By Nadine Abou el Atta
Tourism and real estate, two powerhouse industries in Egypt that are currently performing at opposite ends of the spectrum. It is perhaps common knowledge that international tourism in Egypt is facing mounting challenges that are effectively contributing to the slowdown of the local economy. Yet, in pure numbers, the local tourism industry is generating billions in investments and ROI. The key here is the real estate tourism sector, which –like the rest of the real estate industry– is defying the current economic status and is booming in every way.
A significant part of the real estate sector is focused on developing coastal areas. Mostly concerned with local tourism, this part of the tourism industry is capitalizing well off of the devaluation of the local currency and the sharp growth of resale values.
To better understand the equation uniting both industries, Invest-Gate sat down with the Head of the Tourism Development Authority (TDA), Serag Al Din Saad, for an exclusive interview to explore the current, the future, and the challenges.
Saad began by highlighting that many do not fully understand the specific role of the TDA. The authority was established for the purpose of developing the tourism industry in new and remote areas, outside the cordon of core cities.
Founded by law 7/1991, the TDA is a government entity operating under the umbrella of the Ministry of Tourism. Part of the authority’s mandate is to manage lands for the establishment of touristic regions as well as provide overall support for the development of tourism projects in areas under its control.
“Some have raised the point of working on developing tourism in cities like Cairo or Ismialia. This is not the purpose of the authority. The purpose we were established for is to move the focus from the narrow lines along the river Nile sides, such as Luxor and Aswan, to completely new areas through new investments,” explained Saad.
“Deciding on the correct path to achieve our goals took some time and the involvement of experts as well as consultants. We needed to determine our approach in dealing with investors, as well as the type of investors we would like to attract, in terms of economic capabilities, management approach, and organizational structure. Additionally, we needed to define the specific deliverables required from the investors, as well as specify development categories, he added.
By default, remote land lacks all aspects allowing for sustainable living; one of which posed a significant obstacle to the authority at its early stages. “Land assigned to the TDA did not have any infrastructure nor was it easy to access. Part of the role of the authority is to help overcome such obstacle in terms of attracting both investors and tourists,” commented Saad. A solution to this roadblock was the establishment of a model where the authority offers land at competitive prices, while developers equip the area with the needed infrastructure, thus allowing these areas to flourish.
“The model has proved effective. The total number of operating hotel rooms in Egypt are around 225,000 hotel rooms, areas under the control of the TDA include 91,000 hotel rooms. One of the governorates where we have the strongest presence is the Red Sea, total touristic capacity in the governorate is 77,720 hotel rooms, 50,464 of which are under the authority of the TDA. Numbers speak for themselves,” Saad affirmed.
“The role of the authority has also branched out during the past 25 years to include some environmental aspects, supervision of implementation, provide technical support of touristic governorates; however, this is not our main role, our main purpose is to shift tourism activity to the new, uninhibited areas,” stated Saad.
To facilitate coordination with developers on matters related to infrastructure, the TDA has initiated the concept of touristic centers, which are entities that represent all real estate developers in a given area. These centers act as a liaison between the government and the developers in terms of infrastructure matters. The Red Sea governorate has the most touristic centers totaling 27, and is followed closely by South Sinai which has a total of 21 centers. Ain Sokhna and Upper Egypt both have six touristic centers each, while the newly launched Northwest Coast and North Sinai are represented by four and two touristic centers respectively.
In terms of road networks, the Red Sea and South Sinai governorates enjoy a combined total of 478 kilometers of roads.
Additionally, the Red Sea governorate has a total of 81 desalination plants, while South Sinai follows with 37 plants, Ain Sokhna has 9 plants and the Northwest coast has 4. All four areas produce a total of 169,705 cubic meters of water per day. Sanitation treatment plants, on the other hand, totals to 169 between the same four areas, with the Red Sea representing almost half at 44.3%.
Power generation is well established amongst areas under the control of the TDA. There are 93 power plants, 95% of which are present in the Red Sea Governorate.
The Red Sea has 266 power generators and 234 adapters, while South Sinai enjoys 133 and 283 respectively. Ain Sokhna, due to its relatively smaller size has only 10 power generators and 14 power adapters. On the other hand, the Northwest Coast, with 6 of each, has a long way to reach up to other areas in terms of power generation. However, it is important to note that the area is still under development and is part of a current mega project launched by the government.
The Equation of Land
Shifting to matters of land –the main product the authority is working with– the authority has established several parameters to generate better results. One avowed example is land use.
“The main resource of the TDA is not the touristic building itself, but rather the land the projects are conducted upon. To the authority land use is very important, that is why the type of project for each land is specified prior to its offering. Feasibility studies and specific plans for said projects, however, are left for the developer to conduct,” explained Saad.
Most of land under control of the authority is coastal land, which the authority divides and earmarked for specific projects, prior to offering it through tenders to local, regional, and international investors. The authority additionally clarifies the required number of touristic units, hotel rooms, as well as the administrative, commercial and service venues needed.
An important aspect the authority is focused on is horizontal expansion. “Due to its vastness, development in the Egyptian desert has to be horizontal not vertical, which means that instead of building tall buildings over limited areas, we should aim to build shorter constructions covering expanded areas. That is one of the main reason we supply vast areas of lands for each project,” Saad explained adding “To ensure horizontal expansion one of the parameters we have set is a maximum number of 20 keys per acre, and a minimum of four. Keys here refer to touristic residential units, hotel rooms, or any other type of units.”
Talking about the extent of room investors are allowed to make changes to set plans, especially in terms of expansions, Saad highlighted that set plans are the minimum requirement; once they are met the developer is free to add any additional elements to the project, whether it is a mall, an entire hotel or a service shop.
Setting Prices and Other Authorities
In discussion of land control, Invest-Gate asked Saad about the bases of assigning lands to different authorities, namely the TDA. “Back in the 1980s all land categorized as touristic land automatically became under the control of the TDA after its launch in 1991. However, in 2001 the state launched the National Center for Planning State Land Use (NCPSLU), for the sole purpose of categorizing land in Egypt. The center divides land according to the best usage for its type of soil and location. Land can be earmarked for agriculture usage, residential, industrial or tourism projects, among others,” he explained.
There have been talks about challenges facing different authorities in terms of price coordination on different lands in close proximity. A well heard of example was Marsa Matrouh, where prices set by the TDA were vastly different than those set by the New Urban Communities Authority (NUCA). Explaining these challenges, Saad commented “There cannot be touristic development without cooperation with the local authority in a given governorate. We have to admit that there were negative practices previously, due to some overlapping of authority over land, Marsa Matrouh is one of the more prominent examples of this issue; however, since the launch of the NCPSLU parameters of land use and authority became much clearer.”
Different authorities offer land to investors through different methods, each authority sets its own set of conditions, parameters, and requires certain commitments; consequently prices set by different authority for lands in a given governorate did not always match up. To help resolve the situation, Law 17 for year 2015 removed the authority to set prices from most governmental entities that control land. Currently only four entities have the authority to set land prices. The purpose of this decision is to separate between land control and price levels, with NUCA being an exception to this rule.
“The TDA assists in price determination for different lands by supplying the parameters set for expected land usage. For example, land mostly for commercial purposes should be priced differently from land earmarked for a resort that is expected to have only 20 units per acre,” Saad explained adding that the expected return on investment is another important differentiating parameter, as an example he highlighted the difference between ROI for hotels and for compounds. “Hotels require long periods of time before they are able to cover their initial capital, while a resort or compound covers its costs and generates planned profits simply by selling units,” Saad stated. Other factors that go into price calculation are average price levels, infrastructure extended to the area, among many others.
When asked about the rationale behind basing land prices on the US dollar value, Saad replied “This brings us to the point of whether it was right or wrong to set land prices based on a dollar value. The point is not the currency itself, the point is that the value set remains both competitive and stable enough to encourage development, in return investors will be required to construct all needed infrastructure to awarded land, prior to construction of planned projects. This is the successful equation we built.”
“There is a difference between selling price and value estimation. According to the Egyptian constitution we cannot sell using other currencies; however, to ensure that the determined value of land does not fluctuate, the US dollar is used to convey the value determined for land. For example the price set for West Ras El Hekma in Marsa Matrouh is $47 x EGP 8.85*, and will keep evolving with changes in conversion value,” Saad explained.
The main drawback to basing the value of land on the US dollar falls on investors who are unable to meet payment due dates. Postponing payments exposes them to the danger of increase in due amount due to currency fluctuations, in addition to imposed penalties.
“We cannot really say that we give land at developmental prices, true we provide land at competitive prices, however, all required infrastructure is financed and built by the investor,” he elaborated adding “When price of land as a component of the project represents between 10 to 20 percent of total investment value, that is fine, not very competitive for the project, but yet a fair value.” Saad additionally made a point of highlighting the significant benefit of installing due payments on ten years, a perk that only the TDA offers to investors.
“All infrastructure construction was entirely financed by investors, without resorting to any financial support from the state. The authority has dealings with 896 developers, which is a significant figure in comparison to other entities in Egypt, and it is an indicator of the success of our model.” Saad proudly stated, a clear sign of the success of the methodology the authority is operation through.
Like any industry attracting investment is often mixed with challenges, a mina challenge Saad highlighted is the concern of some Egyptian investors, who approach investment decisions very cautiously. “I do not see a reason to be worried, turbulences from the revolution affecting the industry effectively ended by 2013, and proof of that can be seen in the 70 new projects we launched in 2013 alone, generating unprecedented revenues. All this means that the industry is stable and lucrative for investors,” Saad Confirmed.
Commenting on the effect of the strong presence of foreign investment in the real estate sector verses the flow of Egyptian investment, Saad said “We are aiming to attract investors, we don’t necessarily mean by that foreign investment, we are currently dealing with 896 developers, there are more investors than that in Egypt, and new investors emerge every day.”
The Sinai Factor
When asked about the role of political policies in shaping the direction of investment especially in sensitive governments like Sinai, Saad replied “There is a significant difference between North and South Sinai. South Sinai is open to all kinds of investment with almost no restriction. The only difference is the additional required documents entailed by law 14/2012, which organizes development of Sinai. However, the law was amended in 2015 to allow ownership of land in Sinai for Egyptians, and allows for extended periods of usufruct rights to non Egyptians.”
A key topic of discussion now is the proposed Sinai-Saudi bridge, commenting on the hot topic Saad highlighted the promising nature of the project. “The bridge will not only tie two nations, it will connect two continents, and should have a positive effect on international trade routes.
Answering a question regarding the widely circulating concerns on the bridge, Saad assured “It is too early to determine anything in regards to the bridge. Economic and technical studies are yet to be completed, all aspects of the project are planned to be examined very well, especially in terms of drawbacks. All what is ready at this point are some suggested technical routs, as well as an idea of the methodology of tendering the project. Estimated cost, funding, and many other important factors are yet to be determined by the several governmental entities involved in the preparation of feasibility and technical studies.”
“The Ministry of Environment has a major role in the preparation of the studies, due to the proximity of the suggested location of the bridge to Jackson’s reef, one of the largest reefs in the world,” Saad commented addressing environmental concerns regarding the bridge, adding that the Transportation Ministry and Ministry of Interior Defense also have a major role in preparation of technical studies for the bridge. “In short we still have a long way to go, in terms of economic and technical aspects,” he affirmed.
While on the topic of the environment, Invest-Gate asked Saad about the role of the authority in terms of environmental permits. “The role of the TDA here is a coordinator between the developer and the Ministry of Environment. The ministry has set certain conditions and regulations, especially in assessing the impact of a project on the surrounding environment. Developers need to understand the importance of entrusting these aspects to specialists to avoid delays. Some environmental approvals take four months, while approvals for other projects have been in process for two years,” he answered adding, “I believe there should be more flexibility allowed in terms of project scopes; however, the ministry does not want to allow any flexibilities, out of fear from accuracy of execution.”
When asked about the core changes that need to take place to help further boost this part of the real estate industry, Saad shared two main ideas. The first of which was the notion to encourage non-Egyptians living in Egypt or tourists that visit the country often to acquire touristic units. “We need foreigners to buy real estate in Egypt, this helps both the developer and the country. We still have a long way to go to strengthen this area,” he said.
“Secondly, we also need to encourage the potential of income property, where developers manage and rent out unused property on behalf of owners,” Saad commented adding “Local tourism in Egypt is of significant potential, and can get Egypt out of the current situation the tourism industry is facing.”
“Regional tourism is also of significant potential in resolving any hardship the tourism industry in Egypt is facing. They should be encouraged to purchase well serviced touristic units,” Said commented in hopes that developers would adopt such lucrative concept. “Ras Sudr airport will ensure that this happens. In fact an airport in this area will remove all the pressure imposed on the only access point, Al Shahid Tunnel. The airport will also significantly shorten the time required to reach Sinai from other cities in Egypt, especially the capital,” he added.
In the grander scheme of things, both the tourism and real estate industries have a long way to go in terms of potential as well as stability, with the numerous highlighted points shared through this interview the state’s efforts to ensure that the one currently profitable industry maintains its upwards trajectory is quite visible.
* Conversion value was stated June 2016.