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April 2016

Despite political and economic headwinds, the Egyptian real estate story remains strong.

Last year, the announcement of the Cairo Capital City mega project followed by the completion of the new Suez Canal expansion have set a positive market sentiment for Egypt.

Today, a few months into 2016, this positive sentiment is largely maintained, experts say, despite numerous challenges.

Ian Albert, Regional Director at Colliers International MENA, says: “Despite political and economic headwinds, sentiment in the Egyptian real estate market has remained cautiously optimistic and we are starting to see an improvement in the performance across all asset classes.”

Ayman Sami, Country Head, JLL Egypt, agrees: “The current sentiment is not as positive as it was before, however, when it comes to real estate it is still holding good value and is still considered as a hedge against any economic instabilities,” he says, adding that JLL have observed mixed real estate sector performance with some sectors being positively impacted and others less so.

For Colliers’ Albert, the key to Egypt’s real estate potential and reason for positive outlook lies in the fundamentals the country offers. “The underlying demographics driving [the real estate] industry are substantial and there is untapped potential in almost all market segments,” he says.

Residential sector

Driven by strong demand from a young and continuously growing population, Egypt’s residential sector has traditionally been the most promising sector in Egypt and offers significant room for development and investment.

While “residential is still the strongest performer since local demand is still strong,” as Sami says, there is a persistent issue regarding affordability.

According to Albert, the affordable or mid-market segment in Cairo is a key area to consider owing to the current gap in the market. “While the low end of the market is addressed by the government in terms of social housing facilities, and key developers launch projects targeting high-income residents, the market gap for affordable housing targeting the majority of middle income residents (77% of the population) remains unmet,” he says.

For Sami, the main issue with affordability is land prices. “Land prices have witnessed a huge increase, leading to developers shying away from purchasing land to develop in areas that are closer to the city. We are currently seeing new developments to the east starting as far as 40 kilometres east of Cairo and due to its affordable selling prices, the buyers’ appetite is still high. We have seen similar trends on the west side of Cairo too where developers are using their existing land banks to develop new projects with huge success rates,” Sami says.

According to Colliers, overall market performance across Cairo’s residential sales and rental market have improved significantly since 2013. Sales prices across apartments and villas increased by 27% and 64% respectively during the said period. Average rental rates on the other hand increased by 21% across apartments, while villas witness a marginal drop (4%) during the same period.

“Based on current trends, we estimate that the residential market requires an additional 500,000 units by 2020. This constitutes to approximately 90,000 – 100,000 units every year. Based on historic trends however, average new supply released into the market annually is approximately 45,000 units, meeting only 50% of the required housing units,” Albert says.

Foreign investment

Foreign investment is crucial to the growth of Egypt’s economy. Before the 2011 political crisis, Egypt was a very attractive Middle Eastern destination for FDI. The dynamic growth of the Egyptian economy pre crisis, its strategic geographical position, low labour costs, skilled workforce, unique tourist potential, substantial energy reserves, large domestic market and the success of governmental reforms all sharply drove up FDI.

While FDI had decreased as a result of the global economic crisis and later revolution of 2011, it started growing again with the government regularly implementing measures to further increase the inflow of FDI, including in the real estate sector.

The recent move by the central bank devaluing the currency to EGP 8.85 per U.S. dollar will help position Egypt as a value driven proposition for foreign investors as well as enhancing the central bank’s credibility,” says Ian Albert. “However, we anticipate that appetite will still remain cautious and many may adopt a wait and see approach. Despite this, we do expect to continue to see inward FDI, particularly from the GCC states. This reflects both their existing familiarity with Egypt, as they have been investing for many years but also renewed confidence in the outlook for the market,” the Colliers expert adds.

Furthermore, the government has recently re-shuffled 10 ministers “with the objective of improving the investment environment, and reviving tourism, etc.,” Ayman Sami adds. The structural reforms are aimed at making the market more accessible and attractive to foreign investors. “Foreign investment is an important source for foreign funds and the reduction of processes which [the government is] working on is an improvement. This coupled with the devaluation of the Egyptian Pound makes Egypt a more attractive place to invest now,” Sami explains.

Risks ahead

Speaking about the major risks and threats the Egyptian market will face in 2016 and beyond, Ayman Sami says that currency risk is one that needs to be managed well, as this has a stronger impact on importers such as international retailers and manufacturers that rely on imported goods and components. “The devaluation could lead to higher inflation too,” Sami adds.

In terms of real estate specifically, Ian Albert mentions there is a risk of developing products that have limited or no demand in the market. “This can be related to the price positioning, as well as the product offering itself. The best way to overcome this risk is to clearly understand what the market needs while also keeping in mind the volume and positioning of forthcoming products,” Albert concludes.

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