Driven by a growing middle class, rising urbanisation and some of the most attractive prices in the Mediterranean region, Tunisia’s real estate sector offers some of the best potential in North Africa. However, inflation caused by the depreciation of the Tunisian dinar over the last two years, as well as central bank interest rate hikes, have led to increased construction costs and higher prices for residential property. Other long-standing structural challenges also continue to weigh on the market. These include administrative and infrastructural blockages, tightening liquidity, political uncertainty and increasing land scarcity. As such, investors will need to look beyond the short term for returns.
Size & Scope
With 11.7m inhabitants as of early 2019, Tunisia has a considerably smaller population than neighbouring Algeria or Morocco, but its real estate sector has historically seen expansion, as foreign and domestic investors saw it as a secure investment with predictable returns. According to research by online property portal Aleglo, the country’s total stock of residential property stood at just over 3.4m units in 2016, around 81% of which were primary residences, with 7.2% secondary and 8.4% vacant. Reflecting a deeply embedded culture of homeownership, around 80% of the population own their lodgings, although these figures differ between urban (92%) and rural areas (71%). With rising urbanisation rates, the growth of the rental market – especially short-term rentals – is a profitable feature in the country’s major cities. Key figures for the real estate sector’s contribution to the economy are difficult to come by, but in 2016 the mortgage stock was equivalent to around 8.6% of GDP.
Headwinds
The real estate market will likely continue to encounter challenges in 2019 due to upcoming parliamentary and presidential elections set to take place in October and November, but once a new government settles in, the broader market could be stimulated by a wider macroeconomic rebalancing from 2020 onwards. Tunisia’s National Institute of Statistics reported that in the last quarter of 2018 prices of land, houses and apartments were 0.6 index points higher than figures from the same quarter of 2017. However, the volume of trade fell by 8.5 percentage points in the same period.
These trends have led some industry stakeholders to take caution against the rise of a property asset bubble. Promotion activity has been declining, falling by 50% in 2018 by some estimates, while almost no new real estate formation has been sanctioned. “Prior to 2011 promoters were building around 16,000 houses per year, whereas 8460 units were built in 2017 and 6220 were completed in 2018,” Fahmi Chaâbane, president of the National Union Chamber of Real Estate Developers, told local media in early 2019. “This figure is expected to fall further in 2019,” he added.
Foreign Demand
The sector is driven principally by domestic actors, but an improvement in the security environment since terrorist attacks in 2015 means that foreign investors have begun to return to the market. According to figures from the Central Bank of Tunisia (Banque Centrale de Tunisie, BCT), foreign investment in the sector rose by 21% in 2017. The market has particularly benefitted from an increase in Middle Eastern actors, who have invested heavily in social housing schemes, among other ventures. Moreover, Western tourists – traditionally a popular bracket – are beginning to return to Tunisia. Conversely, the market has been impacted by wider regional instability, as the arrival of large numbers of Libyan nationals escaping ongoing conflict has put added pressure on housing demand.
Rising Prices
The lack of available land for development is a wider challenge driven by numerous factors. Indeed, after a doubling in real estate prices between 2006 and 2016 to TD1979 ($687) per sq metre, high yields on land have provoked intense price speculation for private property. Rather than look elsewhere, owners have tended to retrench their activities on existing property, while renters and first-time buyers have borne the brunt of price increases, fuelling the rise of informal arrangements and fiscal evasion. Property values have disproportionally risen in the cities of Tunis, Sousse, Hammamet and Sfax, where prices in prime areas have reached over TD4000 ($1390) per sq metre. Underlying this trend, the rising cost of raw materials due to the depreciation of the dinar and qualified labour shortages have pushed up construction prices. With several statebacked urban transport projects yet to be completed, potential catchment areas around urban areas remain unexploited, while deeper reforms to the long-standing land allocation policies via the Housing Land Agency have yet to be considered with elections impending.
Commercial Potential
Notwithstanding pricing issues, profitability on commercial real estate investment is higher than on residential projects. According to data from property consultancy Knight Frank, prime real estate yields in Tunis for retail and industrial space averaged 10.5% and 9.5%, respectively, some of the highest in North Africa. Meanwhile, the Centre for Affordable Housing Finance in Africa (CAHFA) estimated the residential rental yield at 4.14%. Commercial promoters have also benefitted from government action in their favour. High land prices have compelled the Industrial Land Agency to introduce a law in 2015, which was implemented in 2016, forcing the sale of private property after three years for any projects deemed to be of public interest. Previously, rising land prices delayed major projects because developers could not acquire adequate land. Although the law only affects public works companies, Jamel Ksibi, president of the National Federation of Construction and Public Works Entrepreneurs, told OBG, “The property expropriation issue has improved, and there are fewer delays experienced as a result of the change.”
Financing
While public investment in housing is significant, a sophisticated mortgage-based private finance market has developed over the past decade. Before the deregulation of the housing financing segment in the 2000s, the state-owned Banque de l’Habitat held a monopoly on mortgages; however, by 2014 the banks’ share was reduced to 60% of the total market. According to data from CAHFA, there were 23 domestic banks and eight microfinance institutions operating in the country at the outset of 2017. Mortgage lending accounted for around 8.6% of GDP in 2018.
Ultimately, domestic access to credit remains dependent on the BCT’s interest rate policy. In this regard, demand for mortgages has been impacted by a series of increases to the base interest rate starting in January 2018, from 5%, to 7.75% in February 2019. Moreover, the government raised the rate of value-added tax on property to 20% (set to come into force in 2020) and implemented a stamp duty on properties with a value over TD500,000 ($174,000), all of which has further hit promoters. The stock of debt owed to local banks is estimated at TD5.2bn ($1.8m). As such, banks are requesting higher deposits from buyers to issue finance.
Lending Programmes
With similarities among their real estate products leading them to compete on price, lending institutions have tailored their products to different segments of the market, encompassing high- and middle-income workers, as well as lower-income groups who have access to subsidised lending. Private loans mainly target middle- and upper-income earners, the former of which are estimated by Euromonitor, a market research firm, to account for 36.3% of the population, while state-sponsored loan programmes target social housing for low-income earners, a growing segment given that youth unemployment remains above 35%. Low-income groups have traditionally been serviced by the Social Housing Promotion Fund, administered by Banque de l’Habitat. The scheme allows buyers to purchase a 50-sq-metre property under $25,500 with a 90% loan-to-value ratio at an interest rate of 2.5% per year. However, the degradation of the macroeconomic environment has lowered spending power and the rate of adequate supply.
In February 2017 the government launched the First Housing Programme (Programme Premiere Logement, PPL) to support individuals or households earning 4. 5-10 times the minimum wage in acquiring their first home. The PPL, which was given initial funding of TD200m ($69.5m), finances down payments worth up to 20% of the total cost of a home. Support is limited to a series of government-approved housing developments, and the total cost of a qualifying home cannot exceed TD200,000 ($69,500). The initiative allows the loan to be repaid over 12 years with a five-year grace period and aims to facilitate access to bank loans.
Looking Ahead
Tunisia’s prime location, year-round favourable climate and relatively well-developed financial market offers interesting possibilities for developers and investors alike. This is especially the case since receding security risks are beginning to yield greater foreign involvement in the sector and a recovery in the number of tourist arrivals. Higher property prices may encourage a change in homeownership culture among younger workers over the coming years, funnelling opportunities into the rental market. Although a climate of political uncertainty and wider macroeconomic issues are likely to weigh on the market in 2019 due to the elections, Tunisia’s real estate sector remains poised to bounce back strongly in the medium term.
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