Since the current administration came to power nine years ago, its primary focus has been building more cities, led by the New Administrative Capital. The government’s plan is for those metropolises to be environmentally sustainable from day one.
According to Egypt Vision 2030, half of buildings using renewable energy should be in new cities by 2025 and 75% by 2030.
Those goals should attract significant foreign investment, as “real estate FDI needs a path to reduce their carbon footprints,” SODIC General Manager Ayman Amer told AmCham’s October Real Estate Conference attendees.
However, real estate developers and buyers continue to struggle with longstanding difficulties in accessing local financing. “The developer has [become] a banker who lends money over five, seven and even 10 years,” Naguib Sawiras, executive chairman of Orascom Investment Holding, said during the conference. “That is not our role.”
Ultimately, local developers have limited domestic financing options. Akef Maghraby, Suez Canal Bank CEO, noted during the conference that in the absence of commercial bank lending, real estate funds could be a viable option, especially if the development is eco-friendly.
Funding landscape
Despite Egypt’s growing population and economy, which require rapid growth of cities to accommodate demand, many local commercial banks are reluctant to finance real estate development. “The banks are lagging in providing higher financing limits in response to increased [demand for] financing for new cities and destinations,” said Maghraby.
The resulting gap is growing, as “the cost of building new cities [is already] high, and it has been increasing recently” due to high interest rates and devaluation of the pound, Maghraby said. “That translates to rising prices for buyers.”
Nevertheless, he stressed that despite the sector’s “denomination in [local currency], which means developers’ costs will automatically rise with each devaluation, [yet] the local real estate development sector is one of the most attractive for banks if the formula is right.”
However, this “formula” changes with every project, Maghraby said. “It comes down to the [project’s] investors, developers, location, contractor, target market and cash flows.”
Maghraby noted some local banks can’t lend to private developers due to internal restrictions. “The challenge is that their debts are too high and growing,” he said. That comes mainly from the rising cost of dollar-denominated transactions due to consecutive local currency devaluations. “However, balance sheets of many of those banks are catching up because of the [increasing] interest rate revenue [from buying T-bills],” Maghraby said. “Eventually, they would be able to cater to developers.”
He said commercial banks only provide a project’s local currency component, while “multilateral financing institutions [will] provide the dollar component.”
The cost of green
To maximize the impact of sustainable (green) technologies in new destinations, developers should embed “smart technologies and solutions” in infrastructure, Ayman El Kousy, CEO and managing director of MIDAR, a business-to-business infrastructure developer, said at the conference.
Sustainable infrastructure includes transportation networks, renewable energy stations, fast internet, and utilities. Such facilities “bring quality of life to residents,” El Kousy said, making a project more sellable and commanding a premium over traditional developments.
Currently, local laws don’t mandate that real estate be sustainable. However, some local developers have no option. “Aldar-ADQ [SODIC’s owners since December 2021] has specific environmental mandates,” said Amer of SODIC. “Therefore, local operations have to comply with our parent company’s benchmarks and standards.”
The main downside to eco-friendly destinations is they are expensive. “The cost of a project built to be sustainable could [be up to] 15% more than traditional developments,” Amer said, though developers could alter minor details for “up to 40% energy savings.”
Additional costs arise from securing environmental compliance certificates. “Fees get higher as your gross annual revenue increases,” according to a note from the Business Development Bank of Canada.
Sarah El Battouty, CEO and founder of ECOnsult, a local environmental design and auditing company, said that for some developers, “the rating costs could be inhibitive if replicated across all their projects. It could be feasible for one building or project.”
To minimize certification costs, developers must decide “which rating systems and certifications are suitable for them,” said El Battouty. “There is no one size fits all.” She stressed the importance of hiring top-tier advisers in such situations.
Getting that right is vital for commercial facility developers. Kousy explained that while 100% locally owned residential developers could skip the certification, commercial property developers can’t. For one, at least one major vendor is bound to have an environmental mandate dictating its decisions.
A significant obstacle to certification arises if it requires other sectors to be sustainable. “You can’t put [companies] in front of the sustainability train without their supply chains,” Battouty said. For real estate developers, that can be difficult, as their feeders are some of the most polluting industries worldwide, including steel and cement.
Ultimately, developers will only build eco-friendly destinations if they can sell them. “Our business is built on supply and demand,” said Amer. “If we find demand, we will cater to it.”
El Battouty believes demand for eco-friendly buildings will accelerate. “Locals are eager to reduce their utility bills and running costs,” she said. “Once they realize the savings they will enjoy from living in green buildings and trust the developer’s promises, they will likely buy these eco-friendly developments.”
Hard money
Securing sufficient and suitable local funding to build a sustainable destination is uncommon. “We use traditional financing channels regardless of whether they are suitable for our sustainable projects or not,” said Amer of SODIC. “We deal with [one local bank] in particular because it reduces our interest rate if we are developing a project that meets its sustainability criteria.”
Maghraby of Suez Canal Bank said that lack of financing is because “a lot of financiers look at sustainability as a cost, not a way to create new opportunities.”
Another obstacle is that proven sustainable developments may be unsuitable for some green financiers. “Both have to comply with the [latter’s] sustainability standards,” Maghraby said.
Another problem facing local developers and financiers is “the big debate about whether natural gas is an [environmentally sustainable] fuel,” he said.
A sector-specific hurdle is that “there is no single formula to assess projects applying for green financing,” Maghraby said. It depends on the developer’s track record, the project’s location, the specifics of each project, and its management.
If a developer can overcome those hurdles, “there is a lot of money globally going into sustainable developments,” Maghraby said.
Funds alternative
Real estate funds are one option for financing local sustainable projects, Maghraby said. In October 2023, Egypt introduced a new law and executive regulations allowing the creation of real estate funds.
According to Tarek Abdel Rahman, Compas Capital’s managing partner, the fund had some legislative issues to start with, but “the current regulations are attractive now, solving problems related to including property from the secondary market in funds, their tradability on exchanges and taxes.”
Updates to real estate funds’ regulations need to keep up with international standards to ensure projects are a feasible long-term investment option for foreign investors. “One problem is laws are changing and evolving a lot globally,” said Maghraby. “Real estate development stakeholders must, therefore, always be aware of the latest global developments to create a globally appealing project.”
This article first appeared in November’s print edition of Business Monthly.
