By Mohamed Ahmed
The real estate sector took the attention of investment institutions as well as local and Foreign Direct Investment (FDI) funds that are aimed at completing a series of acquisitions with the support of high profit margins that exceeds 50%, thanks to the high demand for real estate.
More than one fund has announced entering negotiations for the acquisition of real estate companies, most notably the American Graviton company. Graviton is targeting the acquisition of a real estate company in a deal worth of up to EGP 200m. Omega Capital has also announced approaching the acquisition of a real estate company that is registered in the Egyptian Exchange market.
According to FDI experts, the real estate sector has a number of investment attracting factors, including strong cash flow among the crisis, seeing as real estate is value storing.
Thus, the market witnessed signs of interest in investment companies that owns projects aimed at middle and low-income classes.
The appeal of acquisition opportunities
Marian Ghali, Managing Director of private equity firm Sphinx, said that the acquisition opportunities in Egypt are still attractive, especially in a number of sectors that are highly demanded. These sectors include the real estate, retail, and consumption sectors.
According to Ghali, the major factor encouraging FDI funds and strategic investors to take decisions of acquiring real estate companies is the diversity of projects between administrative, commercial and residential.
“Acquisition opportunities increase for companies specialised in administrative units, as they have been witnessing high demand levels over the past two years. The reason for this is the relative improvement in economic performance, which was reflected in the increase in service companies activity”isaid Ghali.
The financial market the completion of Pioneers Holding Company for Financial Investment (PIOH) acquisition of all the shares of Cairo Housing and Development Company (CHD) for EGP 11.8 per share based on the PIOH board decision.
The deal comes within a series of acquisition deals by the company upon the breakout of 23 January 2015 revolution. These deals included Giza General Contracting and Real Estate Investment Co, United Co for Housing, Al Saeed Contracting, and Roaya Group for real estate investment.
According to Ghali, the estimates of real estate companies in the local market are considered more attractive when compared to the markets of the region. Also, there is great variety in the segments of clients; whether they target luxurious, medium or limited housing units.
She also says there are signs of change in FDI funds strategy, which targets the acquisition of real estate companies, as they no longer focus on luxurious projects alone, but also on middle and limited class projects.
“There are new Ideas in the Egyptian market such as investing in the real estate leasing, which is the direction announced by “Sphinx”pas a result of the increased demand on rented units; whether luxurious or middle class”ssaid Ghali.
She has revealed earlier that her company intends to launch an FDI fund with a capital of $50m that focuses on real estate investment, on condition that it invests in leasable real estate. The profit margin exceeds 50%.
Graviton’s regional partner and investment manager at Cartel Capital, Ayman Abou Hend, said that Gulf and foreign FDI funds have a big investment appetite in the real estate sector of the Egyptian market now. The reason is the high profit margins that exceed 50%.
“These high margins led to two main results; the first is the non decline in the values of real estate companies as a result of the turbulences Egypt has witnessed over the past four years. The other result is creating a positive view of the ability of real estate investment to invest in generating revenues in a crises phase”hsaid Abou Hend.
He added that the retreat in purchase power of the Egyptian Pound is the result of the increase in commodities and services prices and the continuous devaluation of the Egyptian Pound. This led the citizens to intensify purchases of real estate unit, as value savers.
He also said that the purchase state that dominated all segments of housing units is the main reason for the recovery of demand for real estate and the increase in revenues of real estate investment companies.
According to Abou Hend, the profit margins generated by the real estate sect in Egypt exceeds the average profit margins targeted by FDI funds which is about 25%. This explains the interest of these funds in concluding acquisition deals in the sector.
Exchange rate is the major risk
Despite all the investment advantages the real estate sector enjoys, there are obstacles in front of these acquisition deals in the Egyptian market generally.
A manager at a major investment bank, who insisted on remaining anonymous, said that there are risks that worry the foreign investors namely FDI funds. On top of these risks is the instability of the tax system in Egypt.
He said that taxes on capital returns in the stock market are expected to be applied, in addition to the current tax on devaluating assets in the framework of property transfer and companies structuring operations. He added that the second factor is the instability in the EGP value and the continuous anticipations of decline, which leads to decreasing the value of profits when they are changed to dollars.
He also added that this makes investors on the watch for stability in exchange rates at a level that allows for developing investment plans and determine a structure of expenses and profits, away from the pressing risks of exchange rates