Driven by pioneering entrepreneurs, Egypt’s real estate developer Inertia has achieved exemplary standing amongst the country’s real estate giants as it celebrates its tenth anniversary. Invest-Gate sits with Inertia’s masterminds Hussein Rifai and Ahmed El-Adawy to shed light on the rise of Inertia and its new take on entrepreneurship as part of its real estate activities. Giving the property sector an interestingly new approach, El-Adawy demonstrates Inertia’s role in real estate development and outlines the company’s ambitious goals.
How do you view the current status of the Egyptian economy? And how do you view the real estate investment climate as well?
We passed through a very difficult time from political instability to drastic economic changes. As we deal with international and local investors, we remain sensitive about the country’s overall situation. From 2011 up until recently, the investment climate has been hindered. It was only in the last couple of years that Egypt has started to gain political stability and has set strategically a proper reform plan in all sectors.
Finally with this instability coming to end, we were faced with some market problems like having two entirely different values of the foreign currency in the market, including the shortage of foreign currency and banks’ pricing versus that of the black market. Now, for the first time, we have actually addressed all the issues and problems and are now working on fixing them. We have finally acknowledged the real situation and are addressing it accordingly.
From an investment perspective, I believe we are in a very good place. At least, we have declared our problems! In front of the entire world, Egypt presents a true picture of its current markets, with all dilemmas, and the government’s plan to overcome them. Whether we achieve our goals or not, this is an entirely different story.
But in general, today, the investment appetite towards Egypt is very positive. We believe that a lot of money will be poured into this country by the end of 2017.
With Inertia turning 10 this year, how did you manage to position Inertia amongst the biggest names in the real estate market today?
In those ten years, we faced everything starting with the world financial crisis, then the two uprisings in Egypt. Let me demonstrate how it all happened…
The real estate industry in Egypt is based on ‘deep pockets’. If we examine the identity of the key players in the market, we find those big local investors, who have decided to pour in capital into developing companies, or 50 to70 year old contracting companies, accumulating their profits and equity over the years and then decided to become developers. This sector, I believe, had no room for entrepreneurs. And this is where Inertia comes into place.
What do you mean exactly?
Hussein Rifai and I come from a consultancy background on public and private projects. Throughout our careers, we have acknowledged some gaps in the business and it became our passion to overcome them. We started with almost no capital and looked into the main challenges that developers are always faced with, which include land scarcity and funds. Banks in Egypt will never fund startups. We had to think outside of the box, creatively, to overcome those two major obstacles in order to play a vital role in this sector. I believe that this is Inertia’s edge unlike any other. We always remain persistent to remove any bumps on the way.
Inertia presents a different business model, how did you manage to overcome land scarcity and funding at the beginning?
With very low capital, we outsourced solutions to be able to bring the dream to reality. Of course, our government has limited resources and therefore, the land plots offered are not ready for immediate development given their lack of infrastructural preparations. So, they offer land plots either through privatization or open lotteries, creating tough competition for startups amongst the biggest key players in the market. So, our chances of buying a land to begin a project were zero.
However, my partner and I found two ways to overcome this issue. First, we decided to introduce the ‘sub-development concept’ to the Egyptian market. Today, the market has mega developers with huge land banks and development plans exceeding a hundred years to say the least. Mind you, this over-100-year-old business model does not exist elsewhere around the world!
So, we decided to approach the master developers by becoming a sub-developer in their long-schemed projects whether through partnership or buying a part of their land plots at convenient terms.
This concept was recognized by SODIC in its Beverly Hills residential project back in 2007. And we managed to sell our concept to Orascom twice in its El-Gouna project, where we now have G Cribs. It was, of course tough, in the beginning to sell this renovated concept especially to Orascom, given that Orascom was the sole developer of El-Gouna and no other developer was to set foot there.
Our key selling argument was, “Orascom has managed to develop 18% of the project in 20 years. So, there is no way you will reach its completion in 100 years as planned.”
The sub-development concept presents a win-win situation for developers. If we take the Orascom case, for example, the company would complete its project at a faster rate and would gain revenues from the Inertia product. In addition, the land value would increase.
To us, Inertia would benefit from the Orascom name. We were the first to introduce such a concept and started implementing our sub-development project, G Cribs, back in 2009. Today, El-Gouna has five other sub-developers and Orascom’s main revenue stream heavily relies on the sub-development projects more than its own residential developments.
I believe that such a concept turned more success to El-Gouna. Over the past six or seven years, El-Gouna has become alive and an all-year-round destination especially to the youth, who could not previously afford Orascom’s USD 4,000-per-meter unit. Today, they have bought our USD1,500-per-meter unit at G Cribs. We managed to attract this new age bracket as homeowner instead of having the youth traveling to El-Gouna for a short stay.
After obtaining land plots, another solution we sought was to approach those private (unrelated to real estate) entities or individuals, who have owned massive land plots for over 20 to 30 years (worth EGP 700 to 800mn today). No developer or businessman can pay this amount of money to buy such lands because of the lack of liquidity and the infeasibility in our market. So, the solution was for us to partner with a developer over revenues of a certain project, according to its development plan. Yet again, it turned out to be a win-win situation because developers generate revenues and internal rate of return (IRR), whereas for Inertia, it is a land bank without liability and installed payments. Furthermore, costs and initial project funds are tremendously cut for Inertia as a developer at the initial phase of project development. We continue to follow this method to secure a profound land bank throughout our ongoing nine projects and at a very cheap cost.
What about funding?
We sought equity finance instead of debt finance, as the bank systems in Egypt cannot fund startups. At the same time, we wanted to keep Inertia shareholding body as is without an investor’s interference. So, we had to separate between the investment vehicle and the Inertia identity. We put those new investments into special purpose vehicles (SPVs) and it is those SPVs that acquire Inertia as a developer. Sometimes, we fund the capital of those SPVs to partner in some projects and in other times, it only relies on external investors with Inertia being only the developer. At some point, those SVPs were owned entirely by Inertia.
It is a flexible system that protects all investments of any sorts and has also given Inertia its presence in the market, given the limited resources we had back then. Those SPVs help investors select between the projects they want to invest in with clear exists and revenue generating.
This, too, continues to be our ongoing strategy and we have attracted local and foreign investors from several markets and not just real estate. We have managed to succeed and reach where we are today following this method without the outdated banking systems of Egypt.
I admit that the political unrest of 2011 played a crucial role in our favor. We gambled with our presence in the market when most companies either fled or put their projects on hold. We decided to work and it paid off.
As for Jefaira, does it follow the same strategy? Is it also a sub-development project?
Inertia is the master developer of the 5.5-million-square-meter Jefaira project and the landlord is AK, an Egyptian investment company.
How do you evaluate the development in the North Coast? Will it be open all year round? Or will it continue to cater to the locals during the summer season?
We bet that we will make the North Coast open to the outside world in the near future. Our vision is to have a Jefaira City featuring communal living and not just a summer residential resort like the rest of them.
To change the identity of the North Coast, we need to look beyond the small summer resorts and compounds of 250 units maximum. The new North Coast should be a fully livable city and only big scale projects like the government’s New El-Alamein City and Emaar’s 6.5-million-square-meter Marassi can make this dream come true. I hope New El-Alamein City has a clear vision and a modern plan to be followed. It is those large-scale projects that will transform the small seasonal resorts of the North Coast that we know of into new urban communities, featuring livelihood amenities and granting access to the North Coast all year round.
Putting that into perspective, Inertia sought the purchase of a- 5.5 million- square-meter- land plot to have a complete project. We are very optimistic about the North Coast as a destination.
So what makes Jefaira so special? And how can it contribute to the development of the North Coast?
Jefaira is to be a city on its own. On its 5.5 million square-meter span, Jefaira will include 10 residential neighborhoods. Our ultimate goal is to have 25%-30% of its residents actually living in Jefaira permanently. As for the rest, we aim to make them stretch their summer season to include a five to six month minimum stay.
How do you aim to achieve this?
We are working on Jefaira’s ‘non-residential components’. In other words, giving our residents guarantees to reside in Jefaira all year long, given the accessibility of amenities and services provided. Our non-residential components that are in constant research include the following; an educational platform (university and a boarding school), a sports platform (a sports academy, team camping, and training sites), a hospitality and leisure platform (hotels and an international marina), and last but not least a health and wellness platform, which mainly caters to the medical and therapeutic tourism sector. Jefaira’s health and wellness platform is to include many rehabilitation centers, cosmetic surgery facilities, and retirement homes as well.
We aim to provide the medical procedures that are not covered by most insurance companies across Europe and the USA so that we have a medical tourism flow and also attract foreign investors to our destination.
We are currently working on those platforms that define Jefaira, making it exceptional and will also cater to the North Coast’s goal of becoming an all-year-round destination.
What is the current status of Jefaira?
We launched our first residential phase and will continue to do so until the end of August. Then, we will move onto the following phases. Throughout all launching phases, we are to remain very much focused on supplying the non-residential components. A lot of homework is being done now to have our platforms ready as we launch each residential phase.
We also focus on utilities and have joined forces with KarmSolar for Jefaira to be 100% solar energy dependent. This is to be reached by the end of the project.
We are currently promoting Jefaira locally and plan to promote it across the MENA region and Europe very soon.
So is Jefaira an eco-friendly project?
This is our aim and we are working hard on it. Aside from our deal with KarmSolar, we are working with other companies on desalinating seawater to be used for water supply and landscaping. Later on, we will include fishing farms and agriculture based on desalinated water, too.
As I said, if we are to put Egypt’s North Coast on the world tourism map, we need to build new cities from scratch and create urban communities. For that we have to focus on all aspects of life from basic living needs to industry, farming, agriculture, and leisure.
So this is somewhat equivalent to the New El-Alamein City?
Yes, this is our plan and we believe it is doable. Egypt’s North Coast is worth a polish to give it the status and value it actually deserves, following years of improper planning.
About the Marina, some other developers aim to have an international marina/port, but remain doubtful? How is Inertia going to achieve that?
We started collaborating with governmental entities only four months ago, mainly with the governorate of Marsa Matrouh, and so far they are very cooperative. We know that the path to obtain an international marina/port is different and somewhat difficult, but we trust that we will have all on board with us in achieving the new North Coast at the end.
The marina is not in the first three to four phases, but if we reach an agreement and approval from the government, which we are always working on, by all means we will put it a priority sooner than we initially planned.
You mentioned working with entrepreneurs like KarmSolar, how crucial is it for Inertia to collaborate and encourage entrepreneurs?
By nature, Inertia deals with a lot of high-caliber companies across all fields from solar technology, architecture design, to technological support and solutions, and so forth. The many we collaborate with are young entrepreneurs.
We have been selected back in 2015 to join Endeavor, a worldwide organization based in Latin America bringing young and successful entrepreneurs from around the world together, aiming at enhancing the international entrepreneurs’ community. As members, we receive of course benefits from this international entity and we pay back by supporting other startup businesses.
What advice do you give them?
In Egypt, the key factor is persistence. There is no other way to reach your goal, but to be persistent and aim for your goal and never take no for an answer.
There were many challenges throughout Inertia’s first ten years, but we managed to overcome them. As we move forward setting higher goals, we know that we will face more difficulties along the way. However, we always stay focused and are determined, knowing that we will achieve what we want at the end.
Yes, there are many obstacles given the current local conditions of the country today, but there is always room for opportunity and a persistent entrepreneur should seek those opportunities.
Are you hopeful?
Yes, we are very much… the investment environment today in Egypt is very promising. I see an amazing future given the high demand on real estate.