Egypt’s SODIC (Sixth of October for Development and Investment Company) is one of the companies at the forefront of plans to reshape the country’s capital city over the next few years. In just a decade since it was established, the company has grown on the back of Egypt’s surging real estate market into one of the region’s leading development companies.
It now has a market capitalisation of more than $1bn and its shares are regularly in the top five most traded stocks on Egypt’s CASE-30 index.
“We’ve had a strong tail wind in that the operating environment has been excellent,” says the company’s managing director, Maher Maksoud, explaining SODIC’s phenomenal growth.
SODIC’s own growth has mirrored the exponential growth of Egypt’s real estate market in the past few years. Land prices have risen more than thirty-fold since SODIC acquired its first 10.7 million square metres of land from the government in 1996, for just E£37 ($6.72) per square metre.
The company’s first development – a residential neighbourhood of approximately 1600 residential units on 1.75 million square metres of land in Sheikh Zayed City, named Beverly Hills – generated sales of more than E£1.2bn. The compound includes flats, villas and chalets with easy access to the new British International School, which opens this year, and the Beverly Hills German School.
Growth in demand
Despite rising prices, demand for this type of development is only increasing. SODIC’s chief commercial officer Youssef Hammad says that the company’s Allegria project, a gated residential development built around a Greg Norman signature golf course, has practically sold out off-plan. Despite the arrival of several large foreign developers, demand for new houses continues to outstrip supply.
Forecasters projected that it would take three years to sell all the units in the Allegria development, but at the current rate of sales, the project will be sold in just 14 months at prices 30% or 40% higher than initially forecast. Mr Hammad says: “We’ve now signed E£1.8bn of sales, equivalent to 70% of the project, and expect to have completely sold the Allegria project by the third quarter.”
The government’s successful economic liberalisation and stimulus programmes have released decades of pent-up demand for property developments. The introduction of a new mortgage law, the fashion for property investment among Egypt’s fast-growing middle class, and the arrival of Gulf investors flush with cash on the back of high oil prices, have also fuelled growing demand for property developments.
“There has been a real change in the government and in the economy,” says Mr Maksoud, who studied at the London School of Economics. “Before 2004/05 the environment was very difficult,” he says. “But now the addressable segment of the population is growing to 10%, whereas 10 years ago it was just 2% to 3%.
“This has had an enormous impact, not only on the residential sector of the real estate market, but [has] also encouraged development of the commercial sectors, including specialised retail and office developments that were not previously viable.”
Other than Allegria, SODIC is currently developing an additional 2.5 million square metres of land to the east and west of Cairo in several high profile projects that will help transform the map of the city.
Last year, SODIC signed an agreement with Lebanon’s Solidere – already famous for rebuilding the war-ravaged central Beirut in the late 1990s – to develop two new town centres on the east and west of Cairo.
SODIC has also undergone significant changes to become one of Egypt’s most successful companies following an effective reorganisation in 2004 after Egyptian investment bank EFG-Hermes acquired a significant stake.
The company had a large bank of undeveloped land, but economic recession had left it in poor financial health. The reorganisation brought a clean balance sheet, new management and perhaps most importantly, a new vision.
By 2006, the company had a fresh balance sheet and a new management team with instructions to take advantage of Egypt’s rapidly changing economic outlook.
During 2006 and 2007, SODIC’s new management began converting the company’s entire five million square metre land bank into some of the biggest real estate projects in Egypt. “We had zero debt and very little cash,” says Mr Maksoud, “so it was a bit like taking on a start-up.”
Since the reorganisation, SODIC has delivered consistently impressive results for its shareholders. Net profits have risen from E£41.3m in 2005, to E£226.7m in 2006, and E£158.2m in the first nine months of 2007.
At the end of the third quarter of 2007, SODIC’s balance sheet showed more than E£450m in cash and some E£600m in receivables from sold projects.
In a recent change to SODIC’s business model, the company has decided to retain ownership of a percentage of its developments so that leasing revenues can generate longer-term earnings streams in addition to income from sales. SODIC’s management team has already begun looking at opportunities to build up a portfolio of leased properties.
Mr Maksoud says that in the past land was “almost a free resource”. The problem was finding investors and construction partners. But, he adds, now that demand for real estate has been proven, the problem is finding land and structuring a business model that uses this increasingly expensive land efficiently in a manner that maintains the required rates of return.
Even though the price of undeveloped land has risen, potential returns for the right projects are also rising. Even though SODIC paid 10 times what it paid in its first deal for land near the American University, returns on its current project are expected “to be in multiples of the land we bought at E£37 per square metre”. says Mr Maksoud. “E£600 per square metre was considered an astronomical figure at the time we bought land adjacent to the new American University in Cairo, but now we wouldn’t sell the same land for E£5000 per square metre,” he adds.
One recent analyst report claims SODIC has sold off land to boost the company’s financial performance, but Mr Maksoud maintains that sales of land to specialist developers were made simply to add value to the overall development.
The fact that SODIC is still trying to buy land – at rates far in excess of what it paid for its existing land bank – gives weight to Mr Maksoud’s explanation.
He says: “We are looking to expand our land bank to develop it, but we would contemplate selling small portions of land to specialist developers for the development of strategic components which add value to our projects.”
SODIC recently initiated development of a luxurious furniture and home accessories mall on a plot of 116,824 square metres, which it subsequently sold to Bonyan Development and Trading Company, a subsidiary of Citadel Capital, a deal amounting to E£300m which valued SODIC’s land at E£2250 per square metre. Once built, the mall will add significant value to the surrounding land.
Analyst reports have started to speculate that SODIC could itself become a takeover target. When asked if the company has become a suitable acquisition candidate following the takeover of Orascom Cement by Lafarge, Mr Maksoud pauses before smiling and saying: “Absolutely. There will be a lot of mergers and acquisitions in this market. SODIC has a lot of cash and the ability to take on a lot of debt if needed. It is also trading close to its net asset valuation and this makes us a potentially interesting takeover target.”
SODIC’s management are clearly keeping their eyes open for opportunities to expand – both in terms of new types of real estate development and into geographical areas outside the Egyptian capital. A merger or acquisition might be one way forward for the firm.
Mr Maksoud’s list of priorities in the next few years includes increasing the size of the company’s land bank, maximising the use of existing land, creating long-term income streams through leasing arrangements, and broadening the company’s investment in areas such as offices, retail developments, residential tourism and possibly even infrastructure.
SODIC has made public its ambition to acquire another two to three million square metres of land in the next six months. Mr Maksoud says: “We are looking for attractive land in the west of the north coast, on the Red Sea coast and also in some non-traditional areas such as Egypt’s still relatively neglected second cities, although these are still small in scale. We have also looked at overseas markets, but the returns are currently still higher in Egypt, although there may be opportunities overseas in the future.”
For the moment, Mr Maksoud is content with his home market: “Egypt has had many false starts, but is finally starting to go forward. This is now our fourth year under the new government and it is an incredibly refreshing environment in which to work. This new liberal environment has unleashed the country’s huge potential.”