In a one-of-its kind interview, Invest-Gate sits with Ashraf Salman, former Minister of Investment and current CEO of AUR Capital, to discuss the Egyptian economy and highlight ARCO Developments’ ongoing take on Egypt’s real estate market. Generously, Salman shares his insights on the industry as a whole and pinpoints the hits and misses of the Egyptian government’s reform plan, aiming to reach the Modern Egypt of the future.
What is your assessment of the Egyptian real estate market today?
Let us first begin with assessing Egypt’s macro picture as many people fear the future following the float of the local currency and its direct relation to the real estate market. We look at the current world economy and, despite the situation here in Egypt, we still witness GDP growth of 3.8% per annum. Some of the developed or advanced economies have negative growth; other young developing economies have only reached GDP growth somewhere in the 2.5%-3% per annum range. African markets too, once had a double-digit growth, but are now achieving 6% to 7% GDP growth per annum. So given all what Egypt faced during recent years and that the GDP growth still able to reach 3.8% in 2016, to me, as an economist, this is very positive.
Now that the purchasing power in Egypt is decreasing and worrying to some extent due to the many reforms beginning by the devaluation, I do not consider it a reform as much as it is taking everything to its correct price; our subsidy of the pound started to be available following the float. At the end of the day, I do not worry about prices as much as considering the availability. When currency is made available, prices become automatically transparent, taking us to stability.
Egypt’s current reform plan is not only the float of the local currency, but also the removal of subsidies on electricity and control of oil prices, leading us to a more free market.
People would ask how is it a free market when the government and the Armed Forces are still intervening in most production and projects?
I say this is bound to happen, given the transitional or reform period we witness today. If we look back at the big financial crisis of 2008, we find that the US administration, for example, interfered tremendously in helping all key players; the federal reserve too had helped a lot of banks to overcome the crisis. To me, this is the case now in Egypt and such governmental interference is legitimate. It is a sort of a stimulus plan.
The Egyptian government, with all its entities, is working hard on the “Emergency Plan” by investing in social housing, infrastructure, the Suez Canal, the Suez Canal Economic Zone, and New Administrative Capital, etc. Going back to the general picture of where we are today, in a two-year span I believe the results of this “Stimulus/Emergency Plan” will show and we will see it reflect on Egypt’s GDP. At that time, leading revenue growth to Egypt’s GDP will be the real estate sector.
Back to real estate market, where does it stand today?
Globally, there has always been concern regarding real estate price increases. We hear experts saying that it is a bubble, as in the case of Dubai. I believe not for a number of reasons, including the supply and demand. Demand for real estate in classes A, B, and C is there and it is increasing. We have witnessed 17% y-o-y growth in the industry. Moreover, this industry is pushing to a super growing sector in the Egyptian economy; demand increases naturally with the increase of Egypt’s population.
On a side note, the frequent population increase must be addressed and controlled immediately. It is eating up everything, despite its positive reflection on real estate demand.
With the increase in demand, supply is not enough. The propaganda surrounding the industry with the focus on a number of developers’ projects here and there makes it sound like supply is more than enough but numbers show otherwise. For example, Class A units across many, if not all developers, do not exceed 100,000 to 150,000 units with a delivery of 10% out of these offered units; we are a population of nearly 100 million today! There is no way that the supply, even across class A, is enough. I can confirm that the demand on class A alone is more than double of those numbers I am giving you.
Then we move to the mortgage market in Egypt, it barely exists. Up until last month, with all public and private banks offers, as well as initiatives, all what is booked so far did not exceed EGP 20 million for a single residential compound.
Among those initiatives, we have the real estate finance law, prohibiting home equity loans like those of the USA as it is allegedly against the Sharia Law. Home Equity laws like that of the USA and other countries allow mortgage banks to increase home financing according to the market. So, when the value of your property increases, mortgage banks give you another grant to spend but once the market is hit – like what happened in the USA in 2008 – you become in debt to the bank. Hence, the bank sells your home as foreclosure since you are unable to pay back and you lose all your savings.
Finally, to evaluate our real estate market today, we take a look at the surrounding markets, namely Saudi Arabia, the North African region, Jordan, Lebanon, and ending by Dubai (as our high-end quality market). In Tunisia, the average price of a class B unit has reached USD 3000 per square meters, Algeria is USD 2500 per square meters, Morocco USD 4000, Dubai USD 4000-5000 per square meters, leaving Egypt the cheapest of all with USD 1500 per square meter at the most prestigious projects targeting class A.
This is accompanied by strong reform program happening in the country for the very first time in years, investing in energy, housing, decreasing the deficit, and removing subsidies on electricity, oil and gas, as well as increasing its foreign reserves. Most importantly, current GDP growth is at 3.8% y-o-y. So I confirm, there is no real estate bubble. This bubble comes from foreclosure, which we do not have. We are a cash market.
For the future of real estate in Egypt, growth will exceed the 17% we already have but by studying the latent needs.
What are the latent needs in this booming industry?
The real estate market is, and will be, the leading sector for the coming three years at least. From an expert point of view and an economic point of view, I do not see any risk in that sector. This risk is in the secondary market that is still liquid and that is due to the lack of mortgage. The interest rates for mortgage plans are still very high.
Studying the currency exchange float, the inflation rate of 30% m-o-m, inexistent increase in income per capita, should theoretically speaking double the property price but it did not. Of course, prices of properties have increased to an average of 20% but still not doubled. So if a unit’s price was EGP 3 million, it is now sold at EGP 4 million only. Prices still lag behind recent economic changes. What developers did was meeting the latent needs of owning a house by offering flexible payment methods, extending the payment installments plan to a 7-10 year period from the popular five-year timeframe previously. So with every price increase, developers are bound to make the payments fit for the consumers’ needs and conditions.
Given the unrealistic increase of units in light of reform, how do you as a developer make profit when units are offered at a higher price but not doubled as per the theoretical market price increase?
In this case, developers offer what is called a “product mix”, mainly tailoring payment plans according to consumer needs. We create less unit sizes with reasonable prices. Now you see 120 square meters on a 160- square meter land plot available. Such dimensions were never previously available in Egypt. The common trend is being again offered on installments depending on the amount the end consumer can afford every month. We go easy on payment methods and flexible plans to sell units, from seven to 10 years. Flexible payment plans are part of the needs to cater to. I presume that the installment plans, when I speak about ARCO, are capable of reaching payment plans of up to 20 years. Meanwhile, we innovate and offer more appealing products.
The real estate market is lagging behind this frequent price increase on all commodities in the market– it is bound to face another increase next year and yet another in 2019. Then, our issue will be affordability when consumer demand is there. And the affordability you, as a developer, provide is flexible payment methods.
So if the float has affected everything in Egypt and yet been seen hopeful for the real estate market when comparing Egypt to neighboring countries, how did it affect AUR Capital as an investor?
As we invest in ARCO Developments, we acknowledge of course that everything has a price. Developers have to be more sophisticated to overcome the challenges presented by the float. We started off with some diagnostic strategies and brand polishing. We sought, after innovative instruments such as hedging, to reduce the risk of adverse price movements in some of the construction materials such as cement. ARCO has projects that need cement for the upcoming three years, so if the one ton of cement today is equal to EGP 700, ARCO managed to fix price to EGP 800 for those three years and not to be bound to the further expected cement price increase. This hedge instrument we apply on all construction materials to be able to meet our development deadlines.
The float of course did affect ARCO but not to an extent of not taking risk or generating profit.
What is your perspective on the latest legislations such as the investment law and contractors’ compensation law?
I find that is being put as part of the reform the government is currently applying. Such laws are already in parliament and will soon be enforced. Some will, of course, lead to revenue loss along the way, but ways are paved for future investments. We are on the right track and we take those business risks as we move forward. Nothing happening in Egypt is exceptional. We have seen reform everywhere else; we just need to be on top of the game on both levels public and private sectors.
How have the government’s large-scale projects such as the New Administrative Capital and the Suez Canal Economic Zone affected Arco’s outlook? Also, Dabaa on the North Coast?
Direct investment is a long-term plan and I hope people stop analyzing those projects on a daily basis. Both projects are crucial for this period and the reform plan. They are what we call “Alternative Investments” for a long-term direct investment, and it is calculated as IRR over the course of seven to 10 years.
I find the government’s ongoing investment in infrastructure, especially that of the SCZone, is the future of new Egypt. When the world trade market recovers, it will reflect on Egypt and thus generating the revenues such mega projects were built for. We just need to be realistic and give it the time it deserves. We are currently rebuilding the infrastructure of Egypt to be ready for direct investment to pore into our country when the depression and world trade recovers, examine the situation in Europe, USA, and even China before we judge the situation in Egypt. We have to be ready when the FDI reviews Egypt as a potential investment market of all sectors.
As for the New Administrative Capital, I believe it is the development of a New Cairo. We had to develop the desert for more investments and projects. We have a well-planned expansion in the desert. We, ARCO, are now seeking first-home projects in our upcoming strategy across the New Administrative Capital and western Cairo in Sheikh Zayed and the 6th of October.
Do you consider Ain Sokhna to become hub for first-home buyers?
No. I do not see it easily. I tend to be rational; so, for a community to develop it needs an average of 10 years. It is easy to deliver a compound in three years but to make people move in, you need to create life. ARCO now is a community developer to provide facilities, landscape, and security in its already developed and sold projects before investing in new projects. I needed to build community. This has to be applied in new cities let alone a city like Ain Sokhna that is in proximity to the SCZone. I do not see it becoming a first home in the upcoming seven years… maybe later.
How do you see the future of Egyptian coastal destinations given all those projects in the rebuilding of new Egypt? Do you see Egypt ever competing on the world tourism map?
The question is: do we cater to the tourism industry and follow the modern trends shaping our tourism flow?! We do not. We need to stop talking about our heritage, having the different and diversified civilization, obtaining how many of the world’s ancient artifacts and archeological sites, etc. Enough with all that! Yes we do have the best beaches, yes we have the remains of the greatest civilization of the world but neither do we cater to it properly or do we follow what the modern tourist needs today.
The tourism sector must anchor the ropes to attract tourists of today. We need to innovate and upgrade our marketing strategies. Archeological administration needs a major update and to follow those who succeeded.
Given the new projects, will we see foreign investments coming in as anticipated?
Yes, of course. With projects like the Dabaa Nuclear Plant in the North Coast and the SCZone on the Red Sea, you are catering to foreign investors’ needs and speaking their language for sure. Here, the devaluation of the pound played a huge role in making a country like Egypt very attractive due to the cheap cost. Also, the current IRR of Egypt today is exceptional. Unlike the rest of the world, the country’s current IRR now is an average of 24% to 30%; this is not available at anywhere around the world today. In the USA it is 3%, Europe 4%, and the GCC 8%.
What is ARCO’s contribution to sustainable living?
If we are looking into ARCO’s Crystal Lagoons of the North Coast, we have provided a developed, technological summer life for your second home. We installed solar panels and I can say that it is the only community of all the North Coast solely depending on solar energy as means of electricity. Crystal Lagoons have developed and patented a sustainable cooling system for industrial processes, such as thermal power plants, data centers, foundries, paper and steel mills, among others, where a sustainable cooling lagoon is built in connection to an industrial process in a closed-circuit system in order to provide high-quality cooling water for its cooling stage. Furthermore, we have developed water-filtering systems in our public areas, including landscape and swimming pools to save on energy and guarantee the quality of life in a sustainable clean way.
Are you hopeful?
After analyzing the Egyptian reform plans, including the major development and infrastructure projects, the still-growing economy as I mentioned earlier, and the real estate sector, yes, I am very much.