of Sixth of October to financing for buyers.
n Consumer Perceptions on Affordable Housing in Egypt
Yougov
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The Housing Gap
n Affordable Housing in Cairo “In essence, there needs to be an incentive that attracts investors to enter the affordable 30 km housing market as a source of high return on investment,” explains Abraj Misr’s Bahaa. To start with, developers looking to enter this mar-
20 km ket need affordable land. Currently, the New Urban Communities Authority (NUCA), the state’s planning agency for urban development, auctions plots at prices that can only be re- 10 km Average sale couped in the high-end property market. A de- price: EGP 120,000 Average 2- bedroom veloper’s profits will be eaten away if the unit annual rent: EGP 2,700 Downtown sales price matches the middle-income buyer’s Government Cairo budget while the land price matches the high- Housing New Cairo end project budget. High land prices not only
6th of discourage large private developers from offer- October City ing affordable properties, due to small profit Haram Ebni margins, they also crowd out smaller develop- City Baitak Average sale Average sale ers who might serve the middle-income market price: EGP 108,500 price: EGP 187,500 but lack the finances and resources to secure Average 2- bedroom Average 2- bedroom annual rent: annual rent: sufficient liquidity for construction. Amid the EGP 7,800 EGP 9,600 foreign exchange shortage, NUCA has also been giving priority to developers able to pay for land plots in USD, driving unit costs higher JLL and eroding consumer affordability.
n Rise of Co-developments To mitigate the high costs of acquiring land, many de- A co-development agreement with the government is velopers are partnering with private or public landown- better known as a public-private partnership (PPP), ers on joint agreements known as co-developments. where the government is paid in revenue shares and/or “Co-development agreements allow private and state in-kind payments, usually a certain quota of finished landowners to monetize their assets without the neces- units that it can sell and claim the revenues. The only sary know-how by entrusting the land to seasoned com- co-development with the government that has gone live panies for a share of revenue,” explains Hasman. is Mountain View’s iCity, in which the state is receiving In a partnership with a private landowner, the both in-kind payments and a share of the revenue. In landowner offers his land at a discount or with flexible August 2016, NUCA called for bids on USD 25 billion payment terms and shares the project risks in return for worth of PPPs to develop eight plots of land over 2,855 shared revenues on a certain quota of units. Jointly devel- feddans. In October 2016, Palm Hills announced it oped projects often allow developers to pay for land in would be signing a PPP agreement for a 25 million- installments rather than at the beginning of the project, square-meter plot in Cairo’s west suburbs for residential meaning they are less reliant on off-plan sales revenues and commercial uses. to fund construction. Meanwhile, the landowner sees his The concept of co-developments, whether with private land value appreciate as units are built and delivered, landowners or with the government, is far from novel, but increasing the internal rate of return on his portion of the scale of such projects has expanded in recent years. revenues. An example is SODIC’s New Heliopolis co-de- “PPP deals signed between the authorities and local de- velopment project with the Heliopolis Company for velopers account for large plots in excess of 2 million Housing and Development (HCHD), signed in December square meters in 2015,” notes Hasman. By making land 2015. SODIC is building its mixed-use development on more affordable and reducing the upfront costs of acquir- a portion of HCHD’s land bank, and HCHD will receive ing it, this model could encourage developers to move 30% of revenues from the housing units. into the lower income market, where demand is great.
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Fostering Facilities Management Facility management (FM) encompasses all the services their own countries to comply with certain regulations. needed for the day-to-day operations and maintenance When they enter the Egyptian market with expectations of a property, including security, grounds keeping and that FM services are fully taken care of, they find that building maintenance, among others. “For example, a these regulations are not adhered to,” he adds. real estate development may need well-groomed land- In terms of residential real estate, FM in Egypt is over- scape, regular waste collection and a responsive home seen by the building or compound’s itihad al-shagheleen, repair [service],” explains Hossam Allam, managing di- or occupants union, which sets the budget and contracts rector of Hassan Allam Services, which provides inte- for FM services. In non-residential properties, facility grated FM services. “An investment bank needs premises managers coordinate these services with in-house staff that are not only clean and presentable, but also [well- or through outsourcing. The Occupants Union Regula- maintained to] avoid electrical outages that could affect tions, issued by the Ministry of Housing in 2008, prohibit stock market trading. And a shopping mall may need to developers from influencing the union’s decisions, in the- be well lit, [and polished] with an unobtrusive security ory to protect the residents from extortive fees. However, presence.” However, maintenance, security and grounds this leaves the matter in the hands of property owners, keeping are not the core functions of FM services. As who may want to spend as little as possible on commu- Gerhard Meyer, COO of Contrack FM – a leading FM nal services. Low budgets translate into low quality serv- provider, puts it, “FM is about enhancing the asset and ices. “For real estate developers, FM has an additional making sure it performs the way it is designed throughout direct impact on marketing as customers considering its lifecycle. Maintenance, cleaning and such services are buying a unit in one new development will first check not the divine functions of FM, but rather complementary the condition of previous projects by that developer,” to making sure the assets are properly functioning.” Allam explains. There are three main types of FM providers. The first are This is a particular concern for foreign investors, who specialized individual service providers, such as pest control are used to proper security, cleaning, maintenance and or cleaning companies; there are hundreds of these small- environmental services for their businesses abroad. scale firms in Egypt. Next are integrated self-provider com- Allam notes, “In the more advanced economies of Eu- panies such as DFMC, which opened in 2002 as Egypt’s first rope, Asia and the United States, owners spend 4-5% of FM company, Contrack FM, LEEDS, Total FM, Benchmark the property’s value annually operating it; in Egypt that FM and Hassan Allam Services. These are local companies number is below 0.5% ... but that’s a start.” Ahmed Sha- providing professional manpower for a range of services laby, CEO of Tatweer Misr, concurs, adding, “Foreign in- such as maintenance technicians, vehicle fleet managers vestors will not buy unless there are proper property and and mailroom staff, among others. Allam estimates there are facilities management services by developers.” fewer than 10 integrated self-providers operating in Egypt. Allam calls for the introduction of professional stan- Finally, there are FM project management companies, usu- dards and quality control measures for FM providers to ally multinational or regional consultancies that outsource “ensure that building owners are not seduced by unreal- for specific services as needed. There are around five of these istically low budgets from unqualified FM service companies working in Egypt—including Hill International, providers.” A well-developed, well-trained local FM in- Mace, Johnson Control, Bilfinger and EFS—mainly involved dustry will create sustainable jobs, for this subsector has in industrial and other large-scale projects. plenty of room to grow. “In Cairo, FM costs LE 250-500 You might expect a thriving real estate sector like per square meter [annually] depending on the range and Egypt’s to also have a well-developed FM industry, but quality of service,” explains Allam. “When you consider this is not the case. “Roughly about only 3% of [clients], the millions of square meters of new real estate that including real estate development companies, understand come online in Egypt every year, that is a substantial eco- what FM is, how to procure it and what it can do for nomic and employment opportunity for Egypt.” To date, them,” explains Meyer. An additional problem is the lack there is not a large percentage of asset owners that un- of legislation that governs the industry and poor enforce- derstand the value of the FM business. “It will probably ment of this legislation. “This poses a problem for multi- take another 10-20 years for the true value of FM to be national [companies], who are subjected to legislation in captured in the Egyptian market,” remarks Meyer.
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The Housing Gap
n Financing Options for Developers In terms of financing, real estate developers have sev- model isn’t suitable for lower income buyers, who have eral options for funding their projects. The majority of difficulty securing the cash for off-plan payments. Ac- high-end residential projects are funded by off-plan cordingly, developers have started resorting to other sales, where buyers make a cash down payment fol- methods to supplement off-plan sales revenues. lowed by monthly cash installments over the next five Since 2011, equity financing has been increasingly to seven years. The model is beneficial for developers popular among the largest real estate development as it secures financing for roughly five years. Revenues firms. In terms of market capitalization, the real estate from off-plan sales are collected prior to construction, sector is currently the third largest contributor to The allowing developers to finance projects with no debt Egyptian Exchange (EGX), after banking and telecom- profiles. “Capital is required only to secure land and munications. By issuing publicly traded shares on the cover initial start-up costs of a project,” explains CI EGX, firms raise capital for operations, while sharehold- Capital’s Hasman. However, sustaining off-plan rev- ers get a portion of the revenues. While stock options enues have become difficult given risks of client de- are one of the easiest methods for financing investments faults and the economy’s credit and foreign currency in real estate, equity markets are closely tied to the busi- pressures. The amount of upfront capital needed has ness cycle, adding elements of uncertainty and volatility notably increased with the rising costs of land. And the to the equation.
n Real Estate Sector Stock Market Performance
Central Bank of Egypt
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A third, more sophisticated financing option for devel- can offer up to EGP 5 billion worth of securities—a opers is the real estate investment fund (REIF), a type of significant source of funding. However, there remain mutual fund that presents a lucrative opportunity to several impediments delaying their growth in Egypt. grow real estate financing in Egypt. With an REIF, the Key among them, REIF certificates in Egypt are sub- fund manager invests in land, commercial, residential ject to taxes on dividends and capital gains; many or industrial properties, stocks of real estate firms, bonds countries exempt REIFs from taxes to encourage small of such firms or any other type of asset or financial in- investors to participate in the funds. Still, several strument that is tied to real estate. One of the unique companies have announced plans to launch REIFs, aspects of real estate funds in Egypt is the fund man- the most visible being the Egyptian Company for ager’s ability to finance a developer who was allocated Housing Development and Reconstruction’s EGP 60 a land plot via government auction but has run out of million fund, offering securities worth EGP 3 billion, money to complete the project. The Egyptian Financial announced in early February 2016. Supervisory Authority (EFSA) regulations prohibit an There is no simple solution for Egypt’s housing REIF from investing more than 30% of its assets in a sin- woes, but what would be a definite catalyst is a con- gle project and no single shareholder can own more centrated effort between the government and the pri- than 75% of the fund. vate sector. The joint effort should be directed toward The EFSA authorized the use of REIFs in 2014, but a number of areas such as the availability of afford- these funds are still undeveloped despite how beneficial able land for private developers, improving the access they are in generating liquidity. Egyptian law allows and efficiency of the mortgage market, and facilitating companies to offer stocks worth 50 times the value of financing solutions to ensure more sustainable options the fund’s capital, meaning an EGP 100 million fund for both developers and buyers. n
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Vacation Venues
Egypt’s tourism sector is one of the country’s leading international tourists visited Egypt compared to 4.8 sources of foreign currency as well as a major contrib- million during the same period of 2015. The tourism utor to job creation and GDP. According to the World metrics tell the tale, reflecting year-on-year declines in Travel and Tourism Council (WTTC), travel and tourism’s the number of international tourist arrivals, hotel occu- total contribution to GDP was 11.4 % in 2015, a strik- pancy rates and average daily hotel room rates. ing drop from 2007, when the sector contributed 19.5% Those metrics, however, do little to reflect Egyptians’ of GDP. At tourism’s peak in 2010, 14.7 million inter- bountiful demand for domestic tourism. WTTC figures national tourists visited Egypt, generating USD 12.5 bil- show that in 2015, direct travel and tourism GDP to- lion in hospitality revenues. The political instability taled EGP 112.1 billion (4.9 % of Egypt’s GDP), nearly following the 2011 Revolution damaged Egypt’s repu- two-thirds (64.3%) of which came from domestic trav- tation as a destination, and the 2013 Revolution hit the eler spending, compared to 35.7% from international sector even harder, pressuring the already-constrained tourism receipts. Tourism’s direct contribution measures economy. Currently, the sector is trying to recover after the total travel and tourism spending within a particular high-profile security incidents, most notably the Octo- country by residents and non-residents for business and ber 2015 downing of the Russian Metrojet Flight 9268 leisure purposes, while the total contribution data takes as it left Sharm El Sheikh, led to international travel bans into account investments, promotional activities, goods that have effectively dried up the flow of inbound and services from feeder industries, and other indirect tourists. During the first half of 2016, nearly 2.4 million sector-related spending.
n Tourism and Travel’s Direct Contribution to GDP in 2015 (Total value: EGP 112.1 billion)
Egypt’s homegrown holidaymakers have been the backbone of an otherwise ailing sector for a number of reasons. The first is economies of scale. While the upper class, which represent no more than 15% of the population, prefer international destinations for vacationing, traveling abroad is costly and generally requires a visa, which is difficult for most Egyptians to access. So, the overwhelming majority of Egyp- tians spend their vacation budget on domestic desti- nations. “It’s cheaper for them, that’s for sure,” Tim Cordon, regional director at Carlson Rezidor Hotel Group, told the Hotel Management Middle East (HME) magazine in January 2016. The wedding market has been an additional source of revenue for the hospitality sector, accounting for as much as 15% of hotel revenues in Egypt. “Only Indians spend more on weddings than Egyptians,” explained Paneet Singh, Royal Maxim Palace Hotel’s WTTC general manager, to Business Monthly magazine in
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July. Lavish weddings are centered not only in the capital but have spread to vacation spots such as Alexandria, the North Coast, Ain Sokhna, Marsa Alam, El Gouna, Sahl Hashish and Aswan. Weddings across the country require transportation, accommo- dation and leisure activities, which have created a safety net for airlines, hotels and tourist attractions previously packed with foreign tourists.
n Big Brands Extend Their Reach The hotel landscape in Cairo remains dominated by five- slated to open in the next decade. Also in the pipeline is star luxury hotels, with a limited supply of three-star and AccorHotels’ 350-room Novotel Cairo East Hotel in Nasr four-star hotels. The market is growing, with more than 10 City, which will launch in 2019, as well as a 250-room hotels expected to open by 2020. Among the main hote- Swissôtel opening in New Cairo in 2020. liers investing in Greater Cairo is the U.S.-based Star- The hotel building boom may seem counterintuitive wood, which opened a five-star Westin hotel in Katameya given the dearth of international leisure tourists, but Dunes in mid-September 2016, and Germany’s Steigen- a 2016 report by real estate brokerage firm Colliers berger Hotels, which is opening the four-star Steigen- International shows that—in Cairo, at least—business berger Hotel El Tahrir toward the end of 2016. Due to travelers have been filling the rooms left empty by for- open in the first quarter of 2017, the USD 750 million St. eign vacationers. In July, Kempinski Nile Hotel Cairo’s Regis Cairo, also part of the Starwood family, is billed as General Manager Mehdi Zaanoun told Business the first “six-star” hotel in Egypt with more than 250 Monthly that while “we get few leisure customers any- rooms and 90 serviced apartments. The hotel is ranked as more,” the number of corporate guests were still at one of the largest tourism real estate investments in Egypt pre-revolution levels, if not more.
n Reasons for Hotel Stays in Cairo
Colliers International
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Outside the capital, the leisure destinations along the invest now given low land prices and other investment Red Sea coast, once bustling with international tourists, incentives during slow periods. Additionally, the sector, have taken a much harder economic hit—especially in once fully dependent on foreign travelers, is shifting to the Sinai, which saw many airlines stop service after the embrace local tourism. “The domestic market is taking a Metrojet downing. Seasonal domestic tourism has soft- larger share of our business, and we needed to react to ened the blow somewhat, reportedly boosting occu- that in terms of our marketing strategy, our pricing, what pancy rates up to 75% during the summer months. The language we do things in,” Cordon explained to HME. hotel landscape along the Red Sea is more diverse than Investment interest is attributed to local and regional de- Cairo’s, and travelers have options ranging from luxury velopers’ penchant for mixed-use development projects, resorts to midscale hotels to the most basic of camps. shopping malls and hotels. The Red Sea’s extensive beaches and excellent dive sites The Colliers International report outlines two main mean there is still much promise for a rapid tourism re- areas for growth in Cairo’s hotel industry: renovating lo- covery, once international confidence in Egypt’s security cally unbranded hotels that are more than 30 years old and stability is restored. and tapping into budget-minded consumer demand, as Although the leisure market is still struggling to stay opposed to the five-star hotel clientele. In the early afloat, international hotel brands are expanding their 1980s, the majority of hotels were locally branded prop- presence across the country. In early April, Hilton erties with moderate room rates. As economic reforms of opened the 199-room five-star Hilton Alexandria King’s the early 1990s ushered in a wave of foreign investment, Ranch near Borg Al Arab airport on the North Coast. international luxury brands started to dominate the scene. The hotelier will also open its first DoubleTree property Now, amid rising inflation, there is a growing need for in Ain Sokhna in 2017. Starwood’s luxury brand W also properties that target cost-conscious guests looking for has two hotels planned in Sharm El Sheikh to open by alternatives such as three- and four-star hotels, as well as 2020—W Sharm El Sheikh and The Residences at W vacation rentals such as serviced apartments. Sharm El Sheikh. In Cairo, the supply of vacation rentals are limited “Despite negative impacts on the investment climate and demand is strong, particularly during the summer in Egypt, there is foreign and domestic investment will- when Gulf Cooperation Council (GCC) tourists arrive ingness due to the country’s strong population growth for extended stays. Colliers indicated that occupancy and Egypt’s strategic location,” explains Abdalla El-Nock- levels for vacation rentals reached 75-80% throughout rashy, Majid Al-Futtaim Properties’ country head for 2015. In early July, real estate brokers reported a 25% Egypt. The government has also offered tax incentives to increase in vacation rental prices during peak season, the hospitality industry, signaling a good opportunity to crediting Gulf tourists as a driver for those increases.
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n Making a Mint with a Summer Home The vacation property market is becoming a major feeder to leasing residential properties. “Residential units require for Egypt’s tourism industry, with many travelers finding it larger initial investments and more long-term commitment. more economical to rent furnished apartments, coastal Tenants are hard to evict, there are high costs of furnishing chalets and/or serviced apartments (with amenities such as and finishing to price it well. The contracts are more long room service, housekeeping and laundering services) in- term, which mean lower flexibility for the leaser,” says Tarek stead of a hotel room. Vacation rentals generally offer ad- Bahaa, commercial director of Abraj Misr, a leading real ditional space for less cost per night and often include estate developer. “At the end of the day [a vacation rental laundry facilities, full kitchens and other amenities that is] a short-term arrangement that can be changed within a guests would have to pay for in traditional hotels. Vacation three-month period at most.” properties have accordingly become a high-value invest- A third factor that encourages owners to rent out their ment, particularly for upper-middle class families, who properties is the higher returns compared to residential commonly own one or more homes along the Mediter- properties. Hesham Shoukri, CEO and chairman of Rooya ranean or Red Sea coasts, which they can rent out during Group, developers of the North Coast’s Telal Al Sahel com- the peak summer season. A number of factors drive the de- pound, notes, “We see property owners in the North Coast mand that makes this segment of the market very attractive owning more than one house—one for themselves, one for for real estate developers. their children and one to enter the leasing business. They Culture plays an important part. Jan P. Hasman, head of will buy a house that will be rented out for only 5% of its CI Capital’s real estate sector, explains, “Your place of res- value every year, but this value is appreciating at a much idence plays a significant role in protecting your social sta- higher rate per year so they are gaining revenue from rent- tus. Ownership of summer residences in Egypt’s resort areas ing as well as [benefiting from] the increase in the prop- fulfills a similar role, even if the unit remains vacant for erty’s value.” For example, a villa bought for EGP 10 million most of the year.” Leasing out vacation properties is also can be rented for up to EGP 40,000 per week, generating easier, more flexible and less costly for owners, compared nearly EGP 500,000 over the three months of summer.
n Driving Demand Online Emerging multi-sided platforms such as Airbnb, an online the company has made a profit since its inception; thus marketplace for travel accommodation, have penetrated a far, Agaztak has served 400 rental nights and holds 2,000 noticeable share of Egypt’s vacation rental market by con- property listings. These so-called sharing economy web- necting property owners with short-term renters. Airbnb is sites offer a value proposition largely untapped by the tra- valued at USD 30 billion (30% more than Hilton, the ditional hotels: the opportunity to experience the most out world’s biggest hotel company) with 100 million guests of a trip at minimal accommodation costs. This holds true worldwide and a 2.3 million room inventory, larger than especially for Egyptians vacationing on a budget. the combined inventory of the three largest hotel chains In an analysis of Airbnb’s impact on hotels for the in- Hilton, Marriott and InterContinental. The Airbnb traveler dustry website Hospitality Net, Ahmed Mahmoud, searches listings of Airbnb hosts who rent out their spare founder of Revenueyourhotel.com, a provider of hotel rooms or apartments and uses the website to book the ac- revenue optimization solutions and services, noted that commodation; the platform generates revenue from a 9- alternatives such as Airbnb “have quickly become a threat 12% commission from guests’ bookings and a 3% service to hotels as travelers choose to book with independent fee from hosts. Airbnb has been active in Egypt since early hosts on the website rather than with traditional hotels.” 2013 and currently has more than 300 active rentals, in- Mahmoud cites a HVS Consulting & Valuation study, cluding listings for some of Egypt’s budget hotels and a few commissioned by the U.S.-based Hotel Association, Nile cruise ships. which noted that between September 2014 and August The business model was successfully cloned by a local 2015, New York hotels lost an estimated USD 450 million start-up called Agaztak in July 2013. While Airbnb in- in direct hotel revenues to Airbnb. Mahmoud concluded, cludes Cairo listings, Agaztak’s activity is limited to prop- “Hotels in areas where Airbnb has an established pres- erties in the North Coast, Sinai and Ain Sokhna. Agaztak’s ence have responded to increased competition by lower- founder Hisham Refaat announced earlier this year that ing their prices, which harms their revenue, but benefits
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travelers, even those who do not use Airbnb. Consumers more than 4,200 active properties available on Airbnb. also benefit from increased variety provided through peer- These home sharing platforms have made it easier for to-peer platforms.” Closer to home, new research by property owners to get into the rental business and may po- global real estate consulting firm Knight Frank indicated tentially drive demand for vacation properties from buyers that Dubai’s hotel market is being pressured by prices of looking to make money out of USD-charged rentals.
n Coastal Construction on the March This explosive demand for seaside vacation property, Sidi Abd El Rahman, Ras El Hikma and Sidi Heneish, all be it for financial or leisure purposes, has resulted in closer to Marsa Matrouh. Almost half a decade ago, these an inflow of investments by real estate developers. areas were considered secluded. Among the biggest proj- “Because of solid purchasing power, prices of vaca- ects in the pipeline are La Vista Developments’ La Vista, tion units are globally competitive with real estate in Amwaj by Al Ahly for Real Estate, Tatweer Misr’s Fouka Bay, the world’s major cities,” states Ahmed Shalaby, man- Swani by Assets for Development, Seashell by Middle East aging director of Tatweer Misr. The project models for Investment and Touristic Development, White Bay by have changed drastically compared to two decades Pact Real Estate, Mountain View’s Ras El Hikma, and Bo Is- ago. In the early years, resort compounds featured lands by Maxim Holding. “If you compare the volume of chalets or villas with beach views and little else in investments injected into the area, which is only used for a terms of onsite amenities. Today’s compounds include couple of months [compared] to other seasonal spots in the retail outlets, luxury hotels, pools, restaurants, beach rest of the world, you’ll find a definite mismatch in the vol- and water sports activities and night life events. In- ume of investments between the two—in favor of Sahel, of creasing competition in the market has pushed devel- course,” points out Shalaby. opers to make their projects stand out. “These were New developments in Ain Sokhna are mostly expanding introduced in the market in the form of additional south toward Ras Ghareb, far beyond Amer Group’s Porto services, activities and entertainment,” says Shalaby. Sokhna. These include Rooya Group’s Telal El Sokhna, Il “And with higher competition came higher quality.” Monte Galala by Tatweer Misr, La Vista El Sokhna 4 and 5, The North Coast and the Red Sea’s Ain Sokhna area have Mountain View El Sukhna II, Areej by Damac Egypt, Wadi seen multiple developments opened or announced this Degla Development’s Blumar El Sokhna, Azha by Madaar year. Projects along the Mediterranean are shifting west to Development and Avenues Real Estate’s Ein Hills.
Ras El Hikma Sidi Heneish Sidi
CeaserMoutain Bay View Abdel Rahman Marsa Haciendas Amwaj Seashell Alexandria Telal El Alamein Matrouh La VistaGhazala Fouka Bay
Marassi Stella Diplo 3
Hacienda White Hacienda Bay Marina 1-7
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Suez The explosive growth of resort developments is attributed by Rooya Group’s Shoukri to demand from Egypt’s untaxed workforce, who park their savings in vacation properties. He asserts this segment comprises “65-70% of the econ- omy, which also includes private practitioners like lawyers, Amigo Ain Sohkna doctors and private tutors who earn very well and see Blumar El Sokhna Ein Bay more benefits to reap from [investing in a second home] Azha Stella Di Mare compared to financial instruments.” It is also an issue of
Ain Sokhna seasonal consumer spending and consumer psychology. Ras Sudr Shoukri says that consumers tend to buy vacation proper- Movenpick El Sokhna ties in the North Coast and Ain Sokhna when they plan on going, even though they could plan ahead and buy them
Il Monte Galala Red Sea earlier at a cheaper price. Adding to that is the desire to buy where the trend is, which beaches are the best to be seen at, and who their neighbors are. “People who previ-
Porto El Sokhna ously bought toward the other end [of the North Coast]
Telal near Marina and Green Beach are now selling to rebuy in the west area where all the hype is,” says Shoukri. Areej La Vista 5 As things stand, vacation properties remain a more lu- La Vista 4 Mountain View II crative investment opportunity than residential properties for private developers. Land in the leisure destinations is
Zaafarana still much cheaper compared to land in Cairo’s residential market. There is more land available in larger plots and at higher returns. “While plots of land in vacation areas can cost EGP 600 per square meter, plots of land in the new Ras Ghareb suburbs of Cairo can reach up to EGP 6,000 per square meter,” notes Shalaby.
n Is the North Coast Saturated? As resort compounds continue to spread across the coasts, Marsa Matrouh and the Libyan border. Many developers there are concerns that the areas are becoming saturated. have begun moving inland into Egypt’s northwest corner, “Ain Sokhna is definitely underdeveloped. There is so much with projects that are close to the coast but have no sea room for real estate development to take place–and not just view. These target consumers looking for low-budget vaca- housing units but additional supplementary services as tions on the North Coast. With lack of infrastructure, wider well,” states Shoukri. Ain Sokhna has about 80 kilometers availability of land and higher affordability for developers, of coastline, currently occupied mostly by the port and re- the area is attracting interest for projects targeting con- sort complexes, with a few independent restaurants, gas sumers in different income segments. Although the likeli- stations and other facilities along the coastal road. The ma- hood of this area becoming saturated is plausible, industry jority of the land is untouched with full potential for further experts forecast this is not likely over the next 20 years. urban development and additional services. This is the case “The risk isn’t in the likelihood of the North Coast [be- for most of Egypt’s holiday areas on the Red Sea coast all coming saturated]. The danger is for the area to continue the way to Sahl Hashish and Safaga. “The same cannot be being developed as a hub for private compounds that said for the North Coast,” adds Shoukri. grant access to the beach only for their residents,” ex- The Mediterranean coast is nearly filled with private re- plains Tatweer Misr’s Shalaby. Using Alexandria as an sort compounds stretching 300 kilometers from Alexandria example, Shalaby demonstrates the need for develop- to Marsa Matrouh, some areas more than others. What re- ment in vacation areas that makes room for urban set- mains is some 200 kilometers still unexploited between tlement that will foster a year-round economy. “There
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needs to be a node for developments away from the Because of these, the city’s hospitality capacity all year shoreline to have access to the sea and to public round is fully booked.” beaches every 100-150 kilometers,” he explains. “The Simply put, saturation is inevitable. But to avoid harmful South of France is another example: Nice and Cannes overload of Egypt’s vacation areas (specifically the North are vacation spots essentially for the summer. Cannes is Coast, since other areas are all underdeveloped), opening operational all year round because of film festivals, con- up public use zones will allow for a wider scope of urban ferences, events and other economic tourism activities. development beyond the shorelines.
n Infrastructure Opportunities Despite the strong demand for vacation areas, they are pipeline, including widening the Cairo-Ras Sudr road con- sparsely populated for most of the year and do not sup- necting the capital to the popular Sinai resort town. A new port year-round use. “There is no social infrastructure to airport in Ras Sudr also promises to provide more conven- support living there for more than just the vacation pe- ient and faster access to the area. riod. Medical and educational facilities are rarely existent There are several gaps to fill in Egypt’s vacation home and of low standard,” explains Shalaby. When the season and tourism market, some easier than others. While boost- ends, shops, restaurants and other services close, leaving ing international tourism remains vital to the health of no options for long-term residents. The government’s Sus- Egypt’s economy, it is one of those issues that is dependent tainable Development Strategy 2030 for urban develop- on external factors. Nonetheless, continuing efforts toward ment hinges in part on incorporating vacation facilities stabilizing Egypt’s security and the Egyptian pound’s deval- in Egypt’s planned new cities. These include the new ad- uation are promising elements to the situation. The Central ministrative capital, New Alamein on the North Coast, El Bank of Egypt’s move on November 3, 2016 to float the Galala on the Red Sea coast near Ain Sokhna and the pound will help draw international tourists looking to make Suez Canal Zone. There have been several initiatives by the most of their vacation budget. different cabinets over the years to develop vacation spots With only 7% of land in Egypt developed, an imper- with social infrastructure such as health and education ative for the sector’s growth is the geographic expansion facilities; Orascom Hotels and Development’s Red Sea of holiday destinations as well as their urban develop- resort city of El Gouna—which has its own hospital, in- ment. Egypt is blessed with two seas and a river, which ternational school and a branch of a German technical is one of the most essential competitive edges for a university—could provide the model for this. tourism-dependent economy. “There’s also room for growth for supplemental services: entertainment, food The Ministry of Tourism is also expanding its outreach and beverage, premium beaches, social infrastructure, plan to make Egypt’s coastlines hubs for international you name it,” adds Rooya Group’s Shoukri. This type of tourism. In May 2016, Tourism Development Agency investment will help develop vacation destinations to head Serag Al Din Saad announced the offering of 73 become suburban communities with the capacity to plots of land (a total of 49 million square meters) for in- absorb residents all year round. n vestors in the North Coast, Red Sea Governorate, South Sinai and Luxor. Almost 20% of the offered lands is ear- marked for the hotel industry, residential tourism and tourism ports. Twelve plots on the North Coast have also been allocated for touristic housing units and entertain- ment projects as part of a comprehensive urban devel- opment plan for the area. The government has also been upgrading the transporta- tion infrastructure to and around Egypt’s vacation destina- tions to encourage foreign tourism to these isolated areas. The upgrade to the Cairo-Alexandria Desert Freeway fin- ished in 2014, while the new Fuka Road connects Sixth of October City with Ras El Hikma near Marsa Matrouh, cut- ting the commute by 100 kilometers. Improvements to road networks connecting Sinai and the North Coast are in the
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A Commercial Break
n Commercial Property: A Pool of Opportunities Up until the early 2000s, most offices were located in res- shift from timeworn office infrastructure inside Cairo to idential buildings scattered throughout Cairo’s many neigh- dedicated administrative buildings with modern archi- borhoods. Shopping also required carefully planned trips tectural designs and newer technologies in the suburbs. to canvas the stores and market streets in the same crowded Industry experts often refer to the commercial subsec- districts. Today’s premium offices are typically located in tor as the “dark horse” of real estate. “The term dark high-end administrative buildings surrounded by countless horse has been used to describe a person or thing that retail outlets in the new suburbs of Cairo. Because of its materializes into success when it seems most unlikely,” substantial growth potential and rewarding returns, com- explains Hesham Shoukri, CEO and chairman of Rooya mercial real estate is viewed as the cash cow of Egypt’s real Group, a leading real estate developer. Commercial real estate industry. According to Nick MacLean, managing di- estate grew fastest in the early 2000s, despite major rector of Middle East consultancy for the global commercial economic challenges. The September 11, 2001, terrorist real estate services firm CBRE, Egypt’s commercial real es- attacks in the United States sparked a global slump that tate is the most promising subsector in real estate. hurt Egypt’s revenues from tourism, the Suez Canal and A combination of factors account for today’s strong oil exports, while the end of the decade brought a presence of quality office space and retail outlets in worldwide economic slowdown. Despite the effects of Egypt. As the trend for suburban living took off, devel- the 2008 global financial crisis, demand for commercial opers capitalized on the opportunity to create residen- real estate remained active in Egypt, with companies or- tial projects that integrated office spaces and retail dering more administrative buildings in the suburbs and outlets. The result was the one-stop-shop version of real a wave of new malls opening their doors. Similarly, in estate developments—mixed-use communities where the wake of the 2011 and 2013 revolutions, commercial residents can walk to their offices and shop for a variety real estate saw rapid progress while many sectors of of needs with no extra commute. The groundwork for Egypt’s economy struggled to maintain growth. this concept was laid in the 1990s as the government Demand for office space has generally been more adopted its economic reform and structural adjustment susceptible to economic and political disruptions since program (ERSAP), which saw a wave of privatization 2011, as businesses are the sole consumers of admin- aimed at enhancing access to foreign markets and tech- istrative buildings. The business climate in Egypt has nologies as well as enticing foreign capital into Egypt. been impeded by numerous operational and financial With regards to the commercial property market, challenges, putting off companies’ plans for expansion ERSAP’s outcomes were twofold. First, domestic and or relocation to more costly headquarters. On the other foreign investors discovered a strong demand base for hand, retail providers have continued to increase alternative retail and shopping experiences. Second, amid strong consumer spending that has thus far foreign firms entering the private sector influenced a proven capable of absorbing economic shocks.
42 Industry Insight AmCham THE PERFECT INTEGRATED COMMUNITY.
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n Stock of Commercial Real Estate
JLL
n Corporate Takeover of the Suburbs The increase in foreign investment and trade, encouraged Ayman Sami, head of the Cairo office for the real estate by ERSAP, brought more multinational companies (MNCs) services firm Jones Lang LaSalle (JLL). Demand for to Egypt, and they needed new places to set up shop. “You class A office space in Cairo is spurred mostly by the need an office space that reflects the company’s name and banking, oil and gas, fast-moving consumer goods, reputation,” explains Shoukri. Beyond branding, there is pharmaceutical, construction and tech sectors. MNCs also the issue of practicality. Businesses used to convert require quality space-efficient offices due to their large apartments in residential buildings into office space be- sizes, global outreach and interdependency of corpo- cause their location in the densely populated neighbor- rate functions. Also, central Cairo’s crowded Down- hoods kept them close to their customers and the town and residential neighborhoods lack proper important facilities found only in the capital. Larger com- parking facilities, which constrains operations of firms panies had to house different departments in separate of- made up of hundreds of employees. fices around Cairo because of the limited supply of spaces JLL figures for Q3 2016 show that current office sup- large enough to accommodate many employees and serv- ply is stable at a gross leasable area (GLA) of 941,000 ices. With the advent of new communication tools, many square meters, forecasting an additional GLA of only businesses found they did not need to be living next to 87,000 square meters by the end of 2017. Regarding their clients and thus could look outside the city for larger the relatively slow pace of new office supply in the offices with better amenities. coming years, Sami clarifies, “There are many office “While most multinational corporates would like to developments that are [partially built], waiting for de- move out to the outskirts, there are some smaller busi- mand to pick up in order to enter the market.” This has nesses that still like to remain inside the city,” states kept rental rates very stable over the past year.
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Commercial Break
n Average Office Space Rents
Jones Lang LaSalle
The leading developers of office space include Al-Fut- mixed-use complexes located in Cairo proper, such as taim, which opened the mixed-use Cairo Festival City Regus’ Nile City Towers on the Nile Corniche and Citys- in New Cairo in 2013, and SVREICO Real Estate Invest- tars’ Star Capital Towers in Heliopolis. Small-scale op- ments, which created Smart Village, a dedicated office tions are found in the outskirts of Cairo in the form of park on the Cairo-Alexandria Desert Road near Sixth of separate office blocks. “Stand-alone buildings espe- October City. Both projects house over 25,000 square cially along Road 90 in New Cairo have become a very meters each of office space. There are also prominent popular destination for offices,” says Sami.
n Making Space for MSMEs There is a relatively untapped pool of demand for office of access to quality office space and advanced tech- space suitable for micro, small and medium enterprises nologies. “SMEs typically require between 100 to 200 (MSMEs). While large corporations are the prime clients square meters, but almost 90% of office buildings re- for office building developers, MSMEs are a potent force quire tenants to take up a minimum floor space of 700 in Egypt’s business scene. MSMEs are major drivers of square meters,” explains Mazen Helmy, founder of The job creation, accounting for more than 98% of busi- District, one of the first co-working spaces in Cairo. nesses in Egypt, according to the latest World Bank Co-working spaces—shared work environments for mul- data. They generate up to 85% of employment in the tiple companies—have grown in popularity among start- non-agriculture private sector. However, MSMEs are ups and MSMEs frustrated by high rental rates and the lack challenged by several constraints, which include lack of suitable offices. Tenants rent basic office space by the
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month and get access to internet, conference and meeting Helmy explains. Hence, rental rates for administrative rooms, and other facilities that are shared with other ten- spaces are approximately four times the price of residential ants. Given the underdeveloped ecosystem for MSMEs in space per square meter. Egypt, tenants of co-working spaces can often benefit from Currently, co-working spaces have several shortcom- additional bookkeeping, accounting, legal and translation ings. Administrative buildings maximize the space avail- services—not to mention the networking opportunities. able for work functions, while co-working spaces are “The idea is for partners in co-working spaces to share re- constrained by the space efficiency designs of residen- sources at the lowest cost possible to benefit themselves tial buildings. In an apartment or villa, Helmy points and each other as much as possible,” says Helmy. out, the space available for work functions occupies According to Helmy, hundreds of co-working spaces “around 40-50% of the total area because of the big have opened up since 2011, mainly in existing or new res- bathrooms, corridors and the other amenities that come idential buildings. Average rental rates for co-working with spaces for residence.” Well-designed, economi- spaces range EGP 3,000-4,000 per month, which includes cally priced residential buildings are also hard to find. internet and energy usage fees—a fraction of the cost of Then there are common issues associated with residen- class A office building spaces, which average USD 315 per tial buildings. “There are always problems with neigh- square meter. Part of the price differential can be directly bors, parking spots and the location of the building attributed to the type of building. “The cost of construction because it is associated with a certain community,” clar- of administrative buildings is almost 1.5 times more expen- ifies Helmy, noting these issues detract from a profes- sive than residential buildings. Commercial construction in sional work environment. general requires much larger and more expensive equip- Certainly, office leasing companies see more value in ment than residential construction projects. The design of pursuing larger deals and managing fewer tenants in- administrative buildings is very different than residential stead of many. Large firms will continue to drive the of- buildings, all because the space is used in an entirely dif- fice market, but developers willing to tailor projects to ferent way—the structure model requires more steel, there the needs of small businesses will find a large client are much fewer walls, different plumbing and electricity,” base to support them.
n Shopping Center Spree Retail in Egypt has gained considerable momentum over fourth behind the United Arab Emirates, Qatar and Saudi the past decade, and consumer demand continues to Arabia. Despite its expanding population and vast con- strengthen—meaning great prospects for investors. Since sumer spending base, Egypt’s retail metrics in both value 2011, more than 1.3 million square meters of GLA have and volume lag well behind regional averages. Cairo’s come online around Cairo. According to a CBRE survey GLA per capita, last estimated at 0.06 square meters, tracking global expansion ambitions in 2016, interna- pales in comparison to the 1.16 square meters in Dubai, tional retailers ranked Egypt 40th out of 75 countries tar- 0.43 square meters in Doha and 0.23 square meters in geted for expansion. Currently, 6% of the world’s Riyadh and Jeddah. This means there is still plenty of retailers are investing in Egypt. Regionally, Egypt ranks room for retail growth in Egypt.
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Commercial Break
n Retail Rents
JLL
“One of the major assets this economy has is the network.” These and the ongoing expansion of Egypt’s sheer size of its population,” explains Abdalla Al road infrastructure are important factors for investors Nockrashy, country head for Majid Al Futtaim, which considering projects that involve importing and ex- developed City Center Maadi, City Center Alexan- porting merchandise. dria and the soon-to-be-launched Mall of Egypt near That said, when premium retail spaces are Sixth of October City. A separate entity from the mapped, they are located almost exclusively in Cairo Cairo Festival City developer Al Futtaim, Majid Al and Alexandria, and they are often found in the same Futtaim has over 34 Carrefour stores in Egypt and is districts. There is the question of whether malls lo- also developing City Center Almaza to open in 2019. cated so close to one another can maintain sufficient Slated for a March 2017 official opening, Mall of demand and not be negatively impacted by the com- Egypt is one of the largest real estate investments petition. “When City Stars was first developed, peo- over the next decade, worth USD 770 million and ple thought that it was going to grab the customers featuring more than 350 shops on a GLA of 165,000 from the existing malls. But when you go to all three square meters. Also in Sixth of October City, [Citystars, City Center and Genena malls], they are Marakez’s Mall of Arabia is launching a second all super crowded,” notes Rooya Group’s Shoukri. phase adding some 30,000 square meters of GLA to The reasons for this are twofold. First, there is still its current 110,000 square meters by early 2017. overwhelming demand for malls in Egypt. Con- Retail’s explosive growth is also attributed to the sumers have been retail-starved for decades, result- country’s strategic geographic location. Al Nockrashy ing in accelerating demand for new consumer goods notes that Egypt is fortunate to have as its entire north in the face of globalization. Before the 2000s, the re- and east borders “coastlines for navigation. And right tail market was dominated by small-scale malls of- dead center, the River Nile is another transportation fering local retail products around Cairo. “It was
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only in the mid-2000s that … import restrictions income consumers. Today, Cairo Festival City as well were lifted and custom duties were reduced, making as smaller retail options such as Point 90, Concorde it easier for franchise groups and international Plaza, Waterway and Galleria malls are all located on brands to penetrate the market,” says JLL’s Sami. or near Road 90, alongside additional complexes under Second, given the level of unsaturated demand, retail construction. Offering a diversified mix of organized complexes have positioned their offerings to attract dif- retail, these malls cater to not just upper-middle class ferent consumer segments. For example, luxury malls shoppers, but also students attending nearby schools such as Beymen Cairo and First Mall in central Cairo and universities. “Each with a different size, architec- cater to affluent consumers. The first major retail com- ture design, shops available, facilities and types of food plex in New Cairo was TSM Mall Management’s outlets, these malls present unique value propositions Downtown Mall Katameya located on the main artery to different consumer segments,” explains Maram Road 90 and catering mainly to upper-middle to high Moussa, director of Mall of Arabia.
n Premium Retail Spaces in Greater Cairo
Designopolis HELIOPOLIS Madinaty Mirage Mall Mega Mall Dandy Mega Mall Al Rehab Mall SunCity Mall Westown First Mall ZAMALEK SHEIKH Twin Plaza Hub Americana MOHANDISEEN Citystars ZAYED Americana Plaza Plaza Beymen Cairo Arkan Plaza Festival CAIRO Galleria 40 City Point 90 Concorde Downtown Plaza Mall of Katameya Arabia MAADI Mall of Egypt Maadi City NEW CAIRO Center SIXTH OF OCTOBER
In recent years, most retail projects have been that offers end users outdoor arrangements and wide dominated by super regional (with GLA of above options for high-end dining with mini retail brands 90,000 square meters) or megamalls (GLA of 30,000 to shop from,” says Moussa. Examples include Arkan, to 90,000 square meters). Although the majority of Galleria 40 and Americana Plaza in the west suburbs retail supply coming into the market over the next of Cairo. Still, as demand continues to outstrip sup- two years is in the form of these large-scale malls, ply, there remains a wide gap in the market for retail smaller retail developments are also on the rise. “De- outlets of all shapes and sizes. Al Nockrashy esti- velopers noticed the need for these retail spaces in mates that only 12% of demand for organized retail the new suburban communities of Cairo in a shape is satisfied.
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n The Story of Rural Retailing If the greater Cairo retail market is undersupplied, then EGP 44,200 and spend an average of EGP 36,700 per the rural areas of Egypt are severely deprived of large- year. Urban households reported an average annual in- scale retail space. Egypt’s population is relatively evenly come of EGP 51,200 and average annual expenditures distributed between urban (43.1%) and rural (56.9%) of EGP 42,400; both metrics are 25% higher than rural areas, yet, as Moussa points out, “Almost all of Egypt’s 26 households, which reported EGP 38,300 in annual in- governorates, with the exception of Cairo and Alexan- come and EGP 31,800 in annual expenditures. The con- dria, have no organized shopping malls. These are cities sistent disparity reflects the higher costs of living in which are eager and hungry for such an experience.” metropolitan areas. Currently, rural retail is highly frag- According to CAPMAS’ 2015 Household Income, Ex- mented and dominated by small, informal and inde- penditure and Spending survey, there are no major dif- pendent outlets, so there is enormous growth potential ferences between average income, consumption and for retail services. “There is a huge population outside expenditure when comparing urban and rural Egypt. of Cairo with strong purchasing power who are still Nationwide, households have an average income of waiting to be served,” says Moussa.
? 6% Food and beverages 2%
4% Household-related expenses
4% Health services RURAL URBAN 5% Transportation 34% Cothing, Textiles & Footwear
5% Education
Tobacco
Average annual Average annual 6% income: EGP 38,300 income: EGP 51,200 Furniture and domestic equipment Average annual Average annual expenditure: EGP 31,800 expenditure: EGP 42,400 Saving rate: 18% Saving rate: 17% Hotels and restaurants
6% Communication
? Other 10% 18%
There is not, however, much room for actual retail is sound: Agriculture accounts for almost a quarter of real estate, geographically speaking. Most of the rural Egypt’s GDP, with more than 6,000 businesses and a land is designated agricultural, and commercial or res- workforce of 6 million people, so the state is trying to idential construction is prohibited on these lands. preserve this sector’s resources. In reality, people have Egyptian law also prohibits agricultural land from being already illegally built informal settlements and even rezoned for commercial use. The intent behind the law residential buildings on agricultural lands, housing a
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population that is now driving the demand for retail out- “Land in Mansoura, for example, is priced as high as lets in these areas today. Accordingly, the scarcity of rural EGP 52,000 per square meter,” illustrates Al Nockrashy. land eligible for legal commercial construction drives He suggests that by re-examining its agricultural land prices as high as those for premium land in the capital, use policies, the government could reap great benefits making development cost prohibitive for investors. from the expansion of the retail sector.
n Robust Consumer Spending More than 50% of consumer spending is dedicated to retail spending, which encompasses food and beverage, clothing and textiles, hotels and restaurants, furniture, electronics, consumer goods, and tobacco. Food and beverage accounts for the largest share, followed by clothing, textiles and footwear. These spending habits strongly influence how retail GLA is allocated. “Based on market research and consumer spending habits surveys, about 30-40% of a mall should be dedicated to entertainment, which includes cinemas, food and beverages, children’s play areas…etc.,” says Shady Selim, Mall of Arabia’s leasing director. Food and beverages alone account for 25-30% of Mall of Arabia’s GLA, including fast food outlets, food courts, high-end dining, juice bars and dessert kiosks. “The other bulk of retail stock is allocated for fashion, which accounts for another 40% and includes depart- ment stores, women’s fashion, children’s wear, footwear, cosmetics and accessories,” says Selim. The remainder is allocated for hypermarkets, electronics, home wear, pharmaceuticals and banks. The current economic challenges and uncertainty may affect consumer spending as rising prices squeeze household budgets. “Inflation has spread and infiltrated consumer goods because of dollar shortages and import restrictions,” explains Al Nockrashy. Confidence in the retail sector is still high, however, mainly because of de- mographics. “Consumers may be more wary about their spending habits, but they still need the same amount of electronics for their homes with around 900,000+ mar- riages per year, they still buy clothes during major [hol- idays], and continue to prefer modern food outlets that are more cost efficient and support their fast lifestyles,” says Moussa. Consumer data suggests healthy spending growth in the near-term. Nielsen’s Consumer Confi- dence Index for Egypt hit 81 for Q2 2016, a three-point gain compared to Q2 2015. Consumers have report- edly been absorbing inflation with no slowdown in spending. Faced with the now common shortages of merchandise, “they have responded by hedging against uncertainty, even with higher prices charged by retailers,” states Al Nockrashy.
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n Accommodating Challenges Office tenants and retailers have been hit hard by the dol- accept rents in local currency or modify business lar shortage, as rental rates for premium office and retail models to ensure growth. “Some outlets are going spaces are typically charged in USD or pegged to the for- back to the EGP in an effort to help retailers,” Moussa eign exchange rate. While retailers headquartered over- explains. “Revenue-share agreements have been also seas are able to source the currency from their home made available to ensure sustainable growth.” Accept- offices, local tenants have had to turn to the parallel mar- ing payment in EGP does limit the developer’s ability ket to source the currency for rents and merchandise to raise the USD value of the rent, at least until the costs, with dollars largely unavailable through official currency situation stabilizes. channels. For the retail segment, rents in several commu- Retail has also been affected by import restrictions, nity malls are pegged to an exchange rate but paid in limiting retailers’ ability to source their products. As per local currency. So while the USD value of rents has re- Ministry of Industry and Trade regulations issued in early mained stable for both retail and office space, the EGP 2016, businesses can import only from sources regis- value of those rents has steadily increased over the past tered with the state’s General Organisation for Export two years, as the pound has devalued by more than 70% and Import Control. “Their stocks on their shops’ floors against the dollar since January 2015. were affected and their imports were delayed in ports,” “Rents have been USD-based for investors/developers states Moussa. The import registry system has been to hedge against devaluation and inflation,” says JLL’s problematic for retailers trying to add their sources, with Sami. The practice started in the early 2000s with the complaints that the process is lengthy and cumbersome. first megamalls, according to Mall of Arabia’s Moussa, Some retailers have turned to alternate sources while who explains that it was also a way to position the new they finish the registration process. “In several incidents, malls as premium retail space compared to existing we have discussed with authorities ways to facilitate is- local offerings. “It was also a source of return on invest- sues our retailers are facing. The response has been pos- ments for mall developers, who all mostly invest in for- itive by authorities, who have strived to make certain eign currency,” she adds. The nature of retail operations accommodations to keep the economic activity running is another reason behind tying rents to dollars. Al Nock- in the country. We have been dedicating a lot of effort rashy notes that many retail outlet operational systems to support our retailers in finding solutions to their prob- like security and energy systems are imported from lems,” adds Al Nockrashy. abroad: “Mall developers need to have access to dollars While the economic woes have been most challenging to maintain operations.” in the first half of 2016, those in the sector say the effects Although largely dependent on the availability of on office space and retail are slowing as the players are foreign currency, commercial property has been the beginning to adjust to the conditions. “It’s not going to most resilient of Egyptian real estate thanks to the flex- get worse,” remarks Rooya Group’s Shoukri. “It can only ibility of the property owners. Some have agreed to get better from here on out.” n
52 Industry Insight AmCham
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