It all turns sour for Capitaland
1 December, 2008Double or nothing: investments to swim against the tide
1 December, 2008That’s going to be a problem for developers with a lot of new projects either nearing completion, under construction or on the drawing board. A look at the books of the major developers there shows a huge amount of construction planned or underway. Take Egypt. Dubai’s Emaar, which operates in Egypt through its Emaar Misr division, has four developments underway. One of them, Uptown Cairo, is a four million square metre project combining 11 villages across the Mukattam suburb. Like many Emaar developments it aims to create an entire town: residential, hotels, restaurants, a golf course and a town centre. It has been costed at US$2.1 billion and is due for completion in 2013.
Another Dubai developer, Damac, has no less than six developments underway in Egypt. Five of them are residential or retail developments in and around Cairo, but the sixth, Gamsha Bay on the Red Sea, is extraordinary – a 320 million square feet, 50,000 unit project that Damac itself calls “the master of all master developments.” Damac declined to respond to queries from Liquid Real Estate about Gamsha Bay’s progress, or any of its projects outside the UAE.
Other Gulf developers busy in the region include the Majid Al Futtaim Group, which builds shopping malls and has been closely involved with Carrefour in Egypt; Qatari Diar, which is building Nile Corniche Towers, a US$1 billion mixed use development in Cairo, and a US$329 million new tourist town in Sharm Al Sheikh; and Kuwait’s Al Kharafi Group, which has had a permanent branch in Egypt since 1980.
That said, one can easily understand why developers are attracted to a market like Egypt. Real estate is not a dominant industry in Egypt, accounting for 3.4% of total GDP in the 2007-8 financial year, but is growing well, at 3.7% in the same year.
“Economic growth, new regulations encouraging registration of home ownership, availability of mortgage financing, entrance of a number of major Middle Eastern property developers, elimination of restrictions on real estate ownership by foreigners, favourable demographics and relatively cheap prices compared to the region, all worked together to fuel [Egypt’s] recent real estate boom,” notes Global Investment House in a recent report.
In particular, the relaunch of the privatisation programme in 2004 and a new tax law the same year improved business confidence in a number of ways, creating a platform for foreign investment and reducing corporate and income taxes. Real estate has benefited from that in the subsequent years, with a marked increased in foreign direct investment into real estate coming to fruition in the 2007-8 financial year, when it hit $400 million, a tenfold increase on the previous year. This FDI has come partly because of the increased ease of access, and partly because valuations are much lower than in the Gulf.
Egypt also has attractive demographics, with the largest chunk of its 77.5 million population being under the age of 20 (44.3% in 2005) and therefore approaching the years when they enter the workforce and buy homes. A further 36% are aged 20-45, the group that provides most of the housing demand today. Mortgage financing is beginning to catch on following the passage of a new law in 2001, and bolstered by the establishment of the Egyptian Company for Mortgage Refinancing by the Central Bank of Egypt and 24 other financial institutions in order to become a market maker in mortgage finance. Property registration fees have been reduced, a credit bureau now exists to help lenders assess risk, and an insurance company for mortgage finance risks is being established. In June Egypt’s parliament endorsed a cut in property tax from its absurdly high current rate of 46% is to 10%, which should also have an impact.
But can all this new development be funded by developers whose home markets show little availability for debt finance and questionable investor appetite? The same question might be asked in Oman, a nation that has benefited from developers’ diversification theme and has much underway. At the root of it is a decision made by Sultan Qaboos in 1995 when he launched the Vision 2020 programme, which aims to diversify sources of national income from petroleum. Real estate development also has been assisted by regulatory change. The Foreign Capital Investment Law now permits 70% foreign participation in Omani companies, which in some cases can rise to 100%; additionally, foreign nationals are now allowed to buy property in Oman.
