Market-based informality — Egypt’s real housing sector

With a population of over 90 mn people and an annual growth rate of c. 2%, Egypt’s demographics are the key driver of real estate demand. Every year, over 800,000 marriages take place, so it’s safe to assume the same number of homes is in demand annually. While demand may be strong, the real question is whether or not supply is keeping up.

The formal answer is, “No.” If we take Cairo as an example, the new, formally developed settlements and satellite cities on its outskirts are geared toward a certain type of consumer — a more affluent one that can afford to spend north of EGP 500,000 on what is now considered a reasonably-priced home. After all, government land auctioned in plots of 500 sqm, at a minimum, can only support a certain level of growth, not to mention luxury compounds and gated communities that are simply beyond the reach of your average Egyptian.

A widely quoted figure to validate the claim of undersupply is that the market currently suffers from a housing gap of some 3 mn units.

This is a staggering figure that, if true, should translate into a considerable population of street dwellers. Yet this is not the case. Take a drive along Cairo’s Ring Road and it becomes clear that the housing shortage in Egypt is not all that short. Thousands upon thousands of red-brick developments built on what was previously farmland provide for a much-needed pressure valve for demand pent-up by the shortfall of the formal real estate market.

The absence of a nation-wide housing policy geared toward the masses has seen Egypt’s informal urban developments grow to constitute some 50% of urbanized areas, including cities, towns and villages; in Cairo the figure is at 60%. Our readers would be surprised to learn that neighborhoods like Haram and Faisal actually started as informal urban developments back in the day when they were simply farmland. Analysts talk about the erosion of Egypt’s agricultural wealth, and this is at its core. Private farm owners opted to divvy up their land into smaller plots, erect 12-story buildings and effectively tap into the bulk of Egypt’s real estate demand with cheap and affordable homes. It is the informal sprawl, or Egypt’s real housing market.

In some cases, said developments are not just plagued by the dynamics that accompany informality — lack of basic services, such as public schools, medical care centers, fire departments, and the like — but can be downright uninhabitable. With the absence of amenities, such as safe electricity, water supply, and sewage treatment, inhabitants find themselves exposed to a host of dangers and disease. What’s more is that residents of these areas are sometimes exploited by crooked, cash-chasing contractors and may easily find themselves living in houses built on weak foundations or none at all.

Today, over 90% of the informal housing market is built on privately owned land. Proximity to urban centers and jobs, payments on installments, no immediate requirement to build, and a mix of middlemen, small-scale developers and construction workers are some of the dynamics of this market-based approach that suits the economic means of many people. Experts from within the cement industry say more than 50% of sales are absorbed by the informal sector, a testament to the scale and size of the market. There’s an economy at play, and the government and formal real estate developers alike would be smart to capture it.

The size and scale of the market leaves no option but to recognize it and formalize the process. In practice, this is what ends up happening anyway. While the government considers these informal areas as illegal, they are slowly recognized, and utilities and infrastructure begin to trickle in; refer back to the Haram and Faisal examples. So if recognition is the inevitable, why not be ahead of the market and incentivize micro-developers to work within a framework? Fast-track land and residential registration, promise infrastructure against minimum setbacks, and percent land allocation for basic services like schools and fire stations are some of the examples that can be deployed in an incentive-based planning policy.

And why stop there? The government together with private sector developers should work to imitate this incremental housing development process. A new framework for land allocation and development with suitable pricing mechanics for affordable housing is the starting point. In short, the development of formal, affordable housing will be through the supply of affordable land laid-out to suit a different urban vitality than what exits in the new satellite cities.

In next in our series, we’ll delve deeper into this topic and share our thoughts on we how the formal market can transform to become more inclusive.