The aftermath of the resignation of Hosni Mubarak, Egypt’s former president, hit many sectors hard. Banks closed, tourists fled, stock trading halted and retailers were left with empty shelves. In the year and a half since, the country has begun to regain its economic footing, though it still grapples with weak growth, low foreign exchange reserves and uncertain policy directions.

However, in spite of the complicated macroeconomic outlook, the real estate sector is staging a modest comeback. While it is far from the growth many might like to see – with projects being cancelled, land being litigated and some rents bottoming out – the medium-term forecast looks surprisingly steady and the longer-term fundamentals seem robust for developers able to ride out the short-term uncertainty.

THE DUST SETTLES: 2011 was something of a lost year for many developers, who were faced a number of market-tightening factors. Broad macroeconomic uncertainty, for example, dampened spending. Large swathes of the private sector froze expansion plans, resulting in several projects – both announced and under construction – being delayed. There were no sizeable new project launches, due in part to a drop in capital inflows, and potential client sectors, including retail and tourism, saw drops in spending.

This obviously had implications for demand. A number of Egypt’s larger developers were left exposed to pre-sales and backlog cancellations, in part due to regulations allowing homebuyers to cancel their contract at any point prior to property handover. Developers can retain a deposit up to roughly one-tenth of the total value, but the rest of the funds must be returned.

As a result, the slowdown in demand left real estate firms facing potential shortfalls in financing, particularly for those companies that had large numbers of presold units in 2010, just before prices fell. While some firms benefitted from strong reserves that enabled them to mitigate the worst effects of cancellations, other developers are still grappling with a cancellation rate that outstrips new contracts. As of the first quarter of 2012, research from Lebanese Blom Egypt Securities noted that one major developer, suffering from a highly-leveraged balance sheet as of early 2012, was signing one new contract for every three cancelled, although total cancellations had fallen by 20% quarter-on-quarter with a rate roughly equal to pre-revolution levels.

COMPLEX COMPLICATIONS: Land risk was also a significant concern. Egypt’s legislative framework currently outlines a somewhat complicated approach to land ownership and agreements. Two laws – one in 1979 and one in 1998 – provide two different channels for agreements. The 1979 legislation authorises the New Urban Communities Authority to set aside acreage based on a “direct order”, while the 1998 law established an auction for all subsequent land transactions. Furthermore, in addition to the opacity of the land allocation process, land pricing also emerged as an issue following Mubarak’s resignation. Concerns over illegal transfers or improper-pricing led to court cases for some projects. Talaat Mustafa Group (TMG), for example, one of the largest firms in the country, has faced a court case over allegations that land tied to its $3bn Madinaty Project was improperly awarded without a competitive auction. While a ruling late 2011 saw the court uphold the existing contract as valid albeit subject to amendments, a panel of judges in mid-2012 recommended the revised contract be annulled. (The decision is non-binding but underlines the uncertainty facing property developers.) Nor was TMG the only company affected. Palm Hills Development saw two plots subject to litigation, over allegations that the sale of land by the state to the firm was illegal due to underpricing. Saudi Arabia’s Kingdom Holding has had portions of its acreage frozen due to concerns over the size and fiscal terms of its contract as well.

GREEN SHOOTS: As a result of these challenges, a number of the country’s largest developers saw losses in 2011 in terms of revenues. Given the nature of many of the obstacles, such as land risk, it will be sometime before they are all resolved. However, there are some encouraging signs that point to an improved performance in 2012. While short of a resurgent boom, this should still offer a degree of comfort to developers hoping to strengthen their cash flow.

THE LONG TERM: There is no doubt healthy long-term fundamentals will underwrite sizeable growth for the real estate sector. With a population of 85m, including a large proportion of youth, growing at 2%, residential demand in particular will be robust. However, even in the medium term, there are signs that the worst of the short-term turbulence is now in the past.

Construction has begun to pick up again. Work has restarted on a number of projects put on hold during the unrest. In late 2011, for example, Emaar Misr began finalising a new LE297m ($49.7m) construction contract with Hassan Allam Construction for work on 200 residential units in its Uptown Cairo project, a 4.5m-sq-metre development. Cairo Festival City is on track to deliver its first office phases by the end of 2012.

Indicators for the residential segment point to an increase in both demand and activity. Rents appear to have largely bottomed out, remaining unchanged for the first two quarters of 2012; for villas in the new-build cities, for example, rents have stayed around $3000 per month. The government is also pushing aggressively ahead with low-income and affordable housing schemes (see analysis) which, while offering tighter margins than luxury and high-end developments, will still go some way towards boosting portfolios at larger firms.

ABROAD APPROACHES: Sales are also ticking upwards. In March, the Ministry of Housing, in a bid to stimulate demand and encourage foreign currency inflows, released 8000 plots of land in the suburbs around Cairo for sale to overseas Egyptians. Some 350 reservations have already been booked. SODIC also announced early in 2012 that the first three phases of its West Town project, totalling more than 300 units, have been sold out off plan, and it expects solid interest for phases four and five, which are due to be released by the end of the year. As another testament to the segment’s confidence, Amer Group has unveiled proposals for six new projects, including three in Cairo.

Performance in the retail sector has been equally upbeat, in spite of dampened consumer spending. Orouba Mall, which is due to open its 36,000 sq metres of gross leasable area (GLA) for business in 2013, recently welcomed its first anchor tenant, Carrefour, which has already begun operations. A number of new retailers have also moved into new locations recently, including GoSport and Imax Cinemas, both of which recently opened outlets in Sixth of October City. Although no new malls were built or launched in Cairo over the first half of 2012, the country’s overall GLA, at 760,000 sq metres of modern retail space, is still quite low, something that Emerald Mall in New Cairo and Dolphins Mall in Sixth of October hope to capitalise on. Rents also appear to have halted their decline since 2010, stabilising over the first half of 2012 at between $920 and $1410 per sq metre per year for premium space. This may be further affected by the release of new space over 2012, but a number of malls have managed to boost rents above base levels.

The long-term health of the sector is not subject to much question, given the size of latent demand and the potential for further growth across all segments. However, the uncertainty and turmoil of the past 18 months has certainly had an impact on performance, cash flow and project delivery, and may herald continuing trouble for 2012, particularly insofar as land risk is concerned. Yet as the broader business environment improves, real estate is making some noticeable progress.