Castles in the Sand
Castles in the Sand
Available at: http://www.businesstodayegypt.com/article.aspx?ArticleID=7870
Photo Credit: Courtesy of DAMAC
One-year-old DAMAC has a unique perspective on the Egyptian construction market and the much-hyped real estate bubble
By: Ethar El-Katatney
Real estate behemoth DAMAC has certainly capitalized on the mounting demand for houses in Egypt. Drawing from a seemingly endless stock of capital, they have flooded the region with billboards and commercials boosting their enormous projects. Welcomed by an investor-friendly government, the property developer is optimistic about their prospects in a country where the overwhelming majority of the population can’t afford their product.
DAMAC Properties is the real estate development arm of DAMAC Holdings, a multi-billion dollar corporation based in Dubai. Established in 2003, DAMAC Properties is worth over $30 billion with projects spread over 450 million square feet in five countries throughout the Arab region. It is known for some of the most successful residential and commercial properties in Dubai and the Middle East, with an ever-expanding regional and international presence.
In December 2006, DAMAC Properties made its debut in the Egyptian market, and has since announced three major projects: Gamsha Bay on the Red Sea, Park Avenue in Sixth of October City and recently Hyde Park in New Cairo.
Ziad El-Chaar, the general manager international of DAMAC Properties, is a Lebanese citizen who joined the company as Vice President of International Sales in 2005. He has been in Egypt for the past year heading the start-up operations of DAMAC Properties Egypt and launching the three projects while simultaneously managing operations in Jordan and KSA.
“When DAMAC was successfully growing in Dubai, the decision was taken to diversify out of Dubai. We studied various cities and various countries,” says El-Chaar. “We looked at different options and then branched from Dubai into Abu Dhabi, Jordan, Qatar, and Lebanon. We like to develop into areas where as much as possible the culture is close to ours, we speak the language, there’s a big talent pool, and there is potential for success. Egypt proved to be perfect among those countries. In Egypt, upper development is an established field, Egypt’s economy is growing and international demand is growing — Egyptian expatriates and foreigners from around the world are demanding a house in Egypt.”
With over 35 sales offices around the globe, DAMAC has seen huge interest in Egypt from clients in countries like the United Kingdom, Italy, Kuwait, Germany and even Kazakhstan. El-Chaar points out that DAMAC researches thoroughly before any attempt to enter a new country. And based on that research, Egypt is well on its way to becoming one of DAMAC’s largest investment areas outside of Dubai, and the market is seen as being strong and sustainable, with unlimited potential.
From a strategic point of view, Egypt seems the perfect place to invest. With economic growth of 7%, not to mention the largest population in the Middle East, it has a lot of potential. For real estate developers, the relatively cheap cost of land, the natural beauty of Egypt’s coastline and demand that far exceeds supply both at home and abroad, make for an enticing opportunity.
Not to mention that the Egyptian government has helped make foreign real estate companies’ entry into Egypt a relatively smooth transaction. Prime Minister Ahmed Nazif and the Ministers of Tourism, Finance and Transportation have all applauded and aided DAMAC’s entry. El-Chaar concurs:
“Our experience in Egypt has been tremendously positive, and we were very impressed by the ministries. We see a big commitment to streamlining the procedure of setting up a business, opening up to foreigners to buy property in Egypt, auctioning lands and making everything more transparent. Most of the things that hindered foreign investment are changed or are in the pipeline. This is very motivating for us and definitely there is a lot of attention given to the foreign investor.”
But in a country where the annual per capita income, according to 2005 World Bank figures, is $1,260, this approach has raised some ire. The “No to Selling Egypt” anti-governmental group accused real estate developers of buying cheap desert land from the Egyptian government and reselling it at staggering prices to a slim segment of society. This, they said, caused an enormous surge in Cairo’s real estate prices that the majority of Egyptians, who could barely afford property a decade ago, will now find completely prohibitive.
“As an example, at least from our side, we bought land in public auctions at very high prices,” says El-Chaar, in answer to the allegation that real estate companies are making exorbitant profits. Although DAMAC is a privately owned company, it bought the land for Park Avenue in New Cairo from the government, and so the figures are public. According to Housing Ministry officials, DAMAC Properties bought 1,500 feddans for LE 4.74 billion. “We were the highest bidders in the first auction,” says El-Chaar. “And yet the government chose the three highest bidders for a second auction.”
DAMAC advertises in accordance with the tastes of their target market — mostly A and A+ segments, that is, wealthy Egyptians who earn $100,000 or more annually. Park Avenue and Hyde Park are named after their European and American counterparts. Their website is in English, their slogan is “Live the Luxury,” and their marketing includes the lines, “The most expensive lifestyles in the Middle East” and “Sorry, the DAMAC luxury is not for everybody.”
“Pricing is a function of supply and demand,” explains El-Chaar. “We’ve chosen from day one, when we launched, that DAMAC is a luxury lifestyle.” And even though this means the exclusion of the majority of the Egyptian population, it also means providing them with much needed jobs. Independent statistics put the unemployment rate as high as 20% in Egypt, with approximately 300,000 university graduates entering the job market each year.
“We believe that every country should be run by its countrymen,” says El-Chaar. “99% of our employees in countries outside the Gulf are from those countries, and the same applies for Egypt. We recruited 170 people from Egypt in the last year and only three are non-Egyptians, including myself.” But if architects and engineers with technical expertise in luxury design are not available in Egypt, then the company will bring in foreign employees. Even so, DAMAC is willing to train top talent.
“We are opening [the] doors for young, talented graduates in all engineering disciplines to apply to our company,” explains El-Chaar. In November 2007, DAMAC announced their engineering student scholarships for Egyptians. “[Every year we will] choose top students, recruit fresh graduates, train them in Egypt or in our head office and allocate them to site offices. They will be employees getting a monthly salary, and we will also provide them with scholarships to get their master’s degrees.”
The Real Estate Bubble
With a surplus of stock accumulating fast and prices rising to all-time highs, some sceptics warn that the Egyptian real estate bubble is building — and could be in danger of bursting. If companies depend too much on credit and prices then decrease, the possibility of collapse in the construction sector is not inconceivable.
But others point to the fact that demand, economic growth, discretionary income and population increases will keep prices rising. Along with the real estate boom, there has been a more than equal growth in the banking industry, with developments in loan and mortgage facilities. Prices and market dynamics must also be taken into consideration.
When asked his opinion of the so-called bubble in a press conference, Hussein Sajawani, founder-owner and chairman of the DAMAC Group said, “The surge in Egypt’s real estate prices has been gradual, so I doubt that it is a bubble, I would rather call it a reawakening of the Egyptian real estate market.”
Likewise, “we see a lot of real demand,” says El-Chaar, “we don’t see the bubble. The economy is growing, the population is growing, and the international demand is growing. There is definitely a boom in demand in the Gulf from the Egyptian expats who live there.” Despite the huge increases in Egypt’s prices, one cannot deny that they are still far lower than their equivalents in other countries across the region.
“So prices will continue to rise,” continues El-Chaar. “Compared to the region, prices in Egypt are cheaper while the economic value of the market is higher, and so they should rise until they are in line with prices in the region. They will continue to rise but not at the same percentages we have seen in the past few years, because we have a lot of developments coming into the market.” He adds that although the market is not saturated and that competition is welcome, a host of new developments may not be ideal.
If newcomers enter the market, could supply exceed demand?
El-Chaar shakes his head, explaining it won’t happen anytime soon. “There is a migration from the traditional downtown of Cairo to new locations in the eastern and western areas,” he explains. “And so you will see a lot of evolution in those areas. In the past they have developed well in terms of residential properties, but we still need to provide all the services to make them the new centers of Cairo. And this is happening gradually. In New Cairo you have AUC, GUC, Choueifat School, two hospitals coming up, et cetera. This is proof that services are coming in to catch up with the residential demand in those areas. In five or six years, the area will be completely developed.”
This will, of course, trigger another wave of demand by those who have the money to move out of the city, but haven’t because they believe there will be a dearth of services and facilities. Considering the residential compounds in the Tenth of Ramadan area 10 years ago, where demand was low due to lack of services, it becomes clearer why adding these services would encourage Cairenes to move to a cleaner, newer city center.
“Very soon in Egypt,” adds El-Chaar, “we will begin serving the upper middle class segment. We are a luxury lifestyle provider. We are not too expensive — we provide luxury at all levels, and even if we are providing a middle class product, it is provided in a luxurious manner.”
So what will they offer the ‘middle class?’ “New units through an extremely competitive financing model with several banks and financial firms.” And costs? “The price of the unit would vary between LE 400,000 to LE 800,000, and definitely there will be a type of mortgage to help in the purchase of that unit.”
Although the definition of ‘middle class’ can be contested, that DAMAC is trying to offer something for everyone within its target market cannot. In Park Avenue, for example, retail shops and office spaces cater to different needs, with the former ranging from 40 to 500 square meters, and the latter from 79 to 1000 square meters.
As the only real estate construction company to offer 15 years of maintenance on their properties, DAMAC has a solid footing. What they have now will provide Egyptians with first-class residential, leisure, office and retail space in the next 10 years. DAMAC’s commitment to Egypt will likely create jobs, attract investment and make at least some people very happy. As for the critics? In the end one must remember that, before all else, private enterprise aims to turn a profit. Whatever wider benefits DAMAC brings about will almost assuredly be results of this pursuit.
Whether or not the Egyptian real estate market will remain stable over the longer term remains to be seen. And just how DAMAC responds to whatever challenges arise, from the fight for talent (as demand for architects, consultants and contractors increases) to the infamous bubble, will be interesting to watch.
DAMAC in Egypt
Although DAMAC says it has no upcoming plans for more projects in Egypt, its three projects provide Egyptians with more than enough options, whether they’re looking for a villa, retail space, a holiday home or an office.
Still in the design phase, the 32 million square meter tourism project located just north of Hurghada, and billed as a “township,” will include townhouses, villas, apartments, five-star hotels, marinas, restaurants, golf courses, spa resorts, shopping boulevards, sports facilities and cinemas. It will be made up of nine districts: Marina, Marina Park, Coral Golf Course, Sea View Crescent, Creek Retreat, Bay, Peninsula Luxury Villas, downtown Ghamsha and Theme Park.
Phase one is expected to be launched next year, and is targeting tourists from the European market who desire ‘hot’ holiday getaways, and second home buyers who want a holiday or retirement home. The most ambitious of DAMAC’s three projects, Gamsha Bay, will cost $16 billion (approximately LE 90 billion) of investment over 10 years time and may very well give Orascom’s El Gouna resort a run for its money.
Located in Sixth of October City on the Cairo/Alexandria Desert Road, this LE 2 billion project covers an area of four million square meters. It will include a mix of office, retail and residential spaces. The architecture will blend modern designs with traditional Middle Eastern structures. Banks, bookstores, healthcare facilities, high-end fashion stores, restaurant chains and fitness facilities will complete the picture. Launched in July 2007, phase one of the project is 40% complete and sold out. Phase two was launched in November 2007 and its expected delivery date is end of 2010-mid 2011.
Announced in December 2007, Hyde Park is the newest of DAMAC’s ongoing projects. Located in New Cairo, Hyde Park comprises 4.7 million square meters of a 6.3 million square meter residential project with an estimated investment value of LE 30 billion.
It will be an exclusive residential development with approximately 3,000 detached and semi-detached villas in three architectural styles: Neo-Classical, Italian-Country and California-Spanish. Prices start at LE 2 million. Leisure services will be available including a huge ‘members only’ country club, sports center and spa.
Environmentally conscious, DAMAC has devoted 60% of the project to greenery, with a one million square meter landscaped park and bodies of water surrounded by seven kilometers of trails. Excavation and construction work is set to begin in June 2008, with the first phase slated for completion by the end of 2011. bt