Eyes on Egypt

Developers from the GCC and beyond are convening on Egypt, but is the country's construction sector ready to welcome the investments?

$12.5bn Investment secured by Egypt from GCC nations at the Future Economic Development Conference
$12.5bn Investment secured by Egypt from GCC nations at the Future Economic Development Conference

The Middle East’s stock markets haven’t had a good rest yet this month. Following the topsy-turvy week the UAE’s, Saudi Arabia’s and Egypt’s bourses had following the announcement of first quarter results last week, news emerged that Emaar Misr, the Egyptian subsidiary of Dubai-based development giant Emaar Properties, is readying to float its first initial public offering (IPO) on Egypt’s stock market (EGX).

In a statement to Dubai Financial Market (DFM) on 20 May, 2015, the company said that Emaar Misr’s IPO will comprise a public offering to retail investors in Egypt, and a private placement to institutional investors in “a number of countries, including in Egypt”. Dubai-headquartered parent company Emaar Properties will retain an 87% stake after listing on the Egyptian bourse.

Emaar Misr’s listing was a long time coming. In January 2015, the firm stated that it would float its IPO in the second quarter of the year. At the time, Reuters had reported that the IPO of a portion of Emaar Misr would be worth up to $270.3m (EGP2.06bn), making it the largest flotation on the Cairo bourse since 2007.

“Within a few days, Emaar Misr will offer the documents to the stock market. The IPO will be in the second quarter, God willing,” said one of the sources who spoke to Reuters at the time.

“You’re talking about a big launch, certainly over two billion [Egyptian] pounds (EGP).”

While Emaar is yet to disclose the full value of its IPO, the company’s intention to list has already shifted the spotlight onto Egypt, the Middle East’s most populated country, which is still recovering following a period of economic and political uncertainty. Since Abdel Fattah Al Sisi’s ascension to power in 2014, Egypt has returned to the fore of conversation, attracting interest from elite construction players in GCC powerhouses such as the UAE and Saudi Arabia.

Evidence of regional support for Egypt was clear at the Future Economic Development Conference, held in Sharm El Sheikh from 13-15 March, 2015.

Touted as a “launch pad” for the country’s economy, the event came good on its promises with a series of pledges by the governments of Kuwait, Saudi Arabia, and the UAE. Each pledged $4bn worth of support to Egypt. Oman’s government also chipped in with a $500m package, bringing the total to $12.5bn.

Alongside the GCC heads of state were a selection of notable attendees, including US Secretary of State John Kerry, the UK’s former Prime Minister Tony Blair, head of the International Monetary Fund (IMF) Christine Lagarde, and a number of captains of industry from major multinationals.

Sachin Kerur, head of Middle East at law firm Pinsent Masons, sees the turnout at Sharm El Sheikh as a sign of both the optimism that surrounds Egypt’s economy, and an indicator of the scope for construction growth in the country.

“There is a lot of liquidity around Egypt, which is pent up, but hasn’t gone anywhere in a while,” he tells Construction Week.

“Tapping into it through local subsidiaries, like Emaar is doing, allows companies access to the huge opportunities in the country. This is a good time to build the brand for your firm given the country’s fundamentals.”

Kerur asserts Egypt’s mid- and long-term fundamentals will be of interest to investors, not just from
neighbouring countries, but also around the world.

“Egypt’s fundamentals have been well chronicled over time. The country has a massive population and acts as a transport hub through the Suez Canal. With the Canal, it can play into major areas in both, the Middle East and Africa. These factors are extremely important when considering the country’s scope for growth, and these fundamentals will accelerate investment into Egypt,” Kerur explains.

“If you look at the summit in Sharm El Sheikh, you’ll find it was attended by investors from both within and outside the region. I would anticipate that if calmness in the country’s political landscape continues, investment will come from the Middle East, as well as other world powers.

“I’d be surprised if no international investors came to Egypt,” Kerur adds.

Global eyes, it appears, are already looking to Egypt. On 19 May, 2015, Daily News Egypt reported that the World Bank’s package of loans to Egypt, which have been approved this year, amount to $1.4bn, compared to $408m in 2014.

This represents an increase of 243%. The loans, intended to support Egypt’s government, finance a range of projects, including affordable housing, power infrastructure development, minority population support, and small- and medium-sized enterprise (SME) funding.

Egypt’s Ministry of Tourism will launch a campaign in December 2015 to attract 20m tourists to the country by the year 2020, thus generating revenues of $26bn (EGP198.37bn) from the sector. Part of these targets will be fuelled by Capital City, the $45bn (EGP343.34bn) administrative centre planned for Cairo East, linking the revamped Suez Canal Corridor to Cairo’s traditional core.

The UAE has immense faith in Egypt’s potential. Capital City, Egypt’s most ambitious project to date, is being developed by Capital City Partners – a public-private partnership (PPP) between Egypt’s Ministry of Housing and a group of global investors, including some prominent figures from the UAE. The company is headed up by Mohamed Alabbar, chairman of Emaar Properties, although the firm itself is not involved in its delivery.

On Monday (25 May, 2015), reports emerged that the country’s Ministry of Housing had approved Arabtec Construction’s housing project, which includes the construction of a million affordable housing units in Egypt over the next five years.

Arabtec, the UAE-based contracting giant currently battling tumultuous stock market figures, is expected to benefit from the announcement, but contracting work in Egypt will not come without challenges. Contracting firms working in Egypt bear the brunt of continuous fluctuations in the price of building materials, Ayman Sami, country head for the Cairo office of JLL MENA, tells Construction Week.

“The number of contractors [in the country has] decreased throughout the years. There might be some scope for partnership and also the revival or expansion of local firms going forward,” Sami says.

“This could create an opportunity for foreign companies to tie up with local [Egyptian] firms to gain projects, and to establish more cement and steel factories to support growth. This will also require more input in raw materials, which could be supplied by the foreign investors or firms.”

Nevertheless, fortunes for the Egyptian construction and property market as a whole are not as bleak as one may be tempted to assume.

The Egyptian property market is witnessing a “recovery” across all sectors due to increased tourism numbers and investor confidence, Sami says, asserting the country’s residential market “was always strong, even through turbulent times, as people considered it a safe haven for their funds”.

“This is due to the fact that EGP was being devalued against USD and there was little risk-free investment to consider. At the same time that residential [sector] performance was strong, the retail and hotel sectors suffered the most due to reduced confidence and security concerns, [both of] which had a negative impact on the number of tourist arrivals and the consumer confidence,” Sami explains.

Emaar Misr intends to use the amount raised from its IPO, along with its existing cash resources, to further the growth of its under-development projects’ non-residential areas.

These primarily include Emaar Square in Uptown Cairo; the planned international marina and hotels in Marassi project; and Downtown area in Mivida project (comprising both retail and office space).

Emaar’s investment in the country also includes its $44.9bn Emaar Drive project, a road connecting Uptown Cairo to key destinations in central and greater Cairo at the company’s Emaar Square development.

Local developers are also investing determinedly in Egypt’s property market. Local property developer Talaat Moustafa Group announced, in April 2015, that it has completed 44% of the total space of the Madinaty project in New Cairo, estimated to be worth between $2bn and $3bn. The project is expected to take 25 years to be fully implemented.

JLL’s Sami says local and regional developers are “equally important” in Egypt’s development, hailing Emaar Misr’s decision to list itself on EGX as a positive move for the country’s market, as well as the developer firm.
“Large, local companies like Talaat Mostafa Group, SODIC, and Palm Hills remain active in the country,” Sami concludes.

“Regional firms are also considered as significant players within [Egypt’s] real estate market. Emaar Misr’s listing on the EGX will accelerate the development of the non-residential components of their projects.”

Egypt: A beginner’s guide
Sachin Kerur, head of Middle East operations at Pinsent Masons, outlines the key factors for those working in Egypt to remember:
• For someone who’s never been to Egypt, you surely have to go in knowing what the situation in the country is like. You need a strong partner since there are challenges on-ground which should not be ignored.
• You have to be extremely committed to the market, and accept that there will be a few bumps on the road. You may not be the best from your first day in the country, but you have to give it time and work with patience. For instance, some companies perform exceptionally as soon as they set up office in, say, the UAE, but you must remember that Egypt is a different landscape altogether.
• The supply chains in Egypt can be tricky. They may not be as robust and long [those] in some other parts of the world. Contractors and other construction firms working in the country need to be prepared for such scenarios.
• Focus on talent develop-ment. One of your biggest advantages is the Egyptian diaspora, a large part of which is distributed around the GCC.
• Carry out training programmes and encourage Egyptians to work in their home country, since they are very talented and can offer value through their familiarity with the terrain.

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