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Egypt: Major building boom breathes life into 37 new smart city projects

By Sherif Tarek
Posted on Thursday, 23 September 2021 18:39, updated on Friday, 24 September 2021 09:14

A general view for the site of the futuristic, iconic tower skyscraper, in the business district, which is being built by China State Construction Engineering Corp (CSCEC) in the New Administrative Capital (NAC) east of Cairo, Egypt March 8, 2021. REUTERS/Mohamed Abd El Ghany

The Egyptian military as well as foreign and local contractors are benefiting from a major government-backed programme to build new cities and infrastructure.

Situated nearly 45km east of Cairo, Egypt’s New Administrative Capital has already taken shape and played host to several glitzy events. The aptly named city, which Egyptian officials liken to South Africa’s Pretoria, is where the new government headquarters are situated. Relocation of some 50,000 state employees is planned to begin within a few months.

The first phase of construction work has been underway for the past five years, with $20bn of investments pumped into an area spanning 40,000 feddans (16,800ha). When all three phases are complete, the fully-developed new capital should be able to accommodate up to 6.5 million people on 70,000ha – almost the size of Singapore.

Building boom

It has been a boon for construction companies both domestic and foreign. China State Construction Engineering Corporation won a deal in 2017 to build 20 big towers in the New Administrative Capital and they are due to be completed by next year. The building boom is also a boost for Orascom Construction, a local company that signed $1bn in projects in the last quarter of 2020, with almost two-thirds of them in Egypt.

In September, Orascom, The Arab Contractors and Germany’s Siemens signed a deal with the government to build a high-speed rail link from Ain Sokhna to Alexandria. The Arab Contractors company is building the new Senate, the new parliament and a huge Islamic cultural centre in the newly constructed city.

[…] the key issue now with building new cities is how to operate them, and what level of governance will be implemented to cope with the new challenges, such as the integration of technologies into day-to-day life.

Hundreds of kilometres to the west – on the Mediterranean – New Alamein, Egypt’s second most eminent mega-development, has been growing since 2018 on a 20,160-hectare parcel of land and is designed to house two million people. Like the new capital, New Alamein bristles with towers and skyscrapers (which are rare in Egypt) as well as government offices.

Both projects are part of 37 smart cities that are either at the planning stage or are already being built under the auspices of the government and the military, which is heavily entrenched in the contracting business.

New Alamein city (Photo: Twitter/@newalamein)

‘Fourth-generation cities’

As enumerated in the Egypt Vision 2030 policy document, these projects are hailed by the government as ‘fourth-generation cities’, which are meant to alleviate congestion in existing urban areas. Their infrastructure is more advanced and eco-friendly, and their green spaces are considerably larger than those in the old districts.

Khaled Tarabieh, associate professor of sustainable design at the American University in Cairo (AUC), says: “The current activity is healthy, as the intent now is directed towards a greener economy that is resilient enough and able to sustain its growth in the middle of an unstable global economy.”

However, he underscores key challenges that ought to be addressed to operate the infrastructure of smart cities, such as energy and water accessibility. “Water raises questions about the availability of the proper technology to resolve future shortages expected due to climate change or any other reason,” he tells The Africa Report.

There are around 20 million unoccupied apartments. This means the wealth is pretty much concentrated in the hands of a small number of people…”

“Accordingly, the key issue now with building new cities is how to operate them, and what level of governance will be implemented to cope with the new challenges, such as the integration of technologies into day-to-day life,” he says.

A view of residential units where mid-level civil servants of Egypt’s new Administrative Capital will be housed, in Badr City, outskirts of Cairo, Egypt August 16, 2021. REUTERS/Sherif Fahmy

The new cities host gated developments of different sizes and with various amenities. Over the past three decades, such developments have gained in popularity in Egypt, particularly among the well-off and the upper-middle class.

More compounds

The management team of each new city is in charge of selling plots of land to developers to build projects. Compounds – where residential units are often more luxurious and expensive than those in standalone buildings – are a favourite choice for major homebuilders.

“Compounds will definitely be more prevalent as the big developers continue their land acquisitions and expansion plans,” Mariam Elsaadany, a senior real-estate analyst at Egyptian investment bank HC Securities, tells The Africa Report.

There is usually some stagnation in prices and then it [picks] up again.”

“We should continue to see the upper-middle [-class] segment move more and more towards these projects, mainly in West and East Cairo,” she says. “But I believe at [a] slower pace as affordability concerns become more of an issue for buyers.”

The success of this trend outside greater Cairo “will depend on the wealth in these cities as well as the infrastructure and services – schools, universities, medical centres, clubs – provided to these areas,” Elsaadany says.

Will the youth come?

The AUC’s Tarabieh says “the level of success of this new generation of cities […] will depend on the willingness of the younger generations to relocate and contribute to their prosperity. This [in turn] will depend on the ability to create lasting economies of scale that can lift up these cities in the future.”

The real-estate market primarily targets the wealthiest 10% of the population, and will continue to do so with the new smart cities, says Salma Hussein, an Egyptian economic researcher. “Until before corona[virus], 80% of wealth in Egypt was concentrated in real estate,” she tells The Africa Report.

“There are around 20 million unoccupied apartments. This means the wealth is pretty much concentrated in the hands of a small number of people […] and with the expansion comes more inequality of wealth.” Many people from the wealthiest 10% deem real estate as a safe haven, and therefore have the tendency to keep “purchasing more and more” amid a “very large” supply customised for them, she says.

Real estate is “hedged against everything: inflation, devaluation [and] what have you,” Hussein says. “There is usually some stagnation in prices and then it [picks] up again,” she says, shrugging off fears over the possibility of a bubble that may burst at some point in the future.

Gaps between supply and demand

“The demand for real estate is always sustained by mere population growth,” which has been high for decades, Hussein says. Today, Egypt’s population exceeds 102 million, with one birth estimated every 13 seconds, despite the government’s efforts to reduce the birth rate.

Elsaadany argues that gaps between supply and demand will vary from one target class to another. “For the luxury segment, which is a niche market that is relatively profitable for developers, we are more likely to see demand lower than supply in the future,” she says. “The [larger] upper-middle segment will definitely have the highest level of demand, so developers catering to this segment will have more business,” Elsaadany says.

There are worldwide practices to preserve and revive the older quarters of the city and [they] can be transformed to be an economic engine as well as a landmark for our identity and culture.”

However, for the lower-middle class, Elsaadany says, “we believe that demand will continue to be higher than supply due to the low profitability of this segment. Most developers do not like to operate in this segment for several reasons, including lower margins, risk of default by buyers, and so on. This is why the state, through the Central Bank of Egypt, launches housing initiatives for lower-priced units, to increase the supply to this segment. The banking system sponsors this low-cost mechanism.”

The ongoing trends support class segregation: the higher- and upper-middle-class segments are concentrated in the new and smart cities, whereas the working-class and the poor are in the old districts.

“This [scenario] is likely to remain, unless initiatives such as social housing units and mortgage finance initiatives are large enough to support a greater portion of the working-class segment into buying houses in the new districts,” Elsaadany says. “What they need is subsidised rent,” because people in the lower classes cannot afford to buy any kind of property, she says. “So far, no social residence programme has been targeting that.”

Hussein, the economic researcher, commends the social housing that the government has been providing in the past to slum residents, who comprise around a quarter of the population. All the same, she says the initiative has thus far covered a negligible percentage of the informal district dwellers, estimated at about 5%.

Tarabieh says the government should not ignore old cities. “The level of development that could be directed to our old cities should be more focused on preservation of memory. There are worldwide practices to preserve and revive the older quarters of the city, and [they] can be transformed to be an economic engine as well as a landmark for our identity and culture.” In August, the government revealed that E£30bn ($1.9bn) has been earmarked for refurbishment works in historic Cairo.

View of the Nile in downtown Cairo beside Kasr El Nil bridge, on November 2019. (© Anne-Marie Bissada)

Bonus to building smart cities

At the business and macroeconomic level, building smart cities most certainly bodes well, says Elsaadany, as a growing real-estate market spurs other industries and encourages more investment.

“Developers who have exposure to the new capital, such as [Egypt’s largest developer] Talaat Moustafa Group Holding, have been successful in generating sales,” Elsaadany says. “The New Administrative Capital Company [which is 51% owned by the military] has also benefited as it generates sales from the selling of land for different purposes, including residential, commercial and other services.” As much as 80% of the first phase’s land is already sold.

The sectors benefiting are numerous and include, basically, all the building materials, contracting, cement and steel.”

The ongoing urbanisation also “reflects well on the growth rate of Egypt’s GDP,” she says. “The sectors benefiting are numerous and include, basically, all the building materials, contracting, cement and steel.”

A source familiar with the construction industry in Egypt echoed similar sentiments, saying that national projects have offered a lifeline to the beleaguered sector. “In recent years, national projects have contributed around 30% of local steel demand and around 40% of local cement demand,” the source, who wished to remain anonymous, tells The Africa Report.

Construction keeps on growing…

Yet, a glut that has caused years-long losses in the cement sector has barely been assuaged, the source says. “No demand, however big, can do away with the cement oversupply problem because the gap is something like 30m tonnes per annum.”

This has “partially made up for subdued demand from private homebuilders, which was affected by low purchasing power from Egyptian pound devaluation [in 2016], and later Covid-19, besides the government’s crackdown on informal housing and halting building permits.”

Ratings agency Fitch predicts that Egypt’s construction sector will grow by 10% year-on-year in 2021 and continue at nearly that pace for the rest of the decade, as the government continues to roll out its pharaonic mega-infrastructure projects.

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