|Wealthy Egyptians have been escaping traffic congestion and pollution to the luxuries of gated compounds on the outskirts of Cairo [EPA]|
Over the past ten years a number of Egyptian developers have started to buck a centuries-old trend, pushing Cairo’s sprawl for the first time outward into a host of new satellite cities seated far from the banks of the Nile.
The abruptness of the shift is a testament to the spectacular rise of the Egyptian real estate market, which has been sustained by a swelling population, rising wages and an infusion of foreign investment here over the past half decade, even as European and American markets have ballooned and burst.
Now, as investors begin to fear that a worldwide recession could halt similar property booms across the region, the coming months will test whether Egyptian real estate – long touted as a relatively stable, speculation-free market – can withstand the financial turmoil.
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Egypt is a vast country, and much of its economy still lays beyond the reach of the government, in the immense informal sector.
Small or individual builders account for about three times as much construction as large ones, says Tarek Shahin, a real estate and construction analyst at the Cairo-based investment bank Beltone Financial. But the recent popularity of suburban communities suggests this balance is likely to shift in the coming years.
In 2004, Ahmed Nazif, the prime minister, embarked on a series of liberal reforms, selling off state holdings, simplifying taxes and pressing for “public private partnerships” in fields as varied as education, transportation and water management. In many ways, the privatisation of housing has been an upshot of this push.
“For the first time we’re seeing more weight given to what’s known as ‘new cities,’ or gated communities,” said Shahin. And Cairenes – at least those who can afford it – are flocking to them.
As well as padding the coffers of big developers like Talaat Moustafa, Palm Hills and the Sixth of October Development and Investment Company (SODIC), the boom has given private companies a decisive role in determining the size of home and location many Egyptians live in, a stark contrast to the state’s traditionally central hand in urban planning.
“Suddenly there’s the option of living in a villa, having an entire garden and a swimming pool, away from the pollution,” Shahin said. “Suddenly you’re willing to take out some of your savings or even borrow money to pursue that new Egyptian dream.”
Privatisation and growth
|Cairo is home to some 20 million people vying for increasingly limited space [GALLO/GETTY]|
When the Free Officers Movement, headed by Gamal Abdel Nasser and Muhammad Naguib, swept into power in 1952, they were buoyed by a wave of populist socialism.
The excesses of the monarchy they supplanted – under which about six per cent of landowners held two-thirds of Egypt’s real estate – rendered Nasser’s rhetoric all the more poignant.
Over the following years, Nasser’s government expropriated broad swathes of property and redistributed it to poorer citizens, often enacting rent ceilings and other market controls.
Despite some reforms under Egypt’s third president, Anwar Sadat, real estate remained mostly a state-run affair until the late 1990s.
“There was a period of, we’ll call it decay,” said Ahmed Badrawi, the director of business development at Sodic, one of Egypt’s largest developers.
“There was no private sector investment into real estate. You only had the kind of Soviet, socialist-style tenement high-rise blocks springing up over the city to try to cater for the demand.”
Overcrowding is of constant concern in a country where most of the nation’s 80 million are crammed into the Nile valley and delta. As the population ballooned from about 26 million in 1960 to 82 million in 2008, the state could not keep up.
Today, nearly 70 per cent of Cairenes live in shantytowns and around nine out of ten residences are unregistered. The sprawl, concentrated along the Nile, has eaten into precious and increasingly scarce farmland.
Amid this disorder, the government was eager to promote fresh urban centres and push Cairo’s growth east and west, said Patrick Gaffney, a real estate analyst at EFG-Hermes.
During the late 1990s, the government sold land cheaply, allowing developers to build without too much risk.
Developments on hold
The developments offering escape from Greater Cairo are still too expensive for the estimated 40 per cent of Egyptians living on under $2 a day. Some Sodic homes sell for as much as LE 20 million ($3.6 million).
At Orascom Hotel and Development (OHD), a luxury developer known for building the Red Sea town of El Gouna essentially from scratch, average villas sell for $550,000.
But when 58 foreign tourists were killed by outlawed groups at Luxor’s Hatshepsut temple in 1997, the Egyptian economy crumbled. Most sectors took years to recover fully, placing many developments on hold.
It was not until 2004, with a series of liberal reforms and the opening of new roads, that non-residential developments like the Smart Village, a Sodic-built business park that hosts over 100 companies, began to sprout in the satellite cities, Badrawi said.
The reforms also gave Egyptian developers access to global capital markets and lured in a host of Gulf-based firms, flush from booms at home and keen to profit from pent-up Egyptian demand.
The results have been dramatic. Gulf developers Emaar, Al-Futtaim and Damac Properties all boast multi-billion-dollar projects in and around Cairo, including Uptown Cairo (four million square metres, $2.35 billion) and Cairo Festival City (three million square metres, $3.7 billion).
In April, the “Next Move” conference, a huge real estate trade show, packed Cairo’s International Conference Centre.
The satellite towns are mushrooming and estimated to house about 1 million people. According to Egypt’s New Urban Communities Authority, the two will eventually swell to a total of 5.75 million residents.
Even Cairo’s famed American University has moved out, reopening in New Cairo earlier this year after closing its historic downtown campus.
Trouble on the way?
|Construction is ongoing in New Cairo, 30km from the capital [EPA]|
But confidence in the real estate sector has waned somewhat since the US financial crisis threatened markets around the world.
Arab sovereign funds, alongside many others, have lost a lot in the past week as investors have deserted emerging exchanges.
Housing markets in Syria, Jordan and Lebanon, long-buoyed by petro-dollars and haunted by the threat of speculation, suddenly appear less rosy.
Egypt, where some house prices have nearly doubled in the last year, is no exception. When the Egyptian stock exchange plunged 27 per cent over two days earlier this week, housing firms were among the hardest hit.
To allay market fears, analysts and industry heads have pointed out that Egyptian companies form the backbone of the sector, despite the well-publicised presence of a number of Gulf-funded projects.
Many add that Egypt’s fledgling mortgage sector is ripening and that demand in general is still robust, if not as strong as last year, when some developments sold out within three days.
“Last year – that was a paradigm shift,” Shahin said. “This year, it’s regular sales. It’s a more natural market where it takes maybe a month to sell an entire phase. But in terms of prices, everyone’s making money.”
As upper-tier demand fills out, firms will have to move on to middle-range housing, many analysts say. Some are already trying: Orascom for Budget Housing, a firm held by the same company as OHD, is building 50,000 lower-rent units across three sites as part of Egypt’s National Housing Project.
But Amr Sheta, the company’s vice chairman, says all this will barely dent the country’s housing gap, which OHD estimates to be 1.5 million units.
Egypt’s home-grown demand, heavily cash-based economy and common use of ‘off-plan’ contracts, where buyers pay for a house as it is built, have dampened the risk of speculation here and sheltered the market from global credit troubles, according to many analysts.
The more pressing concern, they say, is whether Egyptians can afford what is built.
“People are worried that it’s a bubble,” said Gaffney of EFG-Hermes. “I think the bigger problem is that a lot of companies came in and are focusing on the high-end real estate sector.”
Egypt’s inflation rates – a record-snapping 23.6 per cent in August – have also rattled some investors, despite a common theory that inflation could shift investment to assets like housing that “store value”.
And while many developers still cater to an upper tier that hovers above most inflation worries, a cut into middle class budgets at a time when higher-end demand is waning could drag down firms’ fortunes.
Preparing for rough times
Still, most companies appear to be prepared for rough times: The bust of the 1990s added an element of conservatism to many business models.
OHD, for instance, only sells off-plan. Such sales plans have ensured that many companies can weather temporary drops in demand, said Shahin.
“Even if tomorrow one of the developers said, well we didn’t have any new sales this month – and I don’t see this is going to be the case – even if that happens, everyone will still be busy for a number of years,” he said.
None of this might matter, of course, if another tourist scare – bandits kidnapped 19 tourists in Upper Egypt last month – or political upheaval sends the country and its economy down an uncertain path.
Another persistent concern is that the exodus of wealth to satellite cities will gut downtown Cairo, an area affectionately referred to in local dialect as “Wust El-Balad,” or “Centre of the Country”.
But for those fuelling the boom, this fear misses the point. The pined-for era when Cairo was known as “Paris on the Nile,” is already gone, buried beneath decades of neglect and mismanagement.
“There’s no sense of zoning downtown,” Badrawi said. Offices mingle aimlessly with stores and houses. The streets are clogged and polluted.
“We’re all Egyptians,” he said.
“We all talk to our parents’ generation about how Cairo used to be the most beautiful city in the world – perfectly master-planned, uncongested. Our dream is to restore some of that. We’re starting with a blank piece of paper in the suburbs.”