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January 2014 Issue
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IN DEPTH - FDI

By Tamer Hafez

On a recent Saturday evening, Cairo Festival City, a two-story, LE 3 billion mall in New Cairo that opened in late November, was buzzing with shoppers. Roving gangs of teenagers and families towing small children wandered in and out of upscale eyewear boutiques, electronics shops and others among the 300 retail outlets or sipped tea or munched snacks at one of the 95 cafés and restaurants. Alongside department stores like Debenhams and Marks & Spencer stood the mall's 32,000 square meter main draw—Egypt's first IKEA store, where hordes of young couples and future mothers-in-law were busy purchasing rugs, lamps and living room sets by the truckload. Walking about the bright corridors of Cairo Festival City, you'd never know that Egypt is experiencing one of the worst economic slumps it's seen in years.

The project's developer, UAE-based Al Futtaim Real Estate, ultimately aims for it to be a "mini-city," a LE 17 billion development including two luxury hotels, a business park and 700 acres of residential villas and apartments housing some 13,000 residents. Al Futtaim is not the only regional firm currently committing big money to invest in Egypt. Companies like the Saudi-Egypt Construction Company, an outfit co-owned by the Saudi and Egyptian governments, as well as Emaar Properties and Arabtec Construction, both Emirati developers, are also embarking on large-scale local developments.

In the three years since the 2011 revolution, while many foreign investors fled Egypt in the wake of political and economic turmoil, Arabs have showed a greater willingness to stay the course in the face of risk. Foreign direct investment in Egypt dropped from almost $10 billion in 2010, before the revolution, to just $3 billion by the end of fiscal 2012/13. "Foreign investors exited ... directly after the 2011 overthrow of President Mubarak because they didn't know what was going to happen," says Nevine Loutfy, acting chairwoman, CEO and managing director of Abu Dhabi Islamic Bank. Figures show that inflows from the Gulf—which overwhelmingly make up the bulk of Arab investments in Egypt at 94 percent—comprised 14.3 percent of total FDI before the revolution, in financial year 2010/11, and some 43 percent in fiscal 2011/12, namely from the United Arab Emirates, Saudi Arabia and Kuwait, in that order. By the end of financial 2012/13, they made 45.5 percent of FDI. According to statistics from the Egyptian government, Arab investment in Egypt totalled $945 million in fiscal 2010/11; the following financial year the figure increased to $1.064 billion, and total investment reached $1.365 billion in 2012/13.

Analysts attribute the loyalty of Arab investors to obvious commonalities of language and culture. "This makes it easier for them to tailor their products to the tastes and needs of the MENA region consumer," says Malak Reda, a senior economist at the Egyptian Center for Economic Studies. Arab investors also tend to aim for long-term ventures, while other foreigners largely stick with three to five year projects, says Loutfy. "It's a difference in perception based on their investment strategies."

After the Sept. 11 terrorist attacks, wealthy Gulf investors—finding themselves stereotyped as terrorists in many Western countries—began looking more to emerging markets as destinations for their ample petroleum wealth, a trend that accelerated with advent of the 2008 global financial crisis. Egypt is of particular interest to the Gulf thanks to its massive, 80-million strong population, while this enormous market is currently vastly underserved by products and services. "Egypt is a very deep market, and the difference between Egypt and other MENA nations is huge," says Loutfy. A major area of interest among Gulf investors is real estate. With three years of pent up property demand due to political uncertainty, raw materials and labor costs also remain relatively low in Egypt, explains Saudi Egyptian Construction Co. CEO Darwish Hassanien. Meanwhile, property values in Egypt have soared in recent years. Mohamed Alabbar, chairman of Emaar Properties, a UAE-based real estate developer that's behind such projects as Uptown Cairo, a residential development in Moqattam and Marassi, a resort on the North Coast, told reporters at a recent press event in Cairo that real estate costs have spiked by 700 percent in the last seven years. "Egypt is the number one country for Emaar in the region in terms of inflating property prices," he said. "This is why it makes a lot of sense to be in Egypt regardless of the problems we face."

Middle-income housing in particular is seen as having huge potential. The Saudi Egyptian Construction Co. plans to invest in a $100 million project backed by the Saudi and Egyptian governments to develop housing in Upper Egypt and Cairo targeting middle-income residents. Hassanien says its company has already committed LE 185 million to building Zahret Assiut, a 10-building complex in Assiut comprising 232 apartments in sizes ranging from 100 to 140 square meters that will sell at price tags of between LE 3,000 to LE 5,000 per square meter. Arabtec—which is already building two 23-storey luxury apartment blocks called The Nile Towers in Maadi—launched a subsidiary dedicated to medium-income housing construction last month. Its first task is negotiating with Egypt's Ministry of Housing on possible real estate opportunities. "We are serious about coming in," says Hasan Ismaik, the head of Arabtec. May Abdel Hamid, chairwoman of the Egyptian Mortage Finance Authority, says the sudden interest in such projects reflects a shift driven by changing economic realities to projects in which demand is assured as opposed to high-end developments that solely target affluent consumers. "In Egypt, a lot of people are getting married, and not all of them are rich," she says.

Driving such projects is a chronic shortage of affordable housing for Egypt's ballooning population, especially for middle-class residents. "Gulf-based investors are moving into sectors with solid demand. The upscale real estate market is now saturated. So its natural they are now looking at market segments which are not saturated," says Abu Dhabi Islamic Bank's Loutfy. According to Rehab Taha, a real estate analyst at Prime Securities, 2014 will see a projected housing shortage of some 84,000 units. "A company could find good opportunities there," she says.

Of course, less developed markets like Egypt also carry investment risks due to such factors as an excessive and inefficient bureaucracy, lower levels of skilled labor, unreliable services and political instability. Obstacles facing investors include an entrenched Egyptian bureaucracy and a dearth of land that's ready to be developed. "Right now, the Ministry of Housing is not offering us infrastructure-ready plots," says Hassanien, adding that "the government needs to react quickly to meet this demand boom" by speeding approvals and focusing on laying infrastructure for available plots at a faster pace.|

Another major concern is posed by cases in which projects have been tied up by corruption allegations stemming from regulatory problems, especially those tied to the Egyptian government's opaque contract bidding system. In other cases, projects have simply been threatened by bureaucratic inefficiency. For example, construction of the Cairo Festival City mall was initially put on hold by regulatory delays, and Egypt's shifting political landscape further enmeshed the project in disputes. That Al Futtaim pushed forward on the project despite such challenges is "a testament to our confidence in the Egyptian market and the government," said Mohamed El- Mikawi, the firm's managing director. Al Futtaim has currently gained approvals to commence with phase two of the development this year, including building five office blocks, 600 villas and 2,000 apartments, creating an estimated 3,000 new jobs. "We are definitely confident in the market, especially with the support the Gulf governments are giving Egypt," he says, referring to the $12 billion in aid that has flowed in from Arab Gulf countries supportive of Egypt's military-backed interim government. The Mortgage Finance Authority's Abdel Hamid says a new, more transparent system for allotting government land to prospective developers that came into effect in September should minimize the chances for graft and attract more investors.

In the meantime, back at the Cairo Festival City mall, the shoppers stuffing their cars with flat-pack furniture attest to the fact that economic doldrums or not, there is plenty of profit to be made by investors who manage to hit the right note with Egyptian consumers.

                            


 


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