Egypt seen Building Boom in Resilient Real Estate Market

Real estate in Egypt has shown resilience as political turmoil has damaged other parts of the economy over the past four years. A sector seen as “defensive” has thrived despite legal challenges to the land holdings of some of the big developers.

Now the industry is set for another boost with the introduction of rules allowing the government to contribute land to new developments against a share — in kind or in cash — of the revenue.

In a country of more than 85m people and some 800,000 marriages every year, demand for housing remains high at all income levels, say real estate companies and analysts. The country’s big listed developers tend to cater solely for the upper middle and upper classes, among whom demand has remained strong, as buyers have sought security in bricks and mortar during the economic uncertainty.

Habiba Hegab, construction and real estate analyst at Beltone Financial, a Cairo-based investment bank, says since the 2011 uprising the country’s three biggest listed property developers — Talaat Moustafa Group, Sodic and Palm Hills Developments — have been reporting a surge in demand.

“This has been mainly driven by inflation concerns, the depreciation of the currency, stock market volatility and restrictions on foreign currency transactions.”

She says demand is so high that all the companies stock of housing is being sold. Most of the high-end purchases are as an investment.

Ms Hegab says project launches have been helped by the resolution in recent months of most of the outstanding legal disputes over land between the government and private developers that emerged in the wake of the 2011 revolution, when there were allegations that land had been obtained at less than its market value.

In the latest such settlement in February for the flagship Cairo development Madinaty, Talaat Moustafa said it would give the government 3.2m square metres of completed homes and pay $380m over 10 years. Ms Hegab adds that a recent decision to allow government bodies to team up with developers by contributing land against an agreed number of housing units or a share of revenue is helping the sector by reducing costs at a time of surging land prices.

“This is very positive for the industry,” agrees Ahmed Badrawi, Sodic managing director. “Essentially, they are becoming partners with a share of the top line. It is a very new thing. We are now bidding for 900 acres in two plots under [this] new system of revenue sharing.” He says Sodic reported its strongest earnings ever in 2014, and is sitting on a “healthy amount of cash for expansion”.

In May, Ripplewood, the US private equity firm, acquired a 9.4 per cent stake in the company, which also offers retail and office space in its developments in east and west Cairo.

“We think the addressable market is still very big,” Mr Badrawi says. “We believe with more financing options and mortgages, it could become huge.”

For now, though, the absence of an efficient mortgage law hampers investment in real estate aimed at lower segments of the market, where customers cannot afford to buy off-plan.

In a country where 50 per cent of the population are classed as lower income, a profitable formula for the provision of low-cost housing is still lacking and many people resort to the thriving informal sector for housing built without permits.

At the top end, gross margins — earnings after the costs of land and construction have been deducted — range from 35 to 60 per cent, according to Ms Hegab, who says listed developers have been spending more and offering launches to capitalise on rising demand.

She also notes that because inflation remains a significant concern, developers are breaking up projects into phases, so that when they close one, they can raise prices for the next. “That has become the new strategy,” she says.

Investment in office and commercial property is also picking up, having stalled in the wake of the revolution because of muted demand.

Some 20 per cent of projects under development are allocated to office and retail space. Even in Cairo, there has traditionally been a dearth of property purpose-built for business, with most companies operating from converted residential space.

Majid Al Futtaim, a United Arab Emirates developer, announced in March it would expand its investments in Egypt from E£18bn ($2.36bn) to E£22.5bn over five years.

The company, which already has several large shopping mall projects in the country, has signed a memorandum of understanding with the government for four more malls. It also says it wants to expand its supermarket network — a joint venture with French group Carrefour.

Alain Bejjani, Majid Al Futtaim Holding chief executive, says the company wants to attract not only consumers with big disposable incomes to its mall projects, but also the “value conscious”.

The expansion of the supermarkets, with their competitive prices, would appeal to a wider base of customers than those who shop at malls with their often branded products. “We have 3,500 people who are directly employed, but this will increase tremendously because of the scale of the investment,” Mr Bejjani says.

Source: The Financial Times