Mohamed el Taher, CEO of Al Ismaelia for Real Estate Investment, talks about preserving and restoring Downtown Cairo’s heritage and how to develop Egypt’s promising property development sector, to ensure it can fulfil its potential.

LT: Can you give us an overview of Al Ismaelia for Real Estate Investment?

MT: Al Ismaelia was established in 2008 with a view to acquiring and reviving buildings in the Downtown area of Cairo. We focus on restoring what I would term heritage buildings, with our main day-to-day work consisting of acquiring buildings, offering tenants key-money and then working on the restoration.

We currently have around 22 properties, mainly in the Downtown area of Cairo. While people associate the name of our company with Ismaelia the city, in fact Al Ismaelia was the name used for Downtown before the 1952 Revolution. Khedive Ismael developed this area to create big mansions with huge gardens during the 19th Century in what was to become a modern city centre on par with European cities – effectively the New Cairo of its day. Many of the designers of the Downtown buildings were French, Belgian, or Italian…but a number of talented Egyptian architects also took part in this process. So Downtown has a lot of history and heritage to speak about.

What is nice about this project is that everyone understands that we are trying to create value and enhance the lifestyles of people living in Downtown Cairo through reviving the area’s heritage. Of course it would be easier to use the same amount of capital to build a normal compound in New Cairo or 6th October, but we have embraced this project because our shareholders love Downtown and want to bring it to life again. Downtown is still the most central location in Cairo.

When Al Ismaelia started to work on this project, we became aware of the abundance of art and culture in Downtown. Our Chairman, Karim Shafei, who is the generator of the restoration idea, and one of our shareholders, and Aladdin Saba, had a good clear vision of how Al Ismaelia could work in collaboration with entities holding artistic and cultural activities to bring interest and awareness to the aims of both. It was clear that there was something different happening Downtown; the area was not filled exclusively with shopping and other commercial activities.

Premises for art abound in the area: galleries, art schools, artists and musicians living in Downtown. So since our inception we have been one of the biggest supporters of art and culture in Downtown, because there is a naturally complementary aspect to what we are doing with the art and culture scene.

LT: You are a major sponsor of D-CAF, is that right?

We are actually a co-Founder of D-CAF, not just a sponsor. Karim Shafei co-Founded D-CAF with Ahmed El Attar back in 2012 and now it’s a success story. It’s all about building knowledge and awareness of Downtown Cairo and we can see that the clientele are getting more and more interested in the area and its history.

LT: Could the model being used by Al Ismaelia serve as a solution to the real estate bubble? Instead of expanding development in a geographic sense, you are bringing innovation into places where people are already based, so what impact does this have on the sector?

I have been working in property development sector since 2006 and have been with many of the country’s biggest property development companies, including Emaar Misr, City Stars, and now Al Ismaelia. I have also worked as a consultant in public and private sector projects. So I have witnessed the rise and evolution of the real estate sector in Egypt.

There is of course a bubble. The main issue is the devaluation of the Egyptian pound; people want to be able to invest their money somewhere where it can grow. This is driving a lot of investors towards the real estate sector and has put a lot of pressure on the sector in terms of having real market players.

But there is also a slowing down amongst the big real estate players in terms of sales. I believe that this year and next year we will see for the first time a decrease in real estate prices in Egypt. A lot of people have bought property on the assumption that they would be able to resell to another end user, but the other end users have already bought with them, so the market is already extended to beyond its capacity.

Since the devaluation of the pound, rental prices for commercial properties have more than doubled. This has put a lot of pressure on business owners, who are now having to deal with rent issues in a very strategic way rather than being able to focus their attention on their businesses. This gave us the opportunity to offer a centralised location and buildings with considerable heritage, and various finishing standards ranging from A-Class office space to shell and core at competitive prices.

So yes, at this point with the bubble formed, people are looking back at Downtown, Heliopolis, and Zamalek as places to base their businesses. Of course Downtown has good transportation links as well so this is another advantage.

LT: When it comes to your partnerships and projects, do you have anything particular in the pipeline?

We have a lot of strategic partners, including the European Bank for Reconstruction and Development, with whom we have signed a financing deal of over 140 million Egyptian pounds. We have a lot of alignment with the Cairo governorate in terms of developing Downtown; we are supporting the national committee established three months ago under presidential direction to enhance Downtown. We also work with Austrian consultants and the Swiss Embassies.

In terms of our sub-contractors, we work with local and international consultants. We look for people who share our vision to revive some of the history of Downtown. We work with a lot of young entrepreneurs as well, including Kamelizer and Rise Up; we have a lot of activities that we want to undertake jointly to transform Downtown.

Zaki Hashem is our law firm and we have worked on a number of cases with them.

Regarding the projects currently in the pipeline, we have four: an office in the Champollion building, expected delivery date June 2017, Kodak Passage F&B concept, Radio building office and retail, and a co-working space in the old French consulate building. All are expected to be delivered in Q4 2017.

LT: What has been the impact of the new VAT law on the industry?

The VAT law has brought a lot of distortion and noise to the market. As it is not clear how the VAT will apply to different sectors, a lot of delays have been caused in our negotiations with consultants and contractors. Also the price increases affect this; having a sudden additional 13% in your contract obviously impacts operations.

LT: If I am an end user, will my contract be affected by price increases if they occur while we are in the middle of doing business?

No: as long as both parties have signed the contract agreeing to a particular price, the end user will not be affected by price changes, unless there is a particular stipulation or disclosure clause in the contract that such changes can be applied, which would be unusual.

But often we, as a property development company, are expected to shoulder extra costs. In Downtown, margins are very thin and you don’t have a lot of room to cut from your profit. We end up repeatedly coming up against the same question – do we allow these price increases and delays to affect our project efficiency or do we increase our selling prices or renting rates?

Also with the new customs and the devaluation, the impact is even greater. Everything is happening at once: you have the price of energy increasing and the removal of the subsidies; you have the contractors and suppliers increasing their prices; you have the customs increases which affect all imported components – lighting, computers, ACs – and the fluctuation of the US dollar, which affects the customs rate itself. Add to all of this the VAT and it is impossible to absorb all of it at once, as one company.

LT: If you were to say anything to the legislators about current regulation, what would you say?

The real estate sector is large, contributing to 13% of the country’s GDP and it could potentially tap into up to 25% of the GDP. But due to the market being so unregulated it is falling below its potential. The government is selling off large plots of land but there is no regulation or guidance with regard to how the process itself should work so if you want to sell off land you don’t know how to finance it, or even how to advertise it.

Having strong and clear regulations when it comes to, for example, the sales mechanism, would help to avoid the kind of bubble we are currently in. I don’t believe that such large plots of land should be sold – or if they are to be, they should be sold to land developers who will pay 100% of the land price to the government. This is easier to finance; banks can be brought in to do so in a regulated way. Currently, if I ask the bank to finance a project and I don’t own the land, the bank will refuse – because we don’t have collateral, so if we default on a payment the bank will not be able to pay back the investors. If the land was being sold in smaller plots, there would be more control over the process.

Real estate is an extremely important sector, as you have many other sectors supporting it: cement, steel, ceramic tiles, furniture, lighting, roads – they are all interconnected. I am surprised that the new Investment law has not been structured so as to better support this sector; it only supports subsidised residential buildings.

There is also no clear capital gains tax on the industry; if there was, it would reduce the bubble and things would start to move. Property tax is a good and healthy thing to have but it is still very unclear and people don’t know exactly where it should be applied. None of us know what the methodology is in having this tax calculated.

As with any industry, it is crucial that we push to make this one better, but I believe the need is particularly important, given the potential of the real estate sector in Egypt at this time.