Thursday, 4 August 2016

There’s a reason middle-income housing doesn’t exist — here’s how the government can fix it

Cairo did not become what it is overnight: The current state of the historic capital is the result of decades of poor or non-existent planning, mismanagement and the lack of long-term vision, all resulting in a city that is literally bursting at the seams.

As we mentioned in the first two parts of our five-part series on how business and government can work together to save Cairo, informal settlements — 351 of which have been deemed unsafe by the government because they lack basic amenities such as sewage and water — are now home to some 850,000 Cairiens. Add to that an additional 1.5-2 mn people who live in the City of the Dead and then, in sharp contrast, the less than 10-15% of the population that lives in gated communities and owns multiple vacation homes, and it is clear we have a serious imbalance.

Literature abounds on housing needs at the top and bottom of the pyramid. The private sector, which represents approximately 95% of real estate investment in the country, caters to the top of the pyramid, the affluent minority, which is estimated to be not more than 10-15% of the total population. This relatively small demographic, where there continues to be demand, is what keeps us in business. We are, however, fully conscious of the irony that our projects offering multi-mn EGP properties can sell-out in a matter of days while — on the other end of the spectrum — there are people living in dismal conditions in the informal settlements known as the ashwa’iyyat.

Although no one knows exactly what to do about the ashwa’iyyat, the problem of their existence and the necessity of their eradication has been discussed at length. In fact, President Abdel Fattah El Sisi has recently launched a new EGP 14 bn national initiative to move all those living in unsafe informal settlements out of the slums and into new apartments within the next three years. The first two phases of the program (approximately 12,000 housing units) have already been completed through funding from Tahya Misr, and the third phase will begin in 2017. In total, the first three phases of the ambitious initiative are expected to provide housing for approximately 100,000 people, a small drop in the bucket but an important step in the right direction nonetheless.

So while there is now some headway being made in the area of social housing, what remains overlooked is the housing of the bulk of Egyptian society: Not those who can afford to pay mns to live in gated communities. And not those waiting to be relocated from informal settlements to government housing. Where do middle-income Egyptians live?

Do they live with family while they search for homes they can afford? Are they attempting to create the necessary additional space in family homes by closing off balconies and / or illegally adding extra floors? All of these scenarios have become commonplace in a market that has neglected the needs of the vast majority of its population.

The first task at hand if we want to come up with a new housing plan that properly caters to the needs of middle-income Egyptians is to accurately define the demographic we want to address — the masses.

Global commercial real estate firm Colliers International published a 2016 report on the Egyptian real estate market that indicates 52% of what they refer to as middle-income Egyptians can afford residential units priced between EGP 230,000-310,000 (USD 26,000-USD 35,000), in a market of tens of mns of people. Ironically, there are virtually no residential units being developed by the private sector that are in this price range. The report goes on to state that “A 130 sq meter apartment in 6th October City (one of Cairo’s more affordable districts, excluding [master-planned communities]), for instance can sell within the range of US$ 60,000 – US$ 65,000. Units of similar price have the potential to capture 13% of Greater Cairo’s households while units within high-end developments are ‘affordable’ to only 0.2% of total households.”

Private developers are continuously being blamed for exclusively addressing a high-end niche while leaving the market gap unmet. Common sense mandates we stop and ask ourselves why? Why would the private sector collectively ignore the market needs of mns? Surely the sheer scale of the profits make this market gap extremely attractive.

If you talk to real estate developers they will almost all tell you the same thing: the government / NUCA (the Housing Ministry’s New Urban Communities Authority) does not make affordable land available to them, which has in turn forced them to indefinitely shelve any plans for middle-income housing. They will also tell you that land in Cairo’s new urban communities is now fixed at EGP 4,500 per square meter in New Cairo and EGP 2,650 per square meter in Six October. They will point out that adding building and infrastructure costs as well as overheads and profit margins (which need to make sense otherwise they can just park their money in the bank), shoots up the selling price to anywhere between EGP 8,000 and EGP 12,000 per square meter for a core and shell. The rationale for the increase in prices being that these areas are considered prime real estate. This brings one to pose the question, if this land is priced at a premium, forcing private developers to address only the highest target market that can afford the ticket price, where will the majority of Cairenes live? If not on the outskirts of Cairo in new rises, then where?

As a result of the private sector’s inability to address the middle-income market simply due to lack of financial feasibility, the government on its own has repeatedly tried to take action to address the housing gap. Dar Masr is an example of a Housing Ministry project where the most expensive homes located in New Cairo sell for EGP 637,500 for 150 sqm units, while the cheapest units are located in Sadat City and are priced at EGP 255,000 for 100 sqm units. The government is able to sell at these prices because they already own the land they are developing and thus have a few thousand EGP advantage at the get go over private sector developers. Even then, projects such as these are criticized for being too expensive, even so, the supply is unable to keep up with the demand. Egypt’s housing gap is currently estimated at c. 3 mn units, Dar Masr as an example has only been able to add 30,000 units in its first phase, which is scheduled for completion in July 2016, and 150,00 units in total, barely scratching the surface.

It has been globally proven, particularly with countries in emerging markets that have successfully developed affordable housing such as Mexico, Morocco and India, that the only way to address the housing gap is through partnerships between government, businesses and the financial community.

The government can no longer bear the burden alone; it has neither the capacity, budget nor agility to do so. Instead, it should take the lead and come up with a new, data-led approach to policy making informed by the reality on the ground — and look at the real obstacle to mortgage financing in Egypt. More on that next week.

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