With demand for desert McMansions slowing, developers are turning to the forgotten middle class for business

The Middle Ground...

Last year, developer IGI Real Estate launched a massive 16,000-unit residential complex on the outskirts of Cairo that marked a major departure from the conventional wisdom of desert building.

The development, called Kenanah, is typically sprawling; at 500 feddans, it’s the size of Zamalek. It’s bathed in greenery, criss-crossed by wide avenues and billed by IGI as a serene escape from the chaos of the capital.

But unlike the ritzy, villa-filled compounds that surround the city, Kenanah is filled with modest 80 to 150-square-meter apartments aimed squarely at the middle class.

“[It] is the only project of its kind in the country,” says IGI’s managing director Lobna Reda, whose company is among the first to bet big on middle-income home buyers.

“For the next 10 years the projections are that [those sectors] are going to continue to show very high demand.”

In recent years the country has seen a boom in residential real estate, especially in the Greater Cairo area. But lured by high profit margins, developers have largely concentrated on luxury properties.

That appears to be changing, albeit slowly.

Along with IGI, Talaat Moustafa Group and Orascom, Egypt’s biggest real estate developers, are already working on middle and lower-end projects backed up by their own construction companies. The business model is compelling.

A 2008 USAID study on Egypt’s urban housing shows that the vast majority of homebuyers are interested in low to middle-range housing. Ninety-five percent of buyers on the market are looking for homes smaller than 125 square meters and more than half of those are interested in two bedroom apartments.

Many of the sector’s big players, though, are still married to the high profits of luxury housing and are wary of jumping into what is a largely untested model of desert dwelling. But with demand at the high-end slowing, experts say that strategy may put them behind the curve.

From Luxury to Affordability
Though the global financial crisis did not provoke a Dubai-style crash in the Egyptian real estate market, the downturn did bring change to the sector.

“Is there pending oversupply in the [luxury] sector? There are indications of that currently taking place,” says Blair Hagkull, chairman of Jones Lang LaSalle for the Middle East, a real estate services firm.

Larger profit margins and big returns lured the majority of real estate developers into high-end properties. As Cairo’s suburbs expanded, fueled by government infrastructure projects, the scale of real estate grew tremendously. In the 1990s most companies would sign up for a few apartment buildings; today large villa complexes and gated communities mushroom in the orbit around Cairo.

“Before the economic crunch, everybody was [in] class A. It was much easier to build 50, 60, 90 villas and sell them on the spot. Everyone wanted to capitalize in the boom of the property prices,” says Ahmed Haggag, a consultant on the board of Sakan Finance Mortgage Company.

But with the economic slowdown, the high-end housing market is nearing saturation. Demand for luxury housing shrank by 50%, according to a report on the real estate sector in Egypt released by Kuwait Financial Center – Markaz, an investment bank. The report explains that high GDP growth in the pre-crisis years led suppliers to overestimate high-end demand.

However, real estate developers often counter saturation fears with claims that Egypt’s large population and stable growth above the replacement rate guarantee secure long-term housing demand.

The Markaz report seems to indicate that those arguments don’t hold much water. It states “the pent-up demand potential arising out of population growth and marriages [] would remain dormant [] unless it is backed by growth in income levels.” Markaz predicts that the Egyptian economy will recover to pre-crisis GDP growth levels, which will inevitably accelerate realization of potential demand.

“We recognize that the affordable and middle housing is really where the bulk of the market is,” says Hagkull. He points out that most middle-income families pay for new property out of their income or savings, and are regarded as relatively safe buyers, especially with the current fluctuations in the global economy. When real estate markets contracted, the middle-end market contracted 20% less than the high-end, according to Markaz.

Also, middle-income demand might not be limited to residential properties. “If you look at the hospitality industry, people perceive that the best returns are [from] the most luxurious products when, in fact, often the opposite is the case,” Hagkull says. “It can be very good business to develop [middle-income properties]. So that’s obviously where there’s a big opportunity.”

Stuck in the Middle
Lack of interest from developers is not the only challenge for middle-income buyers of real estate. In the Egyptian real estate market prices regularly jump 20-30% in a year. According to Jones Lang LaSalle, there is a noticeable price discrepancy between supply and demand in the market.

“Existing owners of [] assets are averse to selling at what they see as discounted prices, thus creating a buyer-seller mismatch,” says Andrew Charlesworth, head of capital markets at Jones Lang LaSalle MENA.

While this mismatch covers all segments of the market, it has affected the middle-end most. Haggag explains that there are housing projects for lower income brackets with down payments and monthly installments subsidized by the government. To qualify for those subsidies, a family must have a maximum income of no more than LE 2,500 a month.

He explains that families with income above this ceiling, up to about LE 10,000, have a hard time finding apartments that suit their preferences and their income. Such families are comprised of young professionals whose parents reside in high-end housing, but are unable to help their children buy similar properties.

“I don’t think there are properties that match such demand in the market,” says Haggag.
The majority of middle-income families are looking for apartments in the 100 to 120-square-meter ranges. The standard price of an unfinished square meter is LE 500. (Unfinished flats are skeletons that allow buyers to add their own floors, lights and cabinetry, among other things.) A finished square meter costs about LE 4,000. At those prices, a middle-income 100 to 120-square-meter property would run, on average, LE 400,000. Mortgage installments would cost at least LE 6,000 a month, says Haggag. Even at the high end of the middle-income bracket, where a family makes about LE 10,000 a month, properties are still prohibitively expensive. The standard offer from real estate developers, a four-year payment scheme with a down payment of 25%, would be even more burdensome.

“In Egyptian society [] the income structure and income brackets of people do not match inflation and cost of living, the cost of raw materials, the cost of building and the cost of land,” says Haggag.

One of the reasons incomes fail to match the prices of large commodities like real estate is the relatively high cost of borrowing in Egypt.

The mortgage sector still suffers from high interest rates of about 13-14%, and construction prices are high, as real estate developers partially fund projects with borrowed funds. According to Haggag, the solution is a bigger market for funds.

“If there are 20 [mortgage companies] operating in [the market], we’ll find the cost of funds will go down. We’ll find more developers acquiring lines of credit from banks to finance their projects and this will regulate the market and lower it,” says Haggag.

Availability of affordable mortgages can potentially help solve not only the middle class housing troubles, but also the housing shortage for the poor.

“Mortgage finance is not a product; it’s a solution for a market and a society like the Egyptian [one],” says Haggag. bt