Jewel of the Nile:
Cairo offers plentiful property investment opportunities

Cairo is an especially dense city of only 175 square miles. Severe congestion and pollution constrains downtown Cairo, and future growth will likely occur in satellite cities – similar to suburban areas in the United States.

A plan was initiated in the 1970s to build various new satellite cities. Ten new satellite cities are under construction, with the main ones being 6th of October City and New Cairo. Others include 10th of Ramadan, El Ebour, El Shorouq and Sadat City.

Satellite cities have their own municipal governments. For example, the 6th of October was recently transformed into a “Governorate,” the same way Cairo, Giza or the Sinai are Governorates.

Ultimately, the satellite cities’ master plan is to accommodate up to 9 million inhabitants. 6th of October and New Cairo have already attracted a substantial residential population and a number of luxury residential developments.

Development over the past few years has been focused on the luxury residential market, and this sector is now approaching saturation. Future success of the planned satellite cities relies strongly on the development of affordable and lower middle-class housing, which is undersupplied.

Developers such as Talaat Moustafa Group and Orascom have announced that their product mix is shifting more towards affordable apartments rather than villas and middle- or upper-middle-class apartments.

Annual population growth of 2 percent and annual urbanization rate of 1.8 percent are fueling urban housing demand, according to Abdel-Baki. Currently, there is an annual gap of 150,000 housing units per year, with a carried over deficiency of 3 million housing units – 2 million to fulfill needs of the growing population and 1 million to replace depleted units, she notes.

In recent years, the housing market in Greater Cairo has been constrained by relatively low affordability. As a result, less than 10 percent of households have moved over the last five years. “This low residential mobility reflects the overproduction of expensive units and the distortions caused by rent control,” Abdel-Baki explains. “The mobility rate is expected to increase in coming years due to the introduction of new mortgage laws and the increasing supply of more affordable units.”

In Cairo, the primary reason for moving to a new apartment is getting married. As such, the demand for apartments is primarily driven by the city’s rate of new marriages, which is estimated at approximately 100,000 annually. The middle-class population has dramatically increased over the past decade as a result of more flexible economic laws and taxation systems. A larger proportion of the Cairene population can now afford to purchase a dwelling or apply for a mortgage through recently created financing entities.

Abdel-Baki says 85 to 90 percent of the housing units in Egypt are unregistered due to the very high fees in the past, reducing the potential of homeowners to access mortgages. In fact, this is one of the main factors contributing to the housing crisis in Egypt.

In 2004, a mortgage law was introduced in an effort to reform the sector and allowed new mortgage finance firms to operate for the first time in the history of Egypt. There are currently 11 of these firms, of which only four or five are very active, according to Abdel-Baki.

The volume of mortgages shot up from almost 0.45 to 3.5 percent of GDP in less than a decade (compared to 40 percent in some GCC nations), Abdel-Baki notes. These new firms lend out directly to customers and have less rigid formalities compared to commercial banks. “This is a sector with much potential for future growth, and if properly empowered and supported by the government, is apt to address the housing problem,” she contends.

Office

Along with Dubai, Cairo is the MENA region’s favorite destination for major global corporations. Cairo is not only a gateway to Africa’s most populous nation, but also to the broader North and Central Africa regions.

Virtually all of the Fortune 500 companies are located in Cairo. In fact, research by the University of Loughborough (UK) shows that Cairo has one of the highest levels of corporate representation of any city in the MENA region. They’re attracted to the significantly lower labor and other business costs that Cairo offers compared to other destinations around the Mediterranean region.

Although Cairo is the undisputed financial and business centre of Egypt, it does not have a true Central Business District as compared to other international cities of similar size. The office market remains highly fragmented, with the vast majority of office space located in various mid-rise buildings throughout Greater Cairo, according to Jones Lang LaSalle.

The current supply of office units is concentrated in the following four districts: Mohandessin, which has numerous banks and private sector offices; Downtown, where the majority of ministries and government offices are located; Nasr City, which is populated by mid-rise buildings that house banks, auto dealerships and administration space; and Maadi, where oil and gas multinationals, embassies and diplomatic agencies can be found.

The supply of purpose-built, international quality office buildings remains very limited, with the first large office complexes, Nile City Towers and Star Capital, opening in 2003 and 2005, respectively. Pyramids Heights, the first business park in Cairo was completed in 2001, followed by Smart Village in 2003.

Due to the lack of quality supply, large corporations and financial entities have typically bought or constructed buildings to host their headquarters, with any additional space leased out to other entities. As a result, there’s a significant dearth of Grade A office space. In fact, 80 percent of existing office occupiers are housed within residential buildings, according to Jones Lang LaSalle.

The severe congestion and pollution experienced in the downtown area has resulted in the relocation of multinationals and large local firms to new satellite cities. Solidere and SODIC, for example, are expected to add more than 900,000 square meters to the office market starting in 2013, with the ultimate aim of becoming the central business hub of the 6th of October City and New Cairo. This additional supply is expected to change overall market dynamics when completed in 2012 and 2013.

Retail

As Egypt’s GDP has increased, the purchasing power of Egyptians has risen rapidly. Moreover, Egyptians are a consumer-oriented people who love to buy from shopping malls, according to Abdel-Baki.

Yet, Cairo’s retail market is still predominantly fragmented and its retail-per-capita is lower than most peer countries in the region at just 0.07 square meters, according to Jones Lang LaSalle. Today, retail expenditures represent 15 percent of family budgets, but increased urbanization is set to foster retail spending and enhance consumer sophistication.

Today, roughly 400,000 square meters of leasable space exists in retail malls across Cairo. The first shopping mall in the city, Yamama Center, opened its doors in 1989, followed by the World Trade Center in 1990. Since then, some 27 others have followed, including CityStars, the largest mall in Egypt.

With the exception of CityStars and City Centre, world-class shopping malls are non-existent, and most suffer from a general lack of services and maintenance. “This is a haphazard sector and the alarming phenomenon is that shopping malls tend to do very well in the beginning and then die out in a few years,” Abdel-Baki says. “The best potential in this sector is for luxurious shopping centers in new cities, lower-end shopping centers, as well as hypermarkets on the outskirts of the new cities.”

Jones Lang LaSalle reports two key challenges to the retail market: importation tariffs and lack of professional management. Despite recent reductions, tariffs remain higher than in most other countries in the region, and lack of professional retail center management is a key reason why many existing malls have lost their allure.

Hospitality

Tourism presents another large growth opportunity in the Cairo real estate market. Egypt experienced the second highest number of tourist arrivals in the MENA region in both 2008 and 2009, second only to Saudi Arabia.

Cairo is the gateway to approximately 20 percent of total arrivals in Egypt. Western Europeans and Russians represent the largest segments visiting Cairo. However, tourists from Asian markets such as China and India are expected to increase over the next three to five years, according to Jones Lang LaSalle. The number of Arab tourists also has witnessed a significant increase over the past two years.

The hotel market in Cairo is divided into three distinct sub markets: Heliopolis, Cairo City Centre and the Pyramids area (including 6th of October City). The Heliopolis market caters primarily to business visitors and transiting passengers because it is located near the airport. The City Centre hotels welcome tourists visiting Cairo, in addition to a large number of business visitors. Hotels in the Pyramids and 6th of October area have traditionally targeted tourists visiting the archeological and Pharaonic sites but have witnessed an increase in business guests since development of the 6th of October City and its surroundings.

Cairo has a total inventory of 153 hotels totaling 24,000 rooms across all categories, according to the Egyptian Hotel Association. Of the existing inventory, only 32 hotels (roughly 20 percent of the total stock) are affiliated with international hotel management companies.

Recently, new luxury brands such as Kempinski, Dusit Thani and the St. Regis have arrived in Cairo. Experts forecast that more than 1,500 branded rooms will be developed over the next five years, including the recently completed Fairmont Nile City.

Additionally, hotel owners and operators are increasingly active in redeveloping their existing Cairo hotel properties. Several old hotels, such as the Ritz Carlton and Rocco Forte, are currently being renovated and rebranded to answer changing customer needs.

Although the city has been highly dependent on leisure visitors, growth in Cairo’s business sector will position the city to attract a larger number of business visitors as the economy expands. Jones Lang LaSalle says the improvement in global economic conditions is likely to positively impact hotel yields in 2010.

“I would definitely invest in Cairo, as there are plenty of opportunities,” says Tarek Abou Aly, head of Jones Lang LaSalle. “The challenge is to have the best market knowledge to enable you to identify the most appropriate opportunities.”
  

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