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UNCLAS CAIRO 000417 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN EINV PGOV PREL EG
SUBJECT: Housing in Egypt- Construction Everywhere but No Place to 
Live 
 
¶1. (U) Key Points 
 
--     The housing market in Egypt is marked by extreme 
contradiction.  In recent years, the country has witnessed an 
unparalleled building boom alongside an extreme housing shortage for 
the poor and the middle class. 
 
--     Prices for high end housing for the wealthiest five percent 
of the population have skyrocketed in the last few years, fuelled, 
in part, by oil-rich Gulf investors. Oversupply and the economic 
slowdown will likely deflate the high-end housing bubble. 
 
--     There remains a chronic housing shortage for low and 
middle-income buyers. With an estimated four million unit shortfall, 
Cairo residents have increasingly turned to informal housing 
solutions which are dangerous and unregulated. 
 
--     The GOE's response to the housing crisis, the National 
Housing Program, has provided some subsidized housing units to the 
poor, but far fewer than are needed and often in unattractive 
locations. 
 
--     Cairo's outdated rent control laws and underdeveloped 
mortgage market have contributed to the dearth of options for middle 
income renters and homebuyers. 
 
--     Despite government incentives, private sector builders have 
been reluctant to build for lower income buyers, opting instead to 
continue developing high-margin housing for the wealthy. 
 
 
 
¶2. (SBU) Comment:  In addition to basic requirements for shelter, 
the ongoing lack of affordable housing is having profound social 
impact as well.  In Egypt, providing a home is a pre-requisite for 
marriage and with housing priced well out of reach for many would-be 
grooms, marriages are being put of by years, and many single 
Egyptians continue living in their parents' homes into their 30's. 
 
¶3. (SBU) The GOE's insufficient responses to the ongoing housing 
crisis have also led to myriad informal and often unsafe housing 
solutions. The GOE's national housing program is a good start at 
addressing the crisis, but its progress has been halting and 
insufficient.  Problems in zoning, rent-control, and mortgage-law 
alongside rampant corruption and government inefficiency have made 
the translation of "need" into market demand extremely difficult. 
As result, the private sector has been unwilling or unable to be a 
significant part of the solution.  As with many issues in Egypt, 
reform in the sector will have to be driven by the government.  Such 
reform won't be easy, and it is unclear if the GOE has the political 
will and capital to do so. 
 
---------------------------------------- 
Lots of Villas, Not Enough Basic Housing 
---------------------------------------- 
 
¶4. (U) The housing market in Egypt is marked by contradictions and 
extremes. Throughout Cairo and into the new communities on its 
outskirts, there seems no end to residential construction.  Billions 
of dollars have been poured into real estate both from oil-rich Gulf 
investors as well as an ever growing wealthy class of Egyptians. 
Egypt's economy has been growing rapidly in the past several years, 
and with a population of 80 million people, the construction/housing 
industry has boomed.  There is very little room to build anywhere in 
Cairo's center, so the only choice is to build in the periphery.  At 
the same time, there is a critical shortage of middle and low-income 
housing units, with an estimated deficit of 4 million units. 
Informal housing, which has long been an alternative solution for 
many poor Egyptians, has become the norm.  This cable explores the 
current housing situation in Egypt and examines some of the Egyptian 
government's responses to what can only be described as a worsening 
situation. 
 
-------------------------------------- 
Is the High-End Bubble About to Burst? 
-------------------------------------- 
 
¶5. (U) What is generally referred to as the real estate "market" in 
Egypt consists almost solely of the high end real estate market. 
This market caters to a small fraction -- only about five percent -- 
of the population. Middle and low-income housing are not attractive 
or as profitable to developers, and they have been reluctant to 
address those segments. 
 
¶6. (U) Since 2005, the Egyptian economy has been growing at seven 
percent per year; rising incomes and rising domestic demand have 
fueled higher inflation; and housing prices have more than doubled. 
Developers have viewed new real estate projects as an excellent way 
to make a good return. Egypt has also experienced a flood of foreign 
investment, much of it from the Gulf, in real estate which has 
driven up prices for both new and existing housing in the high-end 
segment. As developers have sought to provide units for Egypt's 
elite, excess liquidity along with what some analysts describe as a 
price speculation has created a very large oversupply of high end 
units.  Analysts estimate the supply of high-end homes coming on the 
market at 40,000 units per year while demand represents about 15,000 
units per year. As Egypt experiences slower growth in 2009 (the most 
optimistic estimates for growth are 3-4%, compared with 7-8% range 
in the last three years), this oversupply phenomenon may become more 
acute. 
 
¶7. (U) The market has also witnessed the peculiar phenomenon that 
prices have gone up along with supply. Real estate models based on 
rental yields and interest rates imply that prices are in some cases 
almost four times above reasonable market value. Rental yields are 
generally between 3-7% of property value, which is far below 
interest rates (11-13%) and inflation (20%+). Cash liquidity rather 
than demand thus appears to be fueling the market. 
 
¶8. (U) In addition to speculative pressure, there are various 
explanations for the large rises in high-end real estate in Cairo. 
Some of the cost increase can be attributed to the rising cost of 
land. Government land sold at auction has more than doubled over the 
past three years. Higher raw materials prices early in 2008 also 
impacted prices.  As raw materials prices fall, developers tend to 
expand margins rather than lower prices. 
 
¶9. (U) The GOE and many developers continue to insist that the 
housing market is in fine shape. In November 2008, Housing Minister 
Ahmed El-Magraby, gave an upbeat assessment of the real estate 
sector, saying that the Egyptian market was not facing a "free 
fall." According to Magraby, real estate demand in Egypt -- as 
opposed to other markets -- is not "speculative."  Most buyers pay 
cash for real estate and hence do not access the credit market. Real 
estate developers, he added, are well-financed, maintain low 
inventories, and have no pressure to liquidate assets. He also 
claimed that Egyptians have a certain "mentality" which prevents 
them from selling at a price lower than they desire. This uniquely 
Egyptian attitude, says Magraby, will lead people to take their 
property off the market rather than sell at a reduced price. 
 
¶10. (U) The behavior of the market tells a slightly different story. 
Most of the high-end real estate in Egypt is sold "off plan" (that 
is, before it is built) so much of current construction has been 
prepaid.  Truly new development is very clearly slowing.  Though 
Egyptian developers have by and large left their official selling 
prices unchanged as the market has slowed, analysts report that not 
only have unofficial (actual sales) prices dropped 15-20% but also 
that the sales of new units have stalled.  The Egyptian stock market 
doesn't appear to share Maghraby's optimism either.  The share 
prices on the Cairo stock exchange of the major Egyptian developers 
and construction companies are all down between 60-90% in the last 
12 months. (Note: To put this into perspective, the overall Egyptian 
index fell by 56% in 2008.) 
 
---------------------------------- 
How the Other Half (ok, 95%) Lives 
---------------------------------- 
 
¶11. (U) The explosion in housing supply has yet to impact the vast 
majority of the Egyptian population. While estimates vary, many 
experts point to a four million unit shortfall and demand for an 
additional five million units is expected over the next ten years. 
Other data tends to support this argument. Sixty-five percent of the 
housing supply is informal, and millions live in slum areas.  The 
owner occupancy ratio in Egypt (percentage of people who own their 
homes) stands at 32%, the lowest in the world according to Suha 
Najjar, the Director of Research at Pharos Holdings, a Cairo-based 
investment bank. 
 
¶12. (U) There is huge, real demand for housing, with almost a 
complete lack of available units. The existing housing stock is both 
insufficient and inadequate to serve the needs of the populace. This 
is further exacerbated by the GOE inability to address the issue and 
an underdeveloped mortgage market. The government has undertaken 
efforts to try to stimulate the mortgage market here, but efforts 
are still in their infancy. 
 
--------------------------------------------- --- 
Vacant Housing in the Midst of an Acute Shortage 
--------------------------------------------- --- 
 
¶13. (U) Egypt is unique in that, in the midst of an overall acute 
housing shortage, it has an extraordinarily high level of vacant 
housing units.  According to some estimates, between 20-30% of 
apartments and housing units in urban areas stand empty.  According 
to USAID and World Bank statistics, nearly 4 million existing urban 
housing units are vacant and 42% of greater Cairo's housing stock is 
frozen under rent control. 
 
¶14. (U) This phenomenon is the result of several factors. Real 
estate has traditionally been one of the few avenues for investment 
in what for many years was a centrally planned economy. As a low 
risk, inflation-resistant investment vehicle, families looked to 
real estate as a way to garner capital gains and often to provide 
housing for children and grandchildren. At the same time, Egypt has 
very strong tenant protection laws, with courts that are unwilling 
to evict delinquent tenants, and an expansive rent-control regime. 
As a result, the risks of using real estate as an income producing 
vehicle far outweigh the costs of maintaining units vacant. 
 
---------------------------- 
The National Housing Program 
---------------------------- 
 
¶15. (U) In 2005, in response to the growing crisis, the GOE launched 
the National Housing Program (NHP) with the goal of providing 
500,000 highly -subsidized affordable housing units by 2011 for low 
income buyers.  Since then, the government has shifted its target 
somewhat to providing 500,000 "housing solutions" -- a subtle shift 
that allows the GOE to broaden its offerings under the NHP to 
include rental units as well as self-build solutions. 
 
¶16. (U) Under the NHP, the basic unit of housing costs LE 50,000 
(US$9090) to construct.  The National Housing Program provides for a 
LE 15,000 (US$2727) payment directly to the developer which is 
dispersed in three parts: one-third at the start of construction, 
another third when the roof is built, and the final third when the 
whole house is complete. The purchaser then makes a down payment of 
LE 5000 (US$909) and finances the remainder with monthly installment 
payments over 20 years.  The monthly payment starts at LE 160 
(US$29) in year one and increases each year.  In addition to the 
cash subsidy, the government makes a large contribution to 
infrastructure and provides heavily discounted land. 
 
¶17. (U) The GOE has also put significant resources behind the "build 
your own" housing scheme. According to figures released in December 
2008 by the Ministry of Housing and Utilities, as of October 2008, 
30,000 plots of land had been delivered to beneficiaries in 18 new 
cities.  According to the ministry, the lots all had access to 
utilities and 14,000 of the beneficiaries had been granted 
construction licenses.  This system is not without its critics, who 
argue that it encourages construction of informal and unsafe 
housing; the GOE does not have an effective building inspection 
system.  The "build your own" housing program has also been plagued 
by accusations of corruption and allegations that the government is 
slow in providing promised utilities to the areas. 
 
¶18. (U) Housing Minister Magraby has said that the GOE is doing its 
part by investing LE 15 billion (US$2.7 billion) in infrastructure 
(roads, housing, railroads, water and waste water). In a November 
2008 speech, he encouraged further private sector investment to 
prevent a more severe economic downturn.  With regards to low-income 
housing, Magreby said he hated all monopolies, including the 
government's monopoly on building low-income housing.  He claimed to 
have signed agreements over the past year to provide 250,000 "small 
units," a huge increase over the pre-2004 number of 35,000 per year. 
 The government looks out for the people, he insisted, though no one 
can create paradise:  "I wish we could give every Egyptian a free 
house and swimming pool."  Maghreby said that his goal in the real 
estate sector is for Egyptians to be able to get a fair price in an 
open market. 
 
¶19. (U) Another strong criticism of the GOE's housing initiatives is 
that it doesn't build housing where people want to live.  The GOE 
has by and large, focused its efforts on building housing far from 
Cairo and far from places of employment and schools. This, coupled 
with shoddy transportation and utility infrastructure (if any is 
provided at all) has made many of the "new cities" intensely 
unattractive to the intended beneficiaries and contributed to 
terrible traffic conditions.  Even when faced with imminent danger, 
such as in the case of the rockslide-prone areas of Muqattam in 
Cairo, families are extremely reluctant to move and be faced with 
1-2 hour commutes in stand-still traffic on poor public transport. 
 
---------------------------------------- 
Egypt's Underdeveloped Mortgage Industry 
----------------------------------------- 
 
¶20. (U) The Egyptian government passed a mortgage finance law in 
¶2001. At first there was little activity in the sector and by 
mid-2005 total mortgage debt in Egypt amounted to a paltry LE 16 
million (US$2.74 million).  The past few years have seen much 
greater growth, and by the end of the first quarter of 2008, there 
were LE 2.2. billion (US$400 million) in outstanding mortgage 
obligations. This number is still low for a country of the size of 
Egypt, amounting to only .26% of GDP (as compared to 17% in a 
country like Malaysia or 50% in the US). 
 
¶21. (U)  The creation of the Mortgage Finance Authority, several 
mortgage finance companies, and a refinance company has contributed 
to the rise in mortgages from near zero to a 3-4 billion LE.  The 
growth of mortgage finance in Egypt is hampered by several factors: 
Egyptians traditionally have always wanted to own their homes 
outright.  It is expected that within a new couple, the husband's 
family is expected to procure the home (outright), and the bride's 
family is expected to outfit it.  While this trend is slowly 
changing, it is engrained in many.  Long-term financing is largely 
unavailable, with ten years being the maximum available term. 
Interest rates of 11-13% also make financing unattractive for many 
buyers.  In addition, the legal and regulatory framework remains 
weak with property registration remaining troublesome and a limited 
history of courts willing to foreclose on non-performing loans. 
With improved awareness, appropriate supply, and more attractive 
interest rates, some real estate experts speculate that mortgage 
demand could be as high as LE 40 billion (US$7.3 billion) -- more 
than 10 times greater than the current mortgage market. 
 
------------------ 
The Private Sector 
------------------ 
 
¶22. (U) As mentioned earlier, private sector activity in the real 
estate sector has exploded in recent years, but is almost 
exclusively concentrated on high-end development.  Until recently, 
such development has been so profitable that there has been little 
movement by private sector developers to build for middle and 
low-income segments. Speaking to an industry gathering, the private 
sector attitude was summed up by Sherif Raafat, the Vice Chairman of 
Concord International Investments, a large Egyptian fund management 
company, who when asked about the chronic housing shortage for 
middle and lower class Egyptians, responded that "social housing is 
the responsibility of the government -- not the private sector." Few 
of the gathered disagreed. 
 
¶23. (U) One private sector company that is building low-income 
housing is Orascom Housing Communities (OHC), a subsidiary of the 
Orascom Group-Egypt's largest multinational corporation. OHC is 
building a community consisting of 50,000 low income units in 6th of 
October City, a suburb located about 20 miles from central Cairo. 
The units are available to buyers who make no more than LE2500 
(US$455) per month and range in price from LE 65,000 to 100,000 
(US$11,820 to $18,182). Hala Bassiouini, Chairwoman of the Egyptian 
Housing Finance Company, one of the largest new mortgage finance 
companies, noted recently that developers are starting to understand 
that they are overbuilding for the high end clients and are moving 
to the mid-range clients.  She cited the Orascom project as an 
example of a thoughtfully designed housing solution which she thinks 
will cater to middle-income clients.  She noted that developers are 
simply going to have to accept lower margins of return, but argues 
they can still make money serving middle income clientele. 
 
¶24. (SBU) Omar El Hitamy, OHC's Managing Director, told us that the 
project is profit driven and that OHC could produce low-income 
housing in a profitable way.  OHC's strategy is to produce large 
volumes of housing units quickly and efficiently.  The project, El 
Hitamy told us, is based on a model pioneered by Homex, the largest 
home builder in Mexico, and supported by the Mexican government's 
INFONAVIT national housing fund which provides financing for 
low-income borrowers funded through the Mexican payroll tax. The 
first phase of OHC construction consists of 12,000 units.  7,000 
have been completed and 4,000 of those have already been sold.  In 
addition to the housing units, OHC has built schools and a "town 
square" with shops, restaurants, and entertainment facilities.  If 
the Orascom project can succeed, it will be one of the first such 
satellite cities to do so, as others have foundered because of lack 
of necessary services and public transport. 
 
¶25. (SBU) An important part of OHC's strategy seems to be to 
minimize GOE involvement. By pledging to build low-income housing, 
OHC was able to obtain its land from the government at a rate far 
below market price.  The government is also responsible for 
providing utilities and schools.  In a recent visit to the OHC site, 
El Hitamy us that OHC has chosen not to rely on much GOE assistance, 
since the government lacks the competence and speed required for a 
successful project. OHC has built all of the infrastructure and 
utilities in the community and is implementing a zero-waste 
recycling program that Orascom had developed in its other high-end 
housing projects.  El Hitamy told us that the GOE was unable to meet 
its obligations to build and staff a school, and as a result OHC 
built, staffed, and runs the school as well. 
 
¶26. (SBU) OHC has faced some difficulty in achieving a critical mass 
of residents. El Hitamy shared his frustration with the fact that of 
the 4000 units sold, less than ten percent were currently occupied. 
This low occupancy rate comes despite the fact that 90 percent of 
the units have been financed, and buyers are making mortgage 
payments on empty houses. This might be due to the fact that some 
purchases may have been speculative, despite government controls on 
buyer eligibility.  Another possibility, El Hitamy said, was that 
people were disinclined to relocate in the middle of the school 
year.  Despite his frustrations, El Hitamy told us that OHC was 
confident the project would be a success and would ultimately be 
profitable.  He said that the need for low-income housing was huge, 
but that Egyptian mortgage financing for low-income borrowers needed 
to be improved. GOE restrictions on interest rates and 
payment-to-income ratios meant that very large down payments of 
LE10-20,000 (US$1800-3600) were required, and these were beyond the 
reach of many would-be borrowers. 
SCOBEY