How residential developments are driving growth in Egypt

 

The outbreak of Covid-19 in early 2020 brought disruption to all sectors of the economy, and the real estate market was no exception. While the full impact of the pandemic remains to be seen, the real estate sector is likely to experience difficulties in the shorter term as state funds are redirected to tackling the crisis. However, the government’s LE100bn ($6.2bn) stimulus package introduced in April 2020, as well as the $2.8bn emergency financial assistance given by the IMF the following month, should help to support the industry’s growth in the medium to long term. In addition, in May 2020 the Ministry of Housing, Utilities and Urban Communities announced that it was taking steps to speed up the implementation of projects.

Recent Reforms

The government has responded to calls for a reform of the real estate sector by working on a series of sweeping regulatory changes. In September 2019 the state reviewed a new piece of legislation, the Real Estate Development Law, which had yet to be issued as of May 2020. The long-awaited law will regulate the property industry by establishing a new organisation, the Egyptian Federation for Real Estate Developers, which will be the primary licensing body, as well as creating an insurance fund to limit sector-related risks and excluding those who violate regulations. Under the 84-article bill, new licensing requirements will be introduced, whereby developers will be subject to fines of up to LE1m ($61,600) if they are found to be operating without a licence. The insurance fund, meanwhile, will be able to protect consumers’ rights if a developer fails to deliver units as scheduled.

In a further attempt to protect the market from fraud, Amr Nassar, then-minister of trade and industry, issued Decree No. 827 of 2019 in October that year, which amended the Executive Regulations of the Commercial Agency and Brokerage Law No. 120 of 1982. The amendments expanded the definition of a commercial broker to include real estate brokers, and stated that existing real estate brokers are required to register at the Brokers Registry at the General Organisation for Export and Import Control. If they fail to do so, they will be subject to penalties, which could include imprisonment for a period of up to six months or fines of between LE500 ($30.80) and LE10,000 ($616).

Additionally, in a bid to attract foreign investment, in December 2019 Prime Minister Mostafa Madbouly approved a draft law to grant Egyptian citizenship to foreigners if they purchase real estate assets or invest in the country’s economy, under four specific conditions. First, a foreign individual can be granted citizenship if they buy government-owned or private property worth at least $500,000, with the funds transferred from abroad according to rules set by the Central Bank of Egypt. Second, they can be granted citizenship if they establish or participate in an investment project worth at least $400,000, provided that the money is transferred from abroad and their share in the project does not exceed 40%. Third, if a foreigner deposits $750,000 from abroad, they are eligible for citizenship. The deposit is returned in Egyptian pounds after five years and may be exchanged after three years if the individual deposits more than $1m. In both cases, no interest will be applied. Lastly, if a foreigner transfers a non-refundable $250,000 to the Treasury from abroad, they can be granted Egyptian citizenship.

In May 2020 President Abdel Fattah El Sisi ratified Law No. 23, which amends certain aspects of real estate tax governed by Law No. 196 of 2008. The changes aim to minimise tax liability on factory owners and authorise the government to approve tax exemptions on properties in strategic industries. It is hoped that this will encourage the development of productive industries.

Performance & Size

In recent years the growth of the real estate sector has been supported by government investment in large-scale infrastructure projects, which first began to accelerate in 2013 in an attempt to foster economic and political stability. In FY 2018/19 public and private investment in housing and real estate activities totalled LE103.5bn ($6.4bn), up 28% from LE80.4bn ($4.9bn) the previous year. The sector is a major contributor to economic growth and accounted for 11.2% of the country’s GDP in 2018/19. It also directly or indirectly employed approximately 6m people in the same period. However, in 2019 the market was characterised by weak demand for residential property as a result of slowing consumer purchasing power and high interest rates. Recent years have also seen an accumulated oversupply of high-end real estate due to new players entering the market and the launch of projects across the country.

In October 2019 Cairo-based brokerage group Pharos Holding reported that selling prices increased by approximately 10-15% that year, compared to 30-40% in the years prior to 2018. The company attributed the sector’s slower growth to a limited number of project launches, modest land bank replenishment and no extensions of instalment schedules.

Nevertheless, real estate consultancy JLL reported that the market in Cairo continued to improve in the fourth quarter of 2019, with secondary sales prices on the rise in New Cairo and 6th of October City, and progress on the New Administrative Capital, located 35 km east of Cairo, boosting rental rates.

Although demand for real estate is likely to be affected by the Covid-19 pandemic in the shorter term, Egypt’s expanding population, which reached 100m in early 2020 and is predicted to continue growing by 2.6% per year, should ensure that demand remains high in the longer term. Furthermore, the country’s young population should help to absorb housing supply; according to local brokerage firm Arab African International Securities, in 2019 around 61% of the population was under the age of 30, of which 44% was between 15 and 29 years of age. Demand has also been bolstered by the country’s significant expatriate population, which accounts for approximately 10% of residents. However, expatriate demand has seen a considerable decline as a result of the outbreak of Covid-19, according to research conducted by local real estate marketplace Aqarmap. The company found that expatriates accounted for 45% of online property searches prior to the pandemic, whereas they represented 17% of online searches as of May 2020.

Office Space

The gross leasable area (GLA) of office space in Cairo has risen steadily in recent years, from 936,000 sq metres in 2015 to 1.1m sq metres in 2019. The office market has also seen high levels of absorption, with the average vacancy rate in Cairo falling to 12% in the last quarter of 2019, reflecting healthy demand. In comparison, the average vacancy rate in the same period of 2018 was 23%. At the end of the first quarter of 2020 the vacancy rate remained stable at 12%, despite the beginning of lockdown measures in March. In February 2020 JLL predicted that around 156,000 sq metres of new office space would be completed by the end of 2020, with more than five office complexes in the pipeline. However, this did not take into account potential disruption to construction projects and decline in demand caused by the pandemic.

In the fourth quarter of 2019 West Cairo was the most popular office location in the capital, with a number of high-end projects and extensions taking place, such as the Capital Business Park in Giza, which is being developed by Egyptian construction firm Dorra Group. In the third quarter of 2019 office rental prices in West Cairo rose by around 11% y-o-y as a result of strong demand for high-end gated communities and other recently announced projects.

Demand was also robust in eastern Cairo as developers looked to resettle in close proximity to the New Administrative Capital and Cairo International Airport. Office rents in this location rose by around 7-9% in the third quarter of 2019. In New Cairo, a number of major mixed-use developments containing retail, office, health care and leisure facilities were unveiled, which is set to drive further demand. The new capital itself also offers major potential for the development of office space. “The opening of the New Administrative Capital will give more space to the historic city centre. With efficient refurbishment, the area will offer a lot of advantages for corporate offices,” Mostafa Abdelmeguid, senior business development specialist at Al Ismaelia for Real Estate Investment, told OBG. “Overall, there is around 2m sq metres of unused land that could be utilised for corporate activities,” he added.

Although there was relatively healthy demand for office space in 2019, the segment is likely to see a decline in the short term as businesses and government entities transitioned to remote work in early 2020 due to travel restrictions imposed to contain the spread of Covid-19. In May 2020 Ayman Sami, country head of JLL Egypt, told regional media that demand for offices is expected to remain subdued as more companies opt to allow employees to work from home. “Office rents may not rise at the same annual 10% this year,” he said.

Looking ahead, developers are focusing on delivering more flexible office space to meet the needs of small and medium-sized enterprises (SMEs) and start-ups. “The public and private sectors are already working together to propose an efficient ecosystem for SMEs to be based in Downtown Cairo,” Abdelmeguid told OBG.

Retail

Retail GLA in Cairo also recorded gains in 2019, increasing from 2.1m sq metres in 2018 to 2.2m sq metres. As of the first quarter of 2020 it stood at 2.3m sq metres, but current market conditions are likely to result in project delays and downward pressure on retailers. Although there was limited new supply in this segment, demand remained consistent in general. In the final quarter of 2019 Cairo’s retail GLA grew by 8200 sq metres, with a number of new mixed-used developments in New Cairo adding to the supply. “We are seeing a transition towards more mature mixed-use development in the market,” Yasser Assem, chairman and CEO of Cairo-based Pavillion Architects, told OBG. “Egypt is beginning to capitalise on its experience with such projects, exporting engineering and design services to projects in Africa and the Gulf.”

According to JLL, approximately 7000 sq metres of additional retail space will be completed between April and December 2020. In the final quarter of 2019 average retail rents grew by 10% y-o-y and the vacancy rate fell to 12%, compared to 16% in the same period of 2018. As large-scale shopping malls continue to come on-line, demand for food and beverage outlets remains strong. In May 2020 James Bailey, client services director of real estate service provider Savills Egypt, told international media that the number of contractors fitting units at the Arkan business, retail and leisure complex in West Cairo grew by 60% in one week, suggesting that there is still considerable interest in new retail space.

Consumer behaviour is changing as a result of the rise of e-commerce platforms. This was a trend prior to 2020, but the outbreak of Covid-19 led to a surge in e-commerce activity around the world as physical stores were forced to close temporarily. “The retail sector is likely to see a slowdown in future supply, mostly due to the rise of e-commerce,” Habiba Mostafa, senior retail analyst at JLL, told OBG. However, the growth of e-commerce activity is expected to boost the country’s burgeoning warehousing and logistics segment.

Although e-commerce companies currently occupy only a small share of the market, many sector players are already changing their business plans in response to the segment’s growth. Retailers are increasingly expanding to cater to new consumer trends by adding entertainment facilities and food and beverage outlets in order to diversify their offering and maintain their appeal. Retail developments are also seeking to enhance their in-store experience and investing in their online presence to respond to changing consumer patterns. At the same time, some new brands are increasingly emerging as pop-up stores adopting special leasing approaches in major retail complexes to test market accessibility and demand.

Residential Property

According to JLL, the number of residential units in New Cairo and 6th of October City that have been handed over for immediate occupation stood at 159,000. Some 58,000 new units were scheduled for completion in 2020, the majority of which are to be built in eastern Cairo. However, JLL remained cautious about whether these projects would be completed on time due to budgetary issues and market stagnation. This is expected to be compounded by the effects of Covid-19, which has led to a slowdown in demand and a fall in household incomes. Indeed, in the first quarter of 2020 only 135 units were completed, meaning that the total residential stock remained virtually unchanged compared to the previous quarter.

Housing prices also slowed in the first half of 2019, with the nationwide real estate index falling by 21.5% compared to a y-o-y rise of 12.2% in the same period of 2018, according to research and advisory firm Global Property Guide. While nominal house prices fell by 14.1% y-o-y in the second quarter of 2019, in the third quarter real house prices increased by 4.8% compared to the previous quarter. Average sale and rental prices in 6th of October City both rose by 10% y-o-y in the first three months of 2020. In New Cairo sale and rental prices grew by 2.5% and 13%, respectively, over the same period. JLL attributed the downward pressure on sales prices in New Cairo to the large amount of new units under construction in the area. In comparison, there is a shortage of housing supply in 6th of October City.

Bridging the Gap

Private investment in the residential segment is primarily concentrated in the high-end market due to its lucrative profit margins and high land prices. In the New Administrative Capital, for example, land is usually valued at between LE4500 ($277) and LE5000 ($308) per sq metre. This led to a steady flow of investment in mixed-use communities in Cairo. However, this relatively small segment represents around 15% of the population, so the market is highly saturated. As a result, the remaining middle- and low-income housing segments are still untapped.

According to Global Property Guide, as of June 2019 Egypt had a property shortage of about 3m units, and would need 175,000 to 200,000 additional housing units each year to fill this gap. While there were approximately 5.6m vacant units throughout the country, most of them were unaffordable for low- and middle-income households. In response to the housing gap, in 2014 the government implemented a five-year plan to provide 1m subsidised homes to low-income citizens. As of July 2019 the programme had benefitted 241,517 families.

Urbanisation

Rising investment in the real estate sector is primarily being fuelled by the growing trend of urbanisation, which is being supported by the government’s National Strategic Plan for Urban Development 2052, which aims to double Egypt’s urban area from 7% to 14%. Under this plan the government is constructing 20 new cities, which will cover around 235,000 ha in total and accommodate 26m people. The New Administrative Capital is the government’s main priority in terms of infrastructure development. The city aims to ease congestion in central Cairo and areas close to the Nile as the population continues to rise. As a result of the pandemic, in April 2020 President El Sisi announced that the move to the new capital would be postponed to 2021. However, in May 2020 international media reported that construction had fully resumed with new protective measures. That month the government confirmed that two residential districts were set to be completed by the end of 2021, while the business district would be completed by early 2022.

The new capital has already generated considerable investor interest thanks to its strategic location and use of smart infrastructure. “The New Administrative Capital has managed to attract more than 300 investors, including private developers and national associations,” Khaled El Husseiny Soliman, a spokesperson for the Administrative Capital for Urban Development, the government institution in charge of developing the new city, told OBG.

Labour Saving Programme

In a further step to attract investment in the real estate sector, the government launched its first sovereign wealth fund, the Labour Saving Programme (Thara’a), in November 2019. The fund will take over some of the state’s assets in industries such as real estate with the aim of attracting investment from the private sector. Thara’a is also planning to take control of premises that become vacant when government offices move to the new capital. It may also take possession of buildings in downtown Cairo owned by Misr Insurance Holding Company, the state insurance company that owns 75 historic buildings in central Cairo, and various other state agencies. The fund plans to lease to private owners to restore properties, which will then be rented by private tenants.

Outlook

According to official figures, Egypt will need to construct around 1m units per year to bridge the housing gap. “The level of demand is consistently high enough to sustain real estate development,” M Abdallah Sallam, CEO of Cairo-based real estate company Minka Investment, told OBG. In light of this, in the longer term the country should see growth in investment and construction activity as the population rises. At the same time, the development of infrastructure and new urban centres will also help to support the sector’s expansion.

In the near term, as a result of the effects of the Covid-19 pandemic, the market is likely to see slowed growth as consumers hold onto their cash. According to Aqarmap, one-third of developers surveyed expect to see mergers and bankruptcies, and the majority foresee financial challenges. In response, most developers plan to reduce marketing and construction costs, and refocus on digital marketing. Indeed, the pandemic is likely to accelerate the digitalisation of real estate, and encourage the use of technology and online services.

Some players are confident that activity will pick up by the end of 2020. In May 2020 Catesby Langer-Paget, head of Savills Egypt, told local media that the market should begin to recover by the third quarter of the year.

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