Building Better Communities

Orascom Housing Communities

• OHC was established in January 2007.

• OHC started as a partnership between Orascom Development Holding (ODH) as a majority shareholder, Blue Ridge Capital (USA) , Equity International (USA) and Homex (Mexico).

• Homex Exited in 2009 and the current ownership structure is:

ODH 70%

Blue Ridge 13%

Equity International 17%

Vision and Mission

To be the leader in developing large-scale, sustainable and fully integrated

townships in Egypt and internationally

OHC Core Values:

• Develop towns with high-quality homes at affordable prices, optimizing scale

and efficiency.

• Offer housing solutions exclusively for the low and middle income sectors.

• Manage the communities aiming to maintain the town’s value at maturity.

• Support job creation, the most powerful contributor to community well-being.

• Responsibility originates from within through an unwavering commitment to

employees and customers.

OHC’s Flagship Town

• Haram City (HC), located in 6th of October, 20 km west of Cairo, is built on

approximately 8.4 million sqm.

• Upon completion, HC is expected to host 50,000-70,000 units with a

population of approximately 300,000 inhabitants.

• The township's infrastructure completed by OHC includes electricity,

networks, water, sewage and roads.

• Facilities will comprise schools, clinics, a hospital, a shopping center, retail

stores, a cinema, sporting clubs, houses of worship, office area, workshops

and a waste recycling facility.

• 11,500 units constructed.

• Over 10,500 units either sold or in sales process.

• Currently home to 35,000 people.

• Total commercial area of 7,688 sqm accounting for 192 shops.

• Amenities available:

– 4 Schools – Waste Recycling Facility

– 2 Clinics – Office Buildings

– Retail Stores – Sporting Facilities

– Coffee Shops – Embroidery Factory

– Bakery – House of Worship

– Cinema

Haram City to Date

Haram City – Google Earth Snapshot

Master Plan – 1st Phase

Haram City

The Start – June 2007

3,000 Units – September 2007

5,893 Units – December 2007

7,370 Units – May 2008

10,370 Units – January 2010

11,500 Units – January 2011

Green Landscape Affordable Residence

Developing Townships

Education Facilities

Services Area

Entertainment Area Office Area Shopping Area

Sports Facilities

Parks

Medical Care

Haram Life

• Haram Life (HL), the newest phase of HC covers 504,000 sq m of land

(120 feddans).

• It offers new designs with modern architecture, allowing buyers to

choose two, three, and four bedroom apartments.

• 600 units were sold, 35 buildings are under construction to be delivered

during 2012.

• Payment terms were adjusted to cater to a wider pool of customers (i.e.

down payment can be amortized over a period of 12 months).

Haram Life Design

Haram Life Design

Infrastructure and Services

• Residents began moving 18 months after the onset of construction.

• OHC undertook the following:

– Completion of water, sewage and irrigation networks.

– Establishment of electricity and lighting networks.

– Execution and operation of sewage recycling station.

– Establishment of a 66 kilovolt transformer substation.

Community Management

• One of the biggest challenges OHC faced is managing the fully integrated

community.

• OHC founded a specialized department to respond to the residents’

various needs as well as to provide periodic maintenance services.

• Managing the community became especially challenging in the wake of

the 2011 revolution when OHC had to assume the role of the government

in providing security, and securing subsidized goods for lower income

people.

Corporate Social Responsibility

• Socially responsible initiatives in Haram City include:

– Subsidized Orascom Language School fees for students (Primary

Education) to provide them with a better learning experience.

– Provided lands for governmental schools catering to different needs:

experimental, primary and secondary.

– Supported the Single Mother initiative, OHC rents units for a nominal

fee.

– Hosted a rehabilitation center for less fortunate children (Banati

foundation).

– Provided the land for the waste recycling company “Ertiqaa”.

Corporate Social Responsibility

• In September 2008, a rock slide in the slum area of Doweika in Cairo left

many families without housing.

• As part of its social responsibility, OHC offered its ready units to shelter

these families.

– The Sawiris family donated 600 units with a value of EGP 40 million to

the victims.

– OHC has housed 1,950 of these families to-date.

• Even though this move alienated OHC’s regular clients who are from a

different social segment, the Doweika residents provided much needed

mix to the community and introduced the proper mix of blue collar

activities

Corporate Social Responsibility

• OHC provided both moral and financial support to help victims of the rock

slide cope with the loss of their homes and possessions.

• Within days, OHC was able to furnish a large number of units and for more

than 8 months, OHC supported many families distributing bread and gas

containers as well as providing electricity and water free of charge.

• Moreover, OHC established a nursery, as well as a primary and a

preparatory school for these families.

• Now, these families represent an important part of Haram City’s

community, providing the city with workers and essential services.

Job Creation

• Throughout the life of Haram City, it has created more than 10,000

employment opportunities in different fields.

– This includes 3,400 direct employment with OHC and 1,000 jobs for

city residents in addition to the indirect work opportunities.

• OHC encourages the residents to start their small businesses by

subsidizing rental fees of commercial shops.

• Furthermore, OHC provided land for other entities to operate inside

Haram City and provide employment opportunities for the residents, such

as the embroidery factory (which mainly employs underprivileged

women), and the waste recycling facility.

Business Model

Government

DeveloperMortgage Providers

Business Model

Role of OHC as a Developer:

• OHC provides quality low income housing within sustainable fully-

integrated communities.

• OHC needs to be a volumetric business to maintain low margins

• Fast collection of unit price is of utmost importance in the sustainability of

the business model adopted by OHC.

– The business model is thus dependent on mortgage and its fast

disbursement .

• Here, OHC would like to showcase a successful example of the interaction

between the government, mortgage providers, and developers, in

providing low income housing: Mexico’s INFONAVIT.

Business Model

• OHC’s business model hinges on the interaction between the developer,

the mortgage market and the government .

• Role of the Government of Egypt (GOE):

1. Subsidy: The GOE used to provide low income citizens with a direct cash

subsidy of 10,000 EGP to help purchase the unit.

– However, starting October 2011, the GOE stopped this subsidy.

• A new subsidy is now provided through the Guarantee and Subsidy Fund

(GSF) and is given to the mortgage provider to subsidize both the down

payment and the installments.

• Subsidy amount ranges from 5,000 to 25,000 EGP depending on the

citizen’s income.

Business Model

• Role of the Government of Egypt (GOE):

2. Defining the target market: According to the current law, there are conditions

that must apply to a citizen purchasing in the low income sector:

– Earns a maximum of 2,500 EGP per month if married and 1,750 EGP per

month if single.

– The unit size can only be up to 63 square meters.

– Monthly mortgage installment cannot exceed 25% of the citizen’s

monthly income.

• This latter restriction limits the amount of the mortgage loan (Loan to Value).

• With the increase in prices, the difference directly falls into the down

payment.

Business Model

• Role of the Government of Egypt (GOE):

3. Subsidizing the land: The GOE provided the land of OHC’s flagship

project, Haram City, at a nominal price.

– The land price is payable over a period of 10 years as follows: 10%

down payment, 3 years grace period, 90% on equal annual

installments for the remaining 7 years.

– In return, OHC is obliged to sell only to low income clients, with a unit

area of a maximum of 63 sqm.

Business Model

• Currently the definition of the low income person salary was changed to

be 2250 LE per month for a single person and 3000 LE for a household

income.

• The subsidy structure was redesigned to be implemented with the new

social housing program.

• Low income developments by private sector are effectively counted out by

the structure of the new program.

Mortgage Finance

• Pivotal for the success of the model.

• Low-income customers → questionable affordability → importance of

mortgage finance.

• Solution in the sustainable mortgage market to enhance affordability.

• Turn the need for low-income housing → actual demand

Meaning → develop mortgage products by which low-income clients can afford to

buy housing units.

OHC Mortgage Experience

• OHC experience: mortgage finance represents 85% of sales → interdependence between sales and mortgage finance.

• OHC dealt with different mortgage providers: – Tamweel– Tameer– Egyptian Housing and Finance Company (EHFC)– Housing and Development Bank (HDB)

→ Each entity has its own mortgage product catering to low-income clients.

• Mortgage companies finance up to a period of 20 years.

• Sales process – time analysis • 15% OHC sales + 85% mortgage process → 3-party contract

OHC Mortgage Experience

• Role of the Mortgage Providers:

• Both mortgage companies and commercial banks act as mortgage finance

providers.

• OHC tried working with many mortgage providers.

• However, due to the operational difficulty in processing the volumes in the

low income segment, more than 95% of OHC’s mortgage sales are done

via Tamweel, a sister company subsidiary of ODH.

OHC Mortgage Experience

• Ultimately only Tamweel (Orascom Subsidiary ) remained committed

to funding OHC clients until it consumed its portfolio.

• Other companies refrained due to operational challenges and lack of

mortgage law enforcement and other practical legal challenges like

lack of registration or the ability to register both for old and new

developments.

OHC Mortgage Experience

• With Tamweel reaching its maximum capacity to provide mortgage

loans and with the shift in housing policies, affecting new land

allocations to private developers OHC had to adapt to survive.

• Thus OHC introduced the phase of Haram Life comprising of

multistory buildings and based on seller finance leading to a drop in

volume, calling for capital increase and immediate price hikes

effectively pushing OHC to cater for a higher income category.

Current Situation in the Egyptian Market

• The current adapted policy by the government is totally excluding private

sector and focusing on the 1 million units project .

• The 1 million unit project enjoys heavy subsidies from different angles, price

offered at construction cost not counting land or infrastructure cost, direct

cash subsidy from Guarantee and subsidy fund, heavily subsidized interest

rates through the central bank initiative (7% reducing interest rate ).

• Sustainability is in question as the funds available covers a fraction of the

needed finance.

•

Touching on Mexican Model

• Here, OHC would like to showcase an example of the

interaction between the government, mortgage providers,

and developers, in providing low income housing: Mexico’s

Homex ( Private Developer ) / INFONAVIT, this example used

to be successful till 2 years ago, when the government

introduced a shift introduced a shift in housing policies.

Mexican Model: Homex

• Vertically integrated housing development company focused on Affordable Housing.

• Works on reducing exposure to interest rate and financing risk.

• To reduce working capital needs, home construction begins only when the homebuyer:→Submitted all required documents to obtain financing from the

mortgage lender→Signed a purchase application for loan processing and granting→Made a down payment

Mexican Model: Homex

• As a partner OHC tried to import Homex’s know-how in the industrial production → maximize construction efficiency while maintaining healthy cash flows.

• Up until 2008 – 2009 Homex used to sell and build 60000 units a year.

• Homex as well as other similar developers reaped enormous benefits from the preapproved pool of mortgage clients created by the infonavit system.

* Source: Homex Investor Relations

INFONAVIT

• INFONAVIT is the Mexican workers’ housing fund, founded in 1972

• INFONAVIT receives 5% of all formal workers salaries and provides housing

mortgage products accounting for 60% of all mortgages in Mexico

• INFONAVIT has a dual nature: a mortgage provider with a social mandate

and a pension fund manager

• This scheme is so successful that INFONAVIT is now Latin America’s largest

mortgage supplier

• Over its life, it has helped an estimate of more than 21 million Mexicans

become homeowners

Mexican Model: Infonavit

• Dual nature:

– Pension Fund Manager: since 1992 it is part of the National

Pension System (SAR); workers’ funds are held in separate

individual accounts with minimum guaranteed annual returns.

• Mortgage Bank: mortgage lender with a social mandate; up-to date,

it has originated more than Government body - comprises equal

representation of the labor sector, the employer sector and the

Federal Government.

Role: pre-qualify any worker who is a part of the formal Mexican economy to a

mortgage loan after proving regular employment (income) for a minimum

period of time.

The main source of funding is a 5% deduction from the worker’s monthly salary.

– Workers qualify for a mortgage loan through a point system factoring in a

social dimension.

– Through the Infonavit system, Mexican private sector employees earning 3

to 4 times the minimum wage ($150) can own a home after 2 years of

regular employment.

– 92% of low-income home sales take place through the pre-approved pool

of Infonavit.

Mexican Model: Infonavit

INFONAVIT

• The loans granted by INFONAVIT are denominated in terms of multiples of

the minimum wages (TMW)

– The maximum amortization period is 30 years

– 63% of loans in 2011 went to beneficiaries earning less than 4 TMW

• Essentially, INFONAVIT creates a pool of pre-approved clients and

disburses the loan quickly, allowing developers to work with low margins

• INFONAVIT does not require borrowers to make any down payment to

obtain the house thus eliminating a huge hurdle facing Egyptian

developers in the low income segment

Lessons Learned

• The underlying assumption for any affordable housing policy to claim any degree

of success is being sustainable, in broadening affordable housing ownership among

lower income groups. Otherwise it is doomed to be always temporary (Piece meal

approach).

• From our experience in Egypt, Governments on their own are not successful

developers and any of its policies are destined to be unsustainable without a

market / demand driven private sector participation.

• There is a huge need for housing among lower income groups but this need cannot

be counted as effective demand unless low income people can actually afford

buying homes.

• The only way for private sector developers to be attracted to this market is through

the presence of proper mortgage products carefully designed to cater for low

income people.

• For the private sector to operate successfully and cater for low income

people at affordable prices it needs to produce large volumes of homes,

thus turning housing into a commodity through an industrial process.

• This way it can practically operate on high turnover over a short period

of time on low profit margins and recognize higher return on capital

over the financial year (revolving capital several times in one year)

hence fast collection is a key.

• Accordingly the role of carefully designed mortgage operation and

efficiently mapped home sales / mortgage qualification processes is of

utmost importance.

Lessons Learned

• Ideally for this model to function communities need to be built

horizontally this way a developer can work in parallel and finish up

the unit in record time (It took them 3 weeks to a month with some

Mexican companies). This requires cheap land, which means

companies either acquire land from open market or governments

help with supplying land at nominal prices and attractive payment

terms if not for free as a form of indirect subsidy.

Lessons Learned

Lessons learned

• In both Egypt and Mexico the main affordable housing private

Developers practically stalled and stumbled, Homex Filed for

Bankruptcy protection and struggling to come back under the new

housing strategy.

• In Egypt OHC is struggling under a total lack of support from the

government (actually hostility), and yet another strategy of

counting the private sector out of the affordable housing formula.

Hence OHC currently turned closer to a middle income developer

due to a failure of the original Model.

Lessons Learned

• Does that leave any hope ??

• The answer is : with careful analysis of the causes we can reach

some conclusions.

– Both Homex and OHC are forced to abandon there original

horizontally expanding developments due to lack of Cheap land

that qualifies to the Governmental subsidy haven.

– In Mexico there is a government preference for developments

closer to the city for low income citizens to reside closer to

employment (Homex built far from cities)

Lessons learned

• Building closer to cities means more expensive / smaller available

land plots, forcing developers to go vertical (High rises) thus

fundamentally distorting the business model through forcing it into

longer collection / Capital cycles and definite carry over inventory

(which will further lengthen the cycle) . Very hard to operate

mechanically under strict low margins .

• From a macro perspective The social effects and human product is

in question its been tested all over the world.

Lessons learned

• France, Egypt … etc Such vertical concrete jungles create trouble

gettos.

• In Egypt we ran out of mortgage steam, Orascom group couldn’t go

beyond what it already funded through its tamweel mortgage

subsidiary.

• Egypt has a mortgage low that’s not functioning due to lack of

registration, lack of political will to effectuate foreclosures generally

lack of mortgage low enforcement , hence the model failed again .

Lessons learned

• OHC however has serious emphasis on community aspects as well

as the readiness to provide and operate primary infrastructure

something that Homex lacked.

• It is true that Egyptian government counted out private developers

after revolution yet it was ready before then to provide cheap land

that was far enough and close enough as a form of subsidy, and was

ready to cover these areas with transportation lines

Lessons learned

• Had Homex adapted Orascom’s development vision through

creating real communities it wouldn’t have fallen under the blame

of throwing people out in the middle of nowhere.

• Yet to be fair governments shouldn’t have approved the zoning nor

the master plans in the very first place (attributed to the federal

system and thus lack of central planning.

Lessons learned

• To conclude bring infonavit like system creating a sustainable

mortgage provider entity to Egypt with the national housing

development policies and treat legal defects and anomalies and

private developers will gain cruising altitude.

• And treat the Mexican development issues along with more

government commitments than it will revive an enormous housing

producing machine in the proper development sense.

Comparison of factors affecting original modes of operation.

Strengths of OHC model:- Better accessibility to well situated, subsidized land due to Egypt’s highly centralized government land control. 2. Community Concept with all related benefits of healthy environment and job creation and infrastructure development and management

Weaknesses of OHC model:1. Lack of mortgages due to legal structural issues2. Lack of law enforcement with community charges, making community management very costly.3. No infonavit preapproved pool. 4.Governoment not willing to depend on private developers for affordable housing supply

Strengths of Homex model:1. Infonavit preapproved pool.2. Significantly better legal environment for mortgages and development issue3. Government’s willingness to still cooperate with private developers (on different terms).

Weaknesses of Homex model:1. Access to plots on the open market and with no land subsidy elements. Leading to acquiring plots very far from cities with no transportation 2. Originally lack of community concept leading to alienated ghetto developments and thus to dissatisfied clients. 3. Not necessarily responsible for primary infrastructure and relying on regional governments not necessarily committed.

Mix & Match

• Those previously stated factors if observed carefully they can be

aligned to reach the proper mix for a more sustainable market

driven model with joint government subsidy / private development

engagement. In a manner which may set the stage for healthy

competition among private developers to provide affordable homes

for lower income groups.

• The triple win situation stems out from the fact that all involved

parties need the large housing volumes to benefit from this kind of

model.

Building Better Communities

Thank you