These days may be our last chance to glimpse the Heliopolis Company for Housing and Development before it transforms its entire structure upon the announcement of the anticipated strategy to develop the company.
In March, the state-company announced that it would put together a strategy to develop the company after the failure of a 2018 plan to offer an additional share of the company on the stock market as part of the initial public offering program launched by the loan agreement between Egypt and the International Monetary Fund in 2016.
The 2018 plan aimed to entrust the company’s management as well as 10 percent of its shares to the private sector, in addition to offering 15 percent of its shares on the stock exchange, which would have resulted in the government owning less than 50 percent of the company’s shares. But this plan to develop the Heliopolis Company for Housing and Development in partnership with the private sector failed because there was no appetite in the private sector to take control of the management.
With revenue propped up for years by the sale of unused land, a measure analysts say is a squandering of the state-owned company’s vast land holdings, and a reliance on real estate strategies most private-sector competitors have left behind, the Heliopolis Company for Housing and Development has struggled to find an identity amid an overhaul in the urban planning landscape. And while the exact details of the new plan are not known, market conditions and industry insiders foretell a future in which the company, in partnership with the private sector, will forego its middle-class customer base in favor of a wealthier clientele and will join the ranks of other real estate companies in the private sector in building gated compounds.
The prevailing image associated with the Heliopolis Company for Housing and Development is usually the Cairo neighborhood of Heliopolis itself and specifically its historic heart in the district of Korba, which is a few minutes away from the Baron Palace, home of Baron Empain, who established both the neighborhood and company.
But the story of the company is more complicated. The Heliopolis Company for Housing and Development is one of the oldest real estate companies in the Middle East. It dates back to 1906 when it was first established as the Electric Real Estate and Ain Shams Oasis Company. At that time, the neighborhood sat on desert land. Tram bells would soon ring out for the first time, demarcating the surrounding area as La Courbe, which would later be Arabicized to Korba.
In the 1960s, after the 1952 revolution, the company was nationalized in retaliation for Belgium’s role in the assassination of Congolese Prime Minister Patrice Lumumba. The relationship between Egypt and Lumumba’s government at the time was quite strong due to the foreign policy adopted by former President Gamal Abdel Nasser in support of national liberation struggles in Africa. Decades later, the company would undergo another transformation when some of its shares were offered on the stock market in 1995, a few years after the management of the metro, the electricity, and the water of Heliopolis was assigned to the Cairo Governorate Office.
Heliopolis itself, or more specifically its most famous landmarks, including Merryland Park and the Granada building, make up only a marginal percentage of the company’s total assets. Merryland Park is only 10,615 square meters, whereas the Granada building is 11,400 square meters. Meanwhile, the company owns a total of 33.1 million square meters of land, according to estimates published in a research report by SHUAA Securities in November 2018.
Merryland Park, the Granada building, the Tivoli restaurant complex, the Kids Park and several other properties scattered in the neighborhood are all part of the company’s investment portfolio through lease agreements. However, none of these properties generates significant revenue despite their prime locations in Heliopolis.
The Heliopolis Company for Housing and Development has not been able to generate revenue from rent for various reasons. For instance, the initiative to ‘develop’ Merryland Park as initially planned was halted due to objections by the Ministry of Environment and the residents of Heliopolis. Then, the company managed to rent a portion of the park on a nine-year lease that brought in LE1.452 million per month, to be increased by 10 percent annually. Another section of the park was also rented out for four years for LE6 million per year, to increase by 10 percent each year as well. In addition to this, the company is restricted by many lease contracts with individuals and governmental agencies that fall under the old rent law.
At the same time, the Heliopolis Company for Housing and Development has vast real estate wealth from its 26.4 million square meters of unused lands. The following graph, based on estimates published by Pharos Holding in December 2017, shows that the Heliopolis Company for Housing and Development has the most unused lands out of Egypt’s top real estate companies.
According to the latest estimates published by SHUAA Securities, approximately 73 percent of the Heliopolis Company for Housing and Development’s total real estate holdings consist of undeveloped land.
All of the company’s land wealth is located in eastern Cairo, an advantage that allowed the company to benefit from the boom in land prices in this area more than other companies did in the last few years, as a wealthy consumer class has bought up land in this area, especially in projects around the new administrative capital.
Even though the company’s revenues from its historical properties are low, a real estate development strategy that taps into these swaths of unused land could potentially help. The following figure shows the company’s assets in investment projects and real estate development projects.
According to a research paper published by Arqaam Capital in 2017, the Heliopolis Company for Housing and Development acquired the land for the New Heliopolis and Heliopark projects from the government at prices that did not exceed LE1 per square meter. But land prices increased between 2013 and 2017 by more than 50 percent because of the government’s policy to hike prices in land tenders for real estate developers, which in turn increased the value of lands the company already owned. The increase in land value enhanced the company’s stock performance on the market in the period between mid-2016 and mid-2017.
More importantly, this exceptional increase in land prices paved the way for a partnership deal with SODIC to develop 2.7 million square meters of land in the New Heliopolis area — which is owned by the Heliopolis Company for Housing and Development — over the next 10 years by building 8,600 housing and commercial units. The Heliopolis Company for Housing and Development put down a price of LE3,300 per square meter for the land as the landowner, while SODIC would serve as the real estate developer.
The partnership with SODIC aims to bring in LE30 billion in revenue, 30 percent of which would go to the Heliopolis Company for Housing and Development.
According to Shuaa Securities, New Heliopolis makes up around 75 percent of the company’s stock of unused lands, whereas the Heliopark project makes up around 22 percent. Obour makes up about 1 percent of the total land stock, and the remaining projects in different locations in Heliopolis make up 2 percent.
Heliopolis Company for Housing and Development is not suffering for any losses. On the contrary, the following figure shows the development of the company’s profits for several years, which, in 2019, exceeded LE376 million.
However, despite the company’s huge land wealth and its increasing profits in the past year, it still lags behind other major real estate companies. The following graph shows the revenues of the Heliopolis Company for Housing and Development in comparison to those of its competitors in Fiscal Year 2017/2018.
“The company is in need of development because these profits are based on an unsustainable, inefficient business model that relies on the sale of undeveloped lands,” says Omar al-Menawy, a real estate analyst at CI Capital.
Mahmoud Hegazy, the former head of the Holding Company for Construction and Development, who left his post last year after five years in office, told Mada Masr that since 2014, companies affiliated to the state holding company were prohibited from selling undeveloped lands except in very specific circumstances, like what happened with some small plots of land in Sheraton that the company sold.
“Selling undeveloped lands was always the easy solution to bring in quick revenues, but it is also a huge squandering of assets,” says Hegazy.
But the company continues to sell undeveloped lands, based on data from the stock exchange website. “The company is still relying on selling unused lands to generate a big portion of its revenues, even though it has been said before that the company abandoned this approach,” says Menawy.
Aside from selling land to real estate developers, the company has also continued to sell fully finished units, something that most real estate companies in Egypt stopped doing.
According to a research dispatch published in 2016 by Mubasher Securities, adopting the business model of selling fully finished units — meaning the company receives the money after all construction is done — meant that the company could not implement projects fast enough because it did not have sufficient liquidity. This was evident, for example, in the extremely slow development of the as yet unfinished Heliopark project, which started in 2003, when the company acquired the land. According to the dispatch, this prevented the company from gaining huge profits over the past few years due to the increase in real estate prices.
According to Shuaa Securities, by the end of 2016, the Heliopolis Company for Housing and Development started to shift to a new business model that does not solely rely on selling undeveloped lands and fully finished units. Instead, the company turned to the presale of units still under construction in New Heliopolis, the Heliopark project, Obour, and several other projects in Heliopolis.
These approaches to investment projects as well as the anticipated development plan all make sense given the fact that the Heliopolis Company for Housing and Development is the only HCCD subsidiary whose shares are traded on the stock market. The Holding Company for Construction and Development manages three housing companies among a portfolio with several companies specialized in other activities: the Nasr Company for Housing and Development, the Maadi Company for Housing and Development and the Heliopolis Company for Housing and Development. For that reason, it seems inevitable that the company will gradually transform its business model to match that of the private sector, even though the plan to privatize a further 25 percent of its shares failed.
Currently, the government’s share in the Heliopolis Company for Housing and Development stands at 72 percent, whereas insurance companies, banks, and the Egyptian Trade Union Federation collectively own a little more than 2 percent of the shares. About 26 percent of the company’s shares are freely traded on the stock market.
We have not been able to acquire more details about the development plan that the company announced in March. Mada Masr contacted Sahar al-Domiaty, the managing director of the company, but she refused to talk about the features of the plan or the date of its inauguration.
But according to a Masrawy report, the Heliopolis Company submitted a request to modify its purpose to the Egyptian Exchange on September 15. An emergency general assembly of the company agreed to amend its articles of association so that the company can undertake real estate development or through partnerships, by preparing, planning, and dividing land schemes, providing them with the necessary facilities and services for urban development, and building new cities and tourist resorts. The board also agreed to add a new clause to the same article that would allow the company to sell electricity.
“It is likely that the new development plan will include several partnerships with private real estate companies that will be responsible for developing the lands owned by the Heliopolis Company for Housing and Development. This means that the company will start focusing on extracting wealth from building gated compounds, similar to what the major real estate companies in Egypt do,” says Mohamed Nabil, a real estate analyst at Naeem Brokerage.
“This shift will cause another shift, which is to target a clientele of a higher economic standing because of the different real estate prices on this level, which is much higher when compared to the traditional housing market that the Heliopolis Company has been working in until now,” says Nabil.
Kareem Ibrahim, an architect and urban planner, agrees with this view. “It is likely that the Heliopolis Company for Housing and Development will move away from targeting the middle class and aim to sell to an upper-class clientele for objective reasons that the company has no control over, like the establishment of the new administrative capital and the rise of real estate value in the adjacent Badr City. Badr City is now seen as a suitable residential area for workers in the New Administrative Capital, and that has subsequently led to an increase in land prices in New Heliopolis, which is next to Badr City,” he explains.
Sarah Maher, a former real estate analyst in Shuaa Securities, tells Mada Masr that the gated community model provides potential residents with all the services they need so that they do not need to leave their compounds — something that the Heliopolis Company for Housing and Development cannot currently provide. This is why the company needs to diversify its activities to include the establishment of neighborhoods fully equipped with administrative services, commercial centers and hotels.
“This is why the Heliopolis Company cannot transform its work to this model without partnerships with the major real estate companies, like Talaat Mostafa or SODIC, because the Heliopolis Company lacks the technical expertise to execute this transformation on its own. Not to mention that it needs such big names in order to market its projects at a higher value,” says Nabil.
“Real estate development is a complex process that includes several tasks, including implementing a multilayered strategy to revive the real estate value of a particular plot with regards to its different uses — between administrative, residential, and commercial. It has to be based on market research, regional analysis and feasibility studies. The management of the area has to continue after the housing units are delivered, so ultimately this is a process that aims to create a high-level real estate value for the stock of lands available,” adds Ibrahim.
Ultimately, as Ibrahim, who is the founder and co-director of Tadamun, explains, “the government of Egypt generally lacks true expertise in real estate development, which is far more complicated than the traditional activity of a company like the Heliopolis Company, whose work is limited to constructing buildings and handing them over to the buyer.”
The company’s future plans, in partnership with the private sector, is adopting an approach of “abandoning” middle-class customers in favor of a wealthier clientele and of providing real estate services beyond the selling of lands and housing units. It’s a departure from the history of the company’s early days as a prosperous, foreign-owned company that focused on attracting the middle class. A research study that was published in 2005 by the American University in Cairo shows examples of how the company reduced land prices and offered massive installment schemes in the early twentieth century. The study also shows that the company offered integrated services beyond the selling and renting of housing units, so that the middle-class residents of the neighborhood could enjoy a decent urban life.