As Egypt’s retail sector expands and consumer confidence returns, developers are looking to build dedicated spaces for new outlets. With housing and construction set to attract $7.3bn in investment and offer internal rates of return of 20-30%, it is no surprise that retail real estate is also receiving attention.

According to the press, in the first quarter of 2015, 20% of all real estate projects under development were dedicated to the commercial sector, which consists of retail and offices. A Cairo-focused report published in the first quarter 2015 by real estate services firm Jones Lang LaSalle (JLL) claimed that the Cairo retail real estate market is in the growth phase of its natural business cycle. Retail rental rates are picking up and are still on an upward growth curve. In the first quarter of 2015, rents were up by 5% on the fourth quarter of 2014 and 13% on the first quarter of 2013.

In the medium term, however, the significant increase in supply of new mall space is expected to temper rental growth rates and nudge vacancy rates up in some mall locations. “The surge in supply is expected to dilute demand,” Yasmin El Mahdy, senior analyst for retail in Egypt at JLL told OBG. For the time being, rental rates are continuing a slow move upwards. Prime rental rates in the super-regional malls range from $70 to $130 per sq metre per month, depending on the size and the location of the unit, according to El Mahdy.

Current & Future Supply

The current dynamics are partly the result of a market that is currently underserved. At the end of 2012 there was supply of just 836,000 sq metres of gross leasable area (GLA), a figure that increased to 1.2m sq metres by the end of 2014, according to JLL. “The mall segment is very competitive and there are many large properties in the pipeline,” Mohamed Abo El Yazid, CEO and managing director of Citystars, told OBG. Increased supply is meeting a real need in the market. According to JLL, vacancy rates at Cairo’s shopping malls remained largely the same during the first half of 2015, but rates contracted significantly between June 2014 and June 2015, from 29% down to 15%.

“There is an increased interest by regional retailers to expand in the secondary cities of Egypt in the Delta and in the south, hence establishing new potential real estate markets for shopping centre developers in the major secondary cities like Mansoura, Tanta, Zagazig, Assyut, Menya and Ismailia, is very appealing to real estate funds seeking safe and moderate yields.” Mohamed Galal, chairman of Tasweeq Shopping malls, told OBG.

Gulf Development

The Egyptian market is still extremely under-retailed in terms of organized shopping centres with one of the lowest GLA’s per capita in the world (according to JLL). Hence the owners of Mall of Arabia have decided to expand their presence in Egypt from the existing 160,000 sq metre Mall of Arabia in 6th of October with aggressive plans to grow an additional 500,000sqm of GLA with investments of approximately LE13bn ($1.8bn) across Egypt over the next few years. They have recently recruited a high profile management team to pursue this goal. “I believe that the retail segment in Egypt is very young when compared to the residential sector or the retail segments in other countries. When you think about it, the customs reforms that allowed foreign retailers to enter the market are relatively recent,” Dasha Badrawi, the CEO of Marakez, told OBG. “The market is therefore still adjusting to the influx of these new brands.”

Developed by Dubai’s Majid Al Futtaim, the Mall of Egypt project, scheduled to launch in 2016, is already 70% leased, according to El Mahdy. The mall is being developed at a cost of LE4.9bn ($667.9m), and will include LE250m ($34.1m) of expenditure on associated infrastructure, such as roads and bridges. Once complete, the development is expected to