On 16 June, Emaar Misr, the Egyptian arm of one of Dubai’s leading real estate and mall developers, offered 13 per cent of its share capital on the Cairo bourse in a deal expected to raise about $300m to finance the company’s projects. This is the precursor for a similar-sized initial public offering (IPO) of shares in Egyptian Centres, an affiliate of Saudi Arabia’s Fawaz Alhokair Group and the operator of the Mall of Arabia on the southwestern outskirts of Cairo.

These deals reflect a revival of interest on the part of developers and financial investors in the potential for Egypt’s retail sector as the middle class expands and moves out of city centres.

The first wave of investment in malls started in the 1990s, as developers built a series of new residential areas around the periphery of Cairo, targeted at a relatively small but rapidly expanding middle class. These developments took advantage of the construction of a new ring road around the capital and the extension of the 26 July highway from central Cairo to intersect on the western outskirts of the city with the desert road to Alexandria.

Ambitious developments

At the time of the 2011 uprising against the Mubarak regime, a new wave of ambitious mall and residential development schemes had started. These included the Mall of Egypt, being undertaken southwest of Cairo by the Majid al-Futtaim Group of Dubai, whose local affiliate, MAF Misr, had already established City Centre malls in Cairo and Alexandria in 2002 and 2003, respectively. On the eastern outskirts of the city, the Al-Futtaim Group, a separate Dubai-based entity, was developing Cairo Festival City, incorporating a 32,000 square-metre Ikea superstore. Work on these projects slowed down as a result of the political turbulence. Nevertheless, Cairo Festival City was inaugurated in November 2013, and the Mall of Egypt is scheduled to open in early 2016.

Egypt now has about 15 malls catering to a total population approaching 90 million. The vast majority of Egyptians still shop in small local stores and markets, as well as in government-run co-operatives selling subsidised goods on ration cards. However, the malls have succeeded in attracting large numbers, both for the shopping in branded stores and for the leisure amenities they offer, including children’s play areas, cafes, restaurants and cinemas.

An indication of the size of the retail market can be gleaned from government data that shows the retail and commercial sector being worth about $30bn in 2014, equivalent to 11 per cent of total GDP. This sector is also one of the fastest growing. It expanded by 13 per cent in real terms in the 2013/14 fiscal year and by almost 16 per cent in the first half of 2014/15. According to Majid al-Futtaim, its two City Centre malls in Egypt had a combined footfall of 22.8 million in 2014, which is roughly the same as its Deira City Centre in Dubai, although some way short of the almost 40 million recorded at the emirate’s larger Mall of the Emirates.

The IPOs being launched by Emaar Misr and Egyptian Centres are an indication that mall investors are gearing up for expansion. Alhokair has said it intends to add space to the Mall of Arabia, which was built between 2008 and 2010 by local contractors including Hassan Allam Construction. Alhokair is also planning to build a new mall in eastern Cairo, in partnership with Medinat Nasr Housing & Development, as part of the mixed-use residential Teegan development, near the city’s international airport.

Alhokair partnership

According to an announcement by Medinat Nasr to the stock market at the end of May, the two companies have agreed in principle on the development by Alhokair of a mall on a 100,000 sq m plot. The land would be provided on a 50-year usufruct basis to Egyptian Centres, which would develop a mall with a gross leasable area of 68,500 sq m, just over half the present size of Mall of Arabia.

The main focus of Emaar in Egypt has been on its real estate and tourism developments: Uptown Cairo and Mivida to the east of the capital, and the Marassi resort on the Mediterranean, west of Alexandria. However, in its IPO prospectus, Emaar Misr says it plans to use the proceeds of the offering principally for the development of the non-residential aspects of its projects, including retail.

Part of these funds will be allocated to the pre-launch expenditures and costs related to developing the Cairo Gate mall in 6 October City, southwest of Cairo. Emaar Misr announced the City Gate project in 2012 as a partnership with Al-Futtaim Group. The project is “currently under masterplanning”, according to Emaar Misr.

Legal dispute

Indications of a revival in Egypt’s mall projects will be welcome news for contractors operating in the local market, although their experience in this area has not been without its problems.

One of the first major mall construction contracts was for City Stars, developed in eastern Cairo by Golden Pyramids Plaza, controlled by Abdel-Rahman Sharbatly, a Saudi Arabian businessman. The mall was built by a joint venture of the local Orascom Construction Industries (OCI) and Athens-based Consolidated Contractors Company (CCC). The main contracts were awarded in 1998 and 1999, and the work was completed in 2005. A dispute arose over the performance bonds and payment for additional work by the contractors. In February 2015, OCI, whose corporate headquarters is now in the Netherlands, announced that the Cairo Regional Centre for International Commercial Arbitration had ruled in favour of the two contractors, awarding them $80m-plus interest.

On 2 May, Golden Pyramids Plaza stated that it had yet to make a formal announcement to the Egyptian stock market of the arbitral award as it intended to pursue further legal steps.

Orascom Construction, in partnership with its Belgian affiliate Besix, in 2012 won the $400m main contract for the Mall of Egypt, and has also worked on the Nile City mall, the extension of the Maadi City Centre mall and elements of Cairo Festival City. The main contractor on the latter scheme is Al-Futtaim Carillion. Other local contractors that have worked on mall projects include Hassan Allam Construction and SIAC.

Another factor that has helped revive the appetite of investors for mall and real estate projects in Egypt has been the shift in legal attitudes in favour of business. In the latter part of the Mubarak era, a number of suits were brought against officials and developers on the grounds that the land for some high-profile schemes had been allocated improperly. The judicial backlash against developers intensified during 2011 with a series of court rulings against ministers and business leaders.

Under Mohamed Mursi, the government made some efforts to resolve outstanding disputes with businesses, and this trend gathered momentum after Mursi was removed from office in July 2013. One project affected by the land disputes was Cairo Festival City. After more than two years of deliberations, the government announced in November 2014 that a settlement had been reached between the parties, based on a renegotiation of some of the original land prices.

The government has, meanwhile, pushed through a law that prohibits third parties from initiating legal proceedings against contracts signed between investors and official authorities. The new investment law also contains clauses designed to safeguard the rights of investors in the event of disputes with the government.

Despite these efforts to promote Egypt’s attractions for business, retail investors are likely to exercise caution. The upbeat presentations from the Ministry of Investment and from financial advisers seeking to boost their deal flows provide no guarantee that investors will be able to navigate a smooth passage through the bureaucracy and the legal system, among whose recent controversial actions has been the sentencing, in absentia, of the chief executive of J Sainsbury of the UK to two years in jail (he has since been acquitted on appeal).

Geographical factors

There is also a risk that the Cairo retail market may become saturated once new projects such as the Mall of Egypt come onstream. Other parts of the country are not so well served, but investors say it is much more difficult to secure permits in provincial cities than in the development areas around Cairo.

Nevertheless, positive responses to the Emaar Misr and Egyptian Centres IPOs give a clear signal of confidence from the financial sector in the future prospects for mall and real estate schemes in Egypt.