One for all: The low-income housing segment is in need of massive expansion

Low-cost housing is an underserved real estate segment that is likely to get more attention in 2012 and beyond. This is where the bulk of demand lies, and was one of the sources of revolutionary fervour in January and February 2011. In addition to the resignation of Hosni Mubarak, the country’s former president, and his government, many protestors were demanding increased availability of low-cost housing.

POPULATION PRESSURE: Estimates of the shortage in low-cost housing vary due to the lack of transparency in Egypt, running between 1m and 1.5m units. However, because the revolution slowed the pace of low-income housing construction in 2011 and 2012, it appears clear that the challenge is greater now than it was before the upheaval began.

“The revolution put some restrictions on the construction sector,” Bassam Daher, the area manager for Consolidated Contractors Company, told OBG. “Many projects, and even future prospective initiatives, were frozen until the new government and legislation is approved. The year 2012 will be a year of transition, and in 2013 we will experience a rebound.”

In addition to being the largest in the Arab world, Egypt’s population is also growing rapidly, at a rate topping 1.5%, according to the World Bank. Almost 40% of the population is under the age of 18, so there are tens of millions of young Egyptians who will need housing over the medium to long term.

As an August 2012 report by real estate firm Jones Lang LaSalle noted, marriages also drive demand, as new households are formed. There were more than 860,000 new marriages in Egypt in 2011 alone. While some couples live under the same roof as their parents after getting married, there simply is not enough housing for this to continue to be the case – a desire to reduce overcrowding, as well as cultural changes, are likely to see more young families moving out and seeking their own accommodation.

According to Orascom Housing Communities, a subsidiary of the Orascom conglomerate that focuses on affordable housing, the roots of the current housing shortage can be traced back to the 1950s, when rent ceilings were imposed to help protect the less well off from rent rises by unscrupulous landlords. However, the rent caps also discouraged private investment in supply at the lower end of the market, as rents were set too low for investors to be sure of making a profit. This led to a stagnation in construction.

By the 1970s, the shortage was becoming more acute, and progress was made in addressing it through government schemes over the following decade. Subsidies on low-cost housing were increased again in the 1990s, but private investment remained limited. The government was finally forced to reduce its level of construction activity in the segment due to a number of increasing financial constraints.

One of the most positive moves made in the last decade was the passing of the Mortgage Finance Law in 2001, laying the groundwork for the development of a mortgage market. The law paved the way for the introduction of the Affordable Mortgage Finance Programme, which seeks to replace supply-side subsidies with demand-side support for housing loans for those living on low incomes. While the scheme is still relatively small, and faces many of the same challenges as the broader mortgage sector (low and volatile incomes, lack of title deeds, low levels of public understanding), it could help provide some financial stimulus to encourage greater private sector involvement in providing affordable housing.

PRIVATE SECTOR ROLE: While there is no strict definition for what constitutes low-cost housing in Egypt, government-built units sold below market rates qualify, as do developments such as Haram City, a suburb built on land sold by the government to developer Orascom Housing Communities at below-market rates in exchange for building low-cost homes. Units there cost about LE100,000 ($16,737), which is considered the upper end of the low-cost spectrum. In general, the cost per unit for low-income housing (at about 60 sq metres) is roughly LE60,000 ($10,042). Sale prices which are lower than that represent a significant discount on actual market rates.

The Ministry of Housing has responded to the post-revolution slowdown in construction with a plan to build 1m units in 22 cities within five years. Also, the Supreme Council of the Armed Forces, the country’s caretaker government after Mubarak’s departure, contributed LE2bn ($334.7m) for social housing programmes, and donated a plot of land south of Cairo in Helwan, Fathi El Baradei, the minister of housing, said in public remarks during November 2011.

The government has a mixed track record at building housing for Egyptians who cannot afford what the free market provides. Units have been delivered, but in some cases corruption or incompetence has been a challenge. The lower house of Egypt’s parliament in March 2012 referred to the country’s public prosecutor a case in which the government had collected LE5m ($836,850) from applicants for units in a low-cost project but still had not begun building, according to reports by local media.

A NEW DIRECTION: El Baradei has said that in the post-Mubarak Egypt social justice will now be a part of the ministry’s agenda. He explained at the CityScape real estate conference in Cairo in February 2012 that this new focus would translate into a strong public-sector role in building low-cost housing.

In cases in which the government plans to use public-private partnerships (PPPs) to build low-cost housing, private partners’ roles would be limited to only contracting services. “Previous experience in national projects has shown that when subsidies are involved, responsibility primarily falls on the shoulders of the government,” he told the conference.

While the housing gap is a serious headache for the new government, the good news for business is that a need for new affordable homes should help stimulate construction sector growth. “The need to provide more affordable housing is ensuring that significant levels of new supply remain under construction,” Jones Lang LaSalle said in a report.

CHANGING PREFERENCES: Though developers have in the past been more interested in building homes for high- and middle-income segments, thanks to the higher margins in these areas, that preference may change. The market for high-income housing is saturated, according to research from DMG, an Egyptian real estate, engineering and hospitality firm.

“The lower-end segment of the real estate market has been neglected, and that contributed to the frustrations that sparked the revolution,” Mohamed El Mikawi, the managing director of UAE-based Al Futtaim Group Real Estate in Egypt, told OBG. “The demand in this segment rises by 300,000 units every year. Admittedly, demand for high-end property has remained a lucrative business, but it serves probably 3% of a population that is nearly 90m people strong. If profits are to be made in the low-end segment, projects have to be initiated on a large scale.”

Even if the government wishes to play a prominent role in low-cost housing, the scale of demand as well as its own goal of 1m units in five years may require it to seek help from the private sector, potentially including foreign firms. “The government will also need to incentivise new foreign investors to enter the low- and middle-income housing market on a mass level because the state will not be able to finance it itself,” Khaled Nasser, the regional director of RE/MAX Egypt, a local branch of RE/MAX, told OBG.

SATELLITE DEVELOPMENT: Jones Lang LaSalle’s research also placed Egypt’s low-cost housing conundrum in a regional context: countries such as Iraq, Saudi Arabia and Morocco are facing similar shortages in the low-cost segments of their housing markets and surpluses in luxury developments. The pattern across the MENA region has been to build large-scale developments on the outskirts of cities, where land prices are lower. That may, however, be a false economy.

Housing the poor far away from employment opportunities in the cities themselves means a need to commute. That in turn results in a higher cost of living for people who live in these exurbs, and more road congestion. In Egypt, as long as automotive fuels are heavily subsidised, it is the government that is paying most of the cost of those commutes.

Addressing the housing shortage, particularly acute in the low-income segment, will be one of the new government’s top priorities. The public sector is likely to continue to play an important role in the construction of affordable housing. But it is becoming ever more apparent that, given constraints on the national budget and the state’s mixed record, the private sector must become more heavily involved as well.

Growing interest from private companies is a positive sign. Likewise, successfully executed projects are indicative that well-planned schemes on a larger scale can be financially viable – albeit alongside substantial amounts of government support. Such is the size of the housing gap – and its growth – that this activity may have to be stepped up fairly considerably.

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The Report: Egypt 2012

Construction & Real Estate chapter from The Report: Egypt 2012

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