Coffee with Magued Sherif, Chief Executive Officer, SODIC

Four months into his tenure as the new chief executive officer of SODIC, Magued Sherif (official bio) is fully readjusted to life in Egypt, saying that “life in the suburbs has its charms.” The early-rising exercise addict (he’s out of bed at 5am for a morning run and gets in a workout or squash game after work) says he’s eyeing expansion to new locations in Egypt and, eventually, the wider MENA region, confident the company has the team and the playbook it needs to replicate its success beyond the confines of the capital city.

SODIC proved its distribution network has muscle with the sellout of phase one of Caesar on the North Coast in the summer of 2015, but like all developers faces a challenge restocking its land bank in the Greater Cairo area and runs into a price-driven wall in looking to capture the market opportunity by a 3.5 mn unit market gap for new homes that grows at the rate of about 400k units each year.

Sherif joined SODIC after an 18-month stint in the United States, where he was building his own business before now-former SODIC boss Dasha Badrawi rang him up to see if he was interested in talking about returning home to run one of the nation’s highest-profile real estate developers. Ultimately, he says, the opportunity was just “too compelling to pass up.” An architect and former consultant, he was general manager and board member at Palm Hills Developments for more than a decade before becoming CEO of Majid Al Futtaim Properties in Egypt (2008-11) and then CEO and MD at Hyde Park (2012-14).

In the first of our new monthly “Coffee with…” series, we sat down with Sherif for caffeinated beverages and a chat about the issues of the day. Edited excerpts follow:

THE TAKEAWAYS

1. Land prices are becoming “unsustainable” and GAFI needs to look at putting more than its planned 5 mn feddans p.a. on the market to ease price pressure.
2. Changes to real estate policy will favour developers with liquid balance sheets, proven track records.
3. Revenue-sharing co-development agreements with legacy developers will allow tier-1 developers to more rapidly rebuild land banks in key locations in the Greater Cairo Area.
4. A West Cairo airport would unlock significant value for developers and landowners alike.
5. Rent-to-own model is a market opportunity, but not for developers who are already providing quasi mortgage finance.
6. SODIC targets 25-30% of revenues from recurring sources, will make the stock more attractive to pension funds.

ENTERPRISE: You were out of the domestic market for about 18 months as you started your own business in the United States. What changed in the period you were out of circulation locally?

MAGUED SHERIF: The most noticeable thing was the phenomenal change in land prices when buying from the government, which has definitely had an impact on end-product pricing, making it prohibitively expensive in some cases. It’s happened over a period of years, but it now risks impacting the market going forward.

The other thing I’ve noticed is that that as prices rise — as the investment becomes more substantial — home buyers are turning to larger, more credible players rather than investing with or buying from with smaller developers. We’re definitely a beneficiary of that trend.

E: Were there any surprises?

MS: Pleasant or unpleasant? [Laughs] I like to see the glass as half-full, so I think the surprise to the upside was that the slowdown in planning approvals and building permits that we saw post January 2011 is changing for the better. I’m seeing commitment from government to improving turnaround times, and it’s a continuous process.

Another surprise — and I can’t really pass judgement as we speak now whether it’s pleasant or unpleasant — is the changing mechanism through which land is sold to investors. It’s now happening through GAFI via an announced pricing strategy, and bidding is based only on how much you can increase your down payment. If every bidder is equal in terms of the down payment they’re offering, then it goes to a draw, a lottery.

We’re also moving toward the entry into effect of a policy that classifies developers based on their financial strength and their track record. Qualification to bid for land will be on the basis of a developer’s track record with similar-sized projects and the health of their balance sheet. It could squeeze out the speculators and flippers. This is in a near-final form with the Ministry of Housing and is yet to be approved, but it could go a long way toward improving the chances of credible players to replenish their land banks. It’s really about replenishing this year.

E: SODIC and Heliopolis Housing have entered into a co-development agreement, as have PHD and MNHD. Will we see more “modern developers” tying up with companies that control desirable legacy land banks, but not necessarily distribution platform and balance sheets to develop them?

MS: Revenue-sharing co-development agreements are one way for serious developers to replenish their land banks without incurring significant up-front CAPEX charges. And it’s definitely a way of replenishing land banks without being reliant on the government as the sole source of land. That said, it’s really not yet been tested — none of the 4-5 similar agreements that have been signed have been road-tested, so there will be a learning curve. That said, Heliopolis has been great to work with, and we expect within a month or so to sign the contract with Heliopolis with a view to taking a product to market in early 2017.

E: How large is the project?

It’s 655 feddans, so about 2.5 mn sqm — about the size of Zamalek.

E: Where’s the growth coming from in the market this year and then on maybe a five-year horizon?

MS: In the residential segment, there’s a 3 mn-unit gap in the market. It’s widening at about 400k units a year, and developers are building perhaps 20k units a year. That’s a yawning gap at every level — even in the upper-middle-class segment, which is just 5-10% of the total market. So I see massive opportunity in middle-income and affordable housing, if the land price can be made to work.

E: How do you make it affordable?

MS: Land price is obviously key, but there are many other challenges to mortgage finance in Egypt, from undocumented home and land ownership. Then there’s the fact that with interest rates and tenors where they are, mortgage debt in Egypt would account for under 1% of GDP compared to, say, 13% in countries such as Morocco and much higher in European countries — in the Netherlands and Denmark, it is over 100% of GDP.

E: So developers, in the meantime, are providing what amounts to short-term mortgage finance for upper-middle-class homebuyers. Given the mismatch you’re describing, is there an alternative?

MS: I’d like to think of creating entities that own real estate and provide a rent-to-own type of product for a segment for whom mortgage finance isn’t affordable. But this would — again — have to be subsidized in one form or another by the government. It would involve the creation of bodies ready and willing to live with the property for a substantial number of years.

The other thing that will help in the long term is the government’s drive to include everyone in the tax system. If you have clear, reported tax statements as an individual, it’s easy to assess your credit risk. So lease-to-own would, again, help as an interim measure for people who have documented incomes.

E: What about commercial and office space?

MS: Despite the growth of the retail sector, the market is underserved by decent retail space. The two major obstacles are, number one, securing land for retail developers to build shopping malls. It’s always been an issue — finding the right location, at the right price to deliver a feasible project. The second challenge is that international retailers are reluctant to open new malls or to inject new capital into existing properties because of uncertainty about the future.

E: What uncertainty?

MS: It’s not even the FX situation; it’s knowing that a transaction into which you enter today won’t be reversed in the future. Government is doing its best right now to promote investment and to promote comfort about the future — what happens with the parliament or the next government? Will they respect today’s contracts?

E: Where are the opportunities on the commercial side?

MS: There’s huge demand for decent, smart space for professionals, but it’s primarily on the eastern side of Cairo for the simple reason of its proximity to the airport. There are significant gaps in terms of supply, demand and pricing between east and west Cairo. The west isn’t struggling, but the east side is doing growing faster.

E: What would change that?

MS: We need a commercial airport on the west side of town. It’s that simple. The airport is the key: Multinationals and other institutions want proximity to the airport. It’s a requirement of their security policies, and it’s a requirement in terms of efficiency when you have senior people coming in and out for meetings. There are ongoing discussions of turning the air base into a commercial hub, and that would be huge for this side of the city. But it remains in the discussion stage.

E: Where do real estate developers face FX worries?

MS: As a residential property developer, it’s core and shell, so there’s minimal FX impact. But when we get into a fully finished product such as office space — where you’re relying on imported materials and you have a mechanical, engineering and plumbing component — the FX risk is higher.

E: Real estate is a fragmented industry — does it lend itself to roll-up plays? Will there be M&A plays to acquire new land banks?

MS: That’s a difficult question, but for that to happen, we need a more mature stock market that rewards you for performance, that recognizes actions as such. The stock market doesn’t represent the true value of a company. And fundamentally, the market is so large and so underserved that there’s room for anyone — consolidation won’t provide higher value to shareholders.

E: The industry has been on a recurring-revenue drive since maybe mid-2011, when it became clear that there was going to be an extended slowdown post-25 January. Where does SODIC stand on this?

MS: They’re a very important element in our business plan going forward. It has been in the past, but I don’t think we were properly structured to provide recurring income. Today, we’re creating teams dedicated to leasing in the commercial / retail leasing space. We’re introducing these kinds of assets in our new developments. We’d definitely like to see the weight of recurring income at 25-30% of revenues. Recurring revenues will make our stock more attractive to a class of investors including pension funds.

E: What’s in your business plan? What kind of growth opportunities interest you?

MS: Investment Minister Ashraf Salman was at AmCham recently saying GAFI will be looking to roll out about 5 mn feddans for development on an annual basis. We think that number should be higher — that a larger number would help bring prices back to a more reasonable level. So until we have a clear rollout plan for Cairo and other governorates, expansion is purely opportunistic for us at the moment.

Within that context, Caesar was very successful for us on the North Coast, where we are definitely looking to grow our brand. We’re also very interested in the Red Sea — Ain Sokhna, yes, but we’re very interested in parcels of land further south. What’s happening down in Hurghada, in Sahl Hasheesh, in Soma Bay is amazing.

E: What about the Mansouras and the Alexandrias? The second cities.

MS: They’re definitely on our radar as the government makes clear its rollout plan, and we’re working on developing a “SODIC manual” of how we market and develop communities This will facilitate our expansion into different and more remote geographic areas while ensuring the same quality of delivery and living communities that SODIC offers its client base everywhere.