In an interview with Daily News Egypt, co-CEO of Palm Hills Development Tarek Abdel Rahman and also CEO and managing director of Palm Hills Mohamed Sultan called upon the government to offer more lands linked to facilities and services to ease the increasing cost of land.
The developers at Palm Hills expressed a desire to enter into partnership, seeking to put an end to auctions that have been pushing prices up in the wake of the scarcity of available lands. However, while real estate developers are intrigued by the government’s hint that it will include developers in its plans to construct low-income housing units, they have also expressed the need to balance between sustainable profit margins and affordable prices for citizens.
Abdel Rahman said that the Egyptian real estate sector has potential driven by the huge annual demand. He pointed out that some 900,000 newly married couples seek housing units every year, of which, only 70,000 are addressed by major real estate developments companies that can only provide 20,000 units.
Palm Hills aims to boost its recurring revenues share of its total profit to 20%, through commercial and administrative units, which gives the company’s resources stability and sustainability.
Sultan said the company plans to deliver 1,800 housing units in 2016, compared to its record of 1,600 delivered units last year. He noted that Palm Hills implements EGP 1m worth of constructions every hour.
What does your work plan include for the coming period? And what is the status of your current projects?
Tarek Abdel Rahman: We have already completed three out of 15 total projects, including the Village east of Cairo, of which 60% is currently occupied. We also have the Hacienda White 1 on the North Coast, which is fully prepared to host visitors next summer. The company has also completed its project in west Cairo, the Bamboo Extension.
The company is currently implementing 12 projects, five of them in east Cairo, another five in west Cairo, and two on the North Coast. We expect to complete these projects during 2017 and 2018. Sales, construction, and delivery operations have been on-going for two years.
Palm Hills plans to complete two projects in east and west Cairo this year. This prompted us to meet with Yasseen Mansour, the company’s chairman, and the rest of the management board to discuss the nature of company’s work after completing the current projects. We agreed on the need for expansion.
What is the expansion plan?
TAR: We partnered with Madinet Nasr for Housing and Development to develop the Sarai project on 100 acres east of Cairo. We put forward the Capital Gardens project that includes 2,500 housing units built on an area of 465,000sqm. The project’s sales are valued at between EGP 5m and EGP 5.5m.
We signed the contract with Madinet Nasr for Housing and Development in August 2015. In December, we offered 400 units of the first phase. All of those units were sold within a week, covering all of east Cairo with residential apartments.
Palm Hills assumes responsibility for construction, internal development, and marketing of the project. Madinet Nasr provided the land of the project and linked the project to facilities. The project comes in four phases.
Palm Hills will receive 64% of the project’s revenues and 36% will go to Madinet Nasr for Housing and Development.
As for villas, Palm Hills partnered with the government to implement a 500-acre project in New Cairo. The contract for this project was signed in December. The American SWA firm will finalise the general scheme for sales to begin during the last quarter of 2016.
We expect sales to reach about EGP 35bn. This project will also boost east Cairo’s share of apartments and villas to include an area of 600 acres.
What about the North Coast?
TAR: Palm Hills is the largest real estate developer of the North Coast. We will complete the Hacienda White 2 and Hacienda Bay projects by the end of 2018. We will also enter partnership for a 138-acre real estate development project, in addition to negotiating to buy 300 to 500 acres from owners to expand in that market.
As for the west of Cairo, the company’s projects will be completed by the end of 2017. Moreover, the company is not looking for new plots of land in the west of Cairo.
Palm Hills currently covers the most important areas in Egypt: west and east Cairo, as well as the North Coast. This means that any client who walks into a company sales office will find something to buy.
What about commercial spaces?
TAR: The company currently has commercial spaces on 350,000sqm. We put aside 8% to 12% of residential lands for commercial purposes. We are building two malls in eastern Cairo and another in western Cairo on 5,000sqm, in addition to another administrative building in west Cairo.
The commercial component of the company is always aimed at serving the urban communities of the company, as well as neighbouring areas.
Recurring revenues have been driving the market since 2011. What is your position on that front?
Mohamed Sultan: The company aims to increase the recurring revenues share of its profits to 20% by 2020, driven by expanding into commercial real estate, which will give the company’s financial flow stability and sustainability.
The company’s portfolio of land currently stands at 26.5m sqm, of which about 5m sqm are in Saudi Arabia and are currently up for sale.
What about the financial indicators of the company: sales and profits?
MS: The company targets to deliver 1,800 housing units during 2016 compared to 1,550 units in 2015. We aim to achieve sales of over EGP 6.5bn, a net profit exceeding EGP 650m, and constructions valued at more than EGP 2bn.
The company achieved a net profit of about EGP 1bn at the end of 2015, including EGP 300m of non-operating profits from the sale of the land.
Palm Hills completed EGP 1m worth of construction every hour and it is capable of doubling this figure according to market needs and the availability of skilled labour and purchasing power.
The company, which is the second largest real estate company listed on the Egyptian Exchange, distributed EGP 0.15 per share in 2015 earnings, which is the first cash distribution in the company’s history. This will continue. We will also give away one free bonus share for every 20 shares. This has not happened since 2008, and will boost shareholders’ confidence.
The company’s earnings jumped by 192% in 2015 to record earnings of EGP 1.031bn, compared to EGP 353m in 2014. Revenues also increased 69% to EGP 3.561bn.
Moreover, the company set a new reservation record in 2015 at about EGP 6.3bn, versus EGP 5.5bn in 2010.
TAR: The company’s available liquidity stands at about EGP 1.5bn as customers’ front payments support the company’s position.
How do you see the future of real estate development in Egypt?
TAR: We are very optimistic about the future of the Egyptian real estate market, especially as 2015 was a great year for all developers. The market still has potential to grow in light of the increasing demand for housing and scarcity of supply on all levels.
The market has great competitive elements. About 900,000 recently married couples seek housing every year, while current development capacity only addresses 70,000 of them and provide a limited number of some 20,000 units.
In addition, a large percentage of downtown Cairo residents move to new urban communities, as all major companies, national and international, and banks are moving to those new cities, as well as schools and university. Collectively, this offers a new integrated and attractive environment.
The difficult economic situation drove the government to cut down on its allocations to raise the efficiency of the infrastructure within the Cairo, which makes it less attractive compared to areas of Heliopolis and Nasr City.
Our role as real estate developers is to encourage people to own residential houses in integrated compounds, away from downtown traffic. The market will continue heading north, due to the competitive ingredients.
MS: Demand is the main fuel for the real estate market. There is a hard question that needs an answer: how to build a housing community tailored to meet the request of all segments of the population, and how can the state cooperate with the private sector to balance all givens and cover the annual demand on housing?
The production of housing does not only concern concrete—but it is much more. It is about creating an integrated environment for Egyptians to assure bringing up new psychologically stable generations for the society that will be able to produce and work for the development of the country.
The company is currently looking into finding a more efficient, faster, sustainable, and cheaper mechanism to be able to offer less expensive housing units. We also provide training for workers to raise their abilities and productivity at the lowest cost possible while ensuring the highest quality.
Establishing less costly housing also relies on the element of land, which is available, but not enough.
Does the government have a clear real estate policy?
MS: We can observe a clear and significant shift in the government’s policies toward low-income housing through its hints that it will partner with the private sector for this type of project. This is a very good trend. However, it lacks the mechanism that determines the role of the private sector and the government in the production of housing units suitable for the ordinary citizens.
Over the past years, the government sold lands and used the revenue to build low-income housing units. However, evidence now suggests that the government is leaning toward requesting the help of real estate developers. We welcome such a step and we are ready for it, as soon as we can reach a mechanism that meets the expectations of all parties.
Low-income citizens need a long-term financing scheme that offers low interest rates for housing units, which burdens real estate developers forcing us to become financiers and developers at the same time.
For a real estate developer to build low-income housing, the equation should include free provision of land from the government so that developers can produce something that fits this segment, while still generating profit for the company. Palm Hills is capable of producing housing for all segments of society.
TAR: The company has a variety of experience in property development, whether in the field of marketing, construction, sale, or design. It can cooperate in the implementation of the state’s plan to provide low-income housing, provided that the state secures free land so we won’t lose.
The Egyptian market needs houses for 900,000 annual marriages, while developers only offer 20,000 units a year. That creates a gap of 730,000 units that the government alone cannot cover.
I call upon the government to pen a scheme that enables real estate developers to build low-income units so that they can contribute to solving the housing problem.
How do you see the current prices of land? Do you think current offerings are enough to ease the pressure on land prices?
TAR: The market suffers from a lack of land provisions, which is the main factor driving the housing prices up. This does not mean that Egypt lacks lands, but we are short of lands that are linked to facilities.
But I am optimistic for the next phase, as the offerings in the New Administrative Capital will ease the pressure on land prices.
It is illogical and impossible for any developer to make profit when the price of land per square meter has risen to EGP 5,000. This pricing will of course lead to losses and must be reconsidered.
I ask the government to offer more lands that are linked to facilities.
MS: The state should implement a module that allows developers to help in linking facilities to lands, instead of burdening the state with the process, which hinders expansions outside of residential areas.
Offering readily prepared lands will surely ease the prices of lands and housing units.
How do you see the mechanism of allocation of land based on the advances offered by the developer and the draw, if advances are the same?
TAR: This is a good approach that means that there is a tendency to classify developers according to their financial situation and their portfolios, especially if tenders stipulate implementing similar projects in terms of size and cost.
The move also will eliminate speculators and lead them out of the market, which will enhance the chances of credible companies.
MS: We must separate between the government being a land dealer that seeks revenues to implement projects and a body that is offering lands for overall urban development, which is what should be followed to meet the annual housing demand.
Raising the price of the land reduces the chances of solving the housing shortage crisis. There is another problem of financing the units, where a suitable long-term low-interest financing scheme can enable many to buy houses.
The leasing model is essential to solving the housing problem. Buying an EGP 1m housing unit could be affordable for low-income if the instalments were spread over 20 years with rates less than 40% of their income.
Mortgage debt is still very low at less than 1% of GDP, while it amounts to 13% in countries such as Morocco and the Netherlands, and 100% in Denmark.
As a real estate developer, I sell before construction, due to the poor economic situation of the country. Developers are forced to operate as financiers as well as being developers. Customers pay over 5 years, even though units are delivered within three to four years.
Banks do not finance units that are under 70% of construction, which adds more pressure on developers.
Is the solution a rent-to-own scheme?
TAR: Rent-to-own is not the solution for the housing crisis. The solution is finding an easy and attractive financing formula for housing. It is universally acknowledged that I borrow to buy a house.
How do you see entering into partnerships with developers?
TAR: Palm Hills sees partnerships as a way to develop unexploited lands. The company has entered partnerships with many parties, including Madinet Nasr to develop 100 acres east of Cairo, and with the government to develop 500 acres east of Cairo, as well as a partnership to develop 138 acres in the North Coast. We are currently seeking to acquire lands in west Cairo.
Real Estate development is still just staring. Do you think developers will follow the merger and acquisition model?
TAR: I rule out the possibility of mergers becoming a trend in the short term, but they will take place in the future, especially as small developers may disappear from the scene or merge. Mergers give companies competitive advantages to achieve integration.
How do you assess the new administrative capital project? Do you think Egypt needs it now?
MS: The New Administrative Capital will inevitably contribute to the creation of a sizeable movement in the real estate market. Our contribution in the project is conditional on the general plan.
The project is good. It links Cairo to the economic zone of the Suez Canal. I hope to someday see urban communities 400km away from Cairo.
The new capital will inevitably contribute to easing the pressure on central Cairo after moving government buildings and the parliament there. However, it requires a plan to invest in the real estate wealth in downtown Cairo after moving ministries and government buildings from it.
Egypt is not going to invent the wheel. The United States, during the sixties and seventies, which saw major densities, moved its government buildings and developed city centres. South Africa and England did the same thing.
Any thoughts to create new communities away from the crowds is positive, but must be accompanied by a plan to develop the old area to avoid its transformation into more dense residential areas. Unfortunately, over the past years, the heart of Cairo turned into a blend of residential, administrative and recreational, educational, tourism, and government areas, which increased the population density and congestion there. Downtown Cairo must be shaken to restore its magnificence.
TAR: About 2 million people wander the streets of Cairo every day. In the morning, 20 million people live in Cairo, while that number drops to 18 million at night. This burdens utilities and streets. It is time to decentralise.
Officials responsible for the real estate sector are becoming more creative. Starting with a new administrative capital will revive the real estate market by offering lands through partnerships, as well as involving the private sector in low-income housing.
MS: The private sector has a strike force capable of undertaking construction work. Instead of focusing on the very small 70,000 segment of the total annual demand of up to 900,000, it should work to raise efficiency and productivity.
The demand exists, but the offers are not enough. Companies are capable of establishing the required housing types. The marker also needs ready lands. However, the most important factor is raising the efficiency of labour and restructuring the work force to create a base that can raise the production levels of the construction industry.
What about your moves into foreign markets?
TAR: We are examining all neighbouring markets, especially those similar to the Egyptian market, and enjoy a broad consumer base. However, we have not announced our intention to enter any of the African markets specifically.
How can we reduce the cost for buying residential units?
MS: Price reduction requires two main things. First, there must be a reduction in the cost of building the units, which requires cheaper land. Second, there must be a financing scheme that requires only 40% of the salary of low-income citizens at varying interest rates spread over more than 15 years.
Is Palm Hills threatened by the dollar shortage?
MS: Production operations cannot be separated from the value of the US dollar, but the degree to which they impact each other differs from one model to another. Most of our operations at Palm Hills are in Egyptian pounds, including production input, sales, and wages. Hence, the dollar fluctuations will not have great impact on the real estate sector.