FDI in the Residential Market: A Closer Look

Tuesday, 20th September 2016

By Tim Nanns

The multitude of building projects across Egypt’s various construction sites is nearly endless, from huge, narrow apartment buildings for lower-income households, to the luxurious shopping malls springing up all over the main population hubs.

Built with a similar view to luxury as these malls are the housing schemes in residential projects geared towards mid- to high-income earners. With the exception of government-funded social housing projects, the flags flying over these residential projects are often those of foreign construction or investment companies.

Though foreign investors are also involved in low- to middle-income residential projects, like the Kuwaiti firm Al Juwisry which is running a social housing project in 6th of October City, high-income buyers are the main focus of foreign companies.

What most residential projects have in common are of course their high-income buyers, but also the region of origin of their investors – they are almost exclusively from Gulf countries like Saudi-Arabia, Qatar, and the UAE. Some of the companies running these residential development projects are joint ventures, some exclusively owned by their foreign investors.

Current Market Activity

Probably the largest investors in the housing sector is the UAE’s Emaar Misr, the Egypt-based subsidiary of Emaar Properties. Its CEO, Mohamed El-Dahan, labelled his company as one of the largest foreign direct investors in Egypt, in a March interview with Daily News Egypt. Indeed, Emaar Misr has a number of projects under development, most prominently Mivida and Uptown Cairo in the Greater Cairo area and Marassi at the North Coast. It also achieved a 21.2% growth in sales from 2014 to 2015, from EGP 7.1 billion to 8.6 billion, taking it to the top tiers of real estate companies listed at the Egyptian stock market.

Another major player in the residential market is Qatari Diar. Despite strained relationships between Egypt and its home country, the company is developing several large-scale projects in the Greater Cairo area: with New Giza and City Gate – over 1,500 and around 2,100 acres in size respectively – it features two major upscale developments. Additionally, it is also building the St. Regis Nile Corniche complex, which involves an upscale hotel and serviced apartments. The New Giza and City Gate projects are both designed as integrated communities, with parks, hotels, clubs and golf courses.

Among the prominent developers is the joint venture Saudi-Egyptian Construction Company (SECON), established through an international agreement between the two countries in 1975. In 2015, the company announced its plans to build two residential towers overlooking the Nile in the Maadi district in Cairo, including a five-star Hilton Hotel with a total investment of approximately EGP 1.6 billion.

What is notable about SECON’s projects is their sheer number, though they mostly lack the scale of Marseilia’s, Emaar’s or Qatari Diar’s community projects.

Moreover, across Egypt’s North and East coasts, Egyptian-Gulf company Marseilia is building a range of residential units with investments worth EGP 1.7 billion in 2016 and 2017, the company’s chairman Yasser Ragab told Al Borsa in August. The main focus of its flagship projects are beach communities on the North Coast and near Alexandria. Further, according to Ragab, in an interview with Daily News Egypt, the company aims to achieve sales of EGP 1bn this year, despite planning to deliver only 824 housing units this year, down from 1,470 last year. Ragab also stated that social housing accounts for 70% of Marseilia’s 8,000 clients, and it would thus compete for land offered by the Ministry of Housing, aiming to implement social projects in the Nile Delta, Upper Egypt and Cairo.

Last but not least is Capital Group Properties (CGP), owned by Abu Dhabi Capital Group and Al Ain Properties. It started its first project on the Egyptian market – labelled Al Burouj – this year. According to CGP, the project aims to establish an integrated urban community between the Suez and Ismailia Desert Roads on 1,212 acres, at an investment volume of EGP 40 billion. CGP claims its new project will create housing for all segments of society.

FDI in the Residential Market: The Figures

To delve deeper into the matter, foreign direct investments (FDI) are by definition direct investments or investments by companies in which foreign shareholders have at least 10% stake, though some definitions put the percentage at 25.

While figures on FDI in residential projects are scarce, numbers from 2014/15 by Santander show that construction and real estate together only amounted to roughly 3.6% of the total FDI flowing into Egypt. According to the UNCTAD’s World Investment Report the total FDI in Egypt has risen by 14.1% and 49.3% in 2014 and 2015 respectively. In particular, the real estate sector has made improvements in terms of easing investment procedures with the General Authority for Investment and Free Zones (GAFI), stating that there are now about six times as many companies on the market as in 2015, while the capital invested rose more than tenfold – signifying a peak in the incentive climate for FDI in the booming real estate industry.

Surprisingly, the UK accounted for 41.5% of foreign investment into Egypt, according to Santander’s 2014/15 figures, while the UAE, Saudi Arabia, and Kuwait together comprised only 17.5% of the investments. However, since there has been an enormous rise of companies working in the real estate sector, and in lights the major trend towards foreign investors coming from the Gulf, it is estimated that the UAE and Saudi Arabia together account for the largest share of FDI in the residential market.

Opportunities and Challenges Faced by Foreign Investors

The residential sector in Egypt is naturally driven by an extremely fast-growing population, and the attendant surge in demand. This compounds an existing housing crisis due to the inability of the government to meet current demand.

Colliers International estimated the residential market to require 500,000 units in 2020, which entails an annual demand of 90,000-100,000 units, with annual supply meeting only half the demand. Of the total demand, 77% is generated by middle-income Egyptians.

This, however, does not account for the great numbers of high-end and luxurious housing currently under construction in Egypt. Incentives for foreign capital involve a weak Egyptian pound, currently in a severe crisis after a recent 13% depreciation of its value, changing hands at EGP 8.88 per dollar in Egyptian banks, and at far higher rates in the unofficial market, with analysts expecting further devaluation.

Additionally, the government has recently made an effort to attract foreign investors with flagship conferences, like the Egypt Economic Development Conference (EEDC) in 2015, but also with an improved legal framework for FDI, like offering a range of incentives to foreign investors and reducing the bureaucracy surrounding foreign business activities.

The investment law, which was amended days prior to the EEDC, introduces incentives for foreign investors, including, but not limited to, reduced customs, reduced sales tax rates, and ensuring equality between local and foreign investors when acquiring lands, entailing provisions for voluntary liquidation within a 120-day deadline.

Main issues foreign investors are still facing however include the transfer of foreign exchange out of Egypt since larger transfers need to be approved by the CBE. According to a 2015 report by the US State Department, legitimate transfers can sometimes be delayed for several months. In light of the recent currency crisis, currency-related issues like this are not likely to vanish anytime soon.

Additionally, there are legal restrictions on the number of foreign workers in foreign companies working in Egypt. The OECD further stated in a 2014 report that, de facto, foreign personnel are not permitted in certain sectors, calling for codification of these limits or their abolishment. Another issue is law no. 89 governing tenders, which allows the government to prioritize bids from domestic contractors over foreign ones when awarding contracts, which could dissuade some foreign companies from even competing over government contracts.

Nonetheless, despite these problems foreign investors might face when investing into Egypt, the recent improvements of the legal framework – specifically targeting foreign investment – were largely praised for improving the investment climate, as highlighted by the US State Department report.

What makes Egypt’s residential market of Egypt so attractive for investors in general, not just foreign ones, is the aforementioned steadily high population growth, which guarantees a high demand for housing units. However, the traditional role of real estate as a safe haven for investments plays a part in this: with the Egyptian pound in a perilous situation and inflation as a very real risk, many people consider real estate as a safe investment opportunity.

Furthermore, as Egypt’s mid- to high-income residents – particularly those in large urban cities – seek to move further away from urban centers and the congestion and other issues associated with them, demand for a new kind of housing has been established. In turn, foreign investors have sought to take advantage of this urban sprawl, effectively changing the landscape of Egypt’s property market.

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