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The Egyptian real estate market: a future between skyrocketing prices and fear of recession - Daily News Egypt

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The Egyptian real estate market: a future between skyrocketing prices and fear of recession

Daily News Egypt has obtained data from Aqarmap, the real estate search engine, regarding land prices in Greater Cairo


Egypt has suffered for over half a decade from turbulences and uncertainty. Since the 25 January Revolution, the economy encountered numerous challenges, from political unrest and declining tourism to foreign currency and fuel shortages.

Consequently, to adopt an economic reform programme aiming to improve Egypt’s public finances, the authorities decided to introduce the value-added tax (VAT) law; raise the price of subsidised fuel; free-float the Egyptian pound; and obtain loans from the International Monetary Fund (IMF), the World Bank, China, and others to finance its ambitious programme in the period between September and November 2016.

The real estate sector was one of the of the most affected sectors after the Central Bank of Egypt’s (CBE) decision to float the pound on 3 November 2016, when it lost around 52% of its value as a consequence. This resulted in uncertainty and doubts in the real estate sector, leading both investors and owners to postpone their decision until the value of the pound stabilises.

Moreover, the currency devaluation greatly increased costs of raw materials, and this had a negative impact of investors’ cash flows. The extra costs were transferred to the end customer, resulting in huge price hikes. Yet, some real estate developers decided to either offer more flexible payment plans or more price-efficient designs, according to JLL’s “Cairo Real Estate” report.

Within a month from the currency flotation, the prices of real estate have spiked. Most real estate developers had increased their prices between 15 and 20%. However, a lot of Egyptians started to buy properties at the new prices with longer payment plans of between 5 and 7 years—some real estate developers, such as ARCO, even offered 10-to-12-year payment plans—as a result of the fear of more price increases in the future.

Consequently, various top-tier real estate developers’ new projects were sold out within a very short period. With the rising uncertainty about the value of the Egyptian pound, many Egyptians tend to consider the real estate sector a safe haven to invest their savings. The longer and more relaxed payment terms allowed people to conserve current prices since they are paying in instalments according to the contract they signed.

2According to Aqarmap, a real estate search engine, the average price per metre for New Cairo’s Fifth Settlement has risen from EGP 5,450 for apartments and EGP 11,550 for villas in November 2016, to reach EGP 6,250, and EGP 13,050 respectively in March 2017, which marks a 12-15% increase.

However, the average price year-on-year increase of 30% in Egyptian pounds was not enough to overcome the decrease in the value of the Egyptian pound as a result of the currency flotation. Average sales prices for both apartments and villas decreased significantly in US dollar terms.

On the other hand, the resale market took a completely different turn. Property owners started to realise they have to increase unit prices, as keeping the same pre-flotation prices would mean losing 55% of the value’s property in dollar terms.

As a result, various property owners doubled the price of their properties after the pound flotation; others calculated the value of their properties in dollar terms previous to the currency flotation and sold their properties at that price. However, buyers cannot afford these prices, as there was no increase in income or savings to fill the gap between the new and old prices.

Furthermore, the difference in expectations between sellers and buyers has led to the reduction of transaction within the market, with the exception of high end luxury properties, which maintained their prices in US dollars.

6.Age2016 was a very busy year for the real estate residential sector, as it witnessed the completion of several new projects across both 6th of October City and New Cairo. In 6th of October City, significant apartment sales were recorded in Ashgar City, Palm Parks, and October Park. In New Cairo, significant sales were recorded by TMG’s Rehab and Madinaty, Emaar’s Mivida, and SODIC’s East Town, according to JLL report.

Yet, rentals within the residential sector have shown more resilience towards currency flotation than sales prices. One of the reasons that could be attributed to this is that some units for rent are targeting foreigners, where asking prices are usually in US dollars—even though the exchange rate used is generally capped at a lower rate than the market rate.

In regards to the office sector, Q4 2016 has witnessed the completion of Majarrah Business Complex in 6th of October City, which added 17,000sqm to Cairo’s office supply. Post flotation, smaller companies have abandoned their plans to upgrade their office spaces and are considering relocating to areas with lower rents as a result of the spike.

The office market has also been significantly impacted. As most lease contracts were formally quoted in US dollars, rental prices have effectively doubled for office occupiers in terms of Egyptian pounds. However, vacancy rates remained unchanged throughout 2016, which represents a sign of limited office activity across the market. New Cairo kept its lead as the most desirable destination for office occupiers, while the activity witnessed in Q4 2016 in 6th of October was very limited. Vacancy rates in the office markets JLL monitored currently stand at 27% and are expected to increase as new supply is added to the market and demand remains at its current levels.

Moreover, because of the witnessed increase in office rent prices, in addition to the increased prices of raw materials, workers demanded higher wages. Companies now naturally face difficulties in paying their rents, which drove some landlords to agree on exchange rates that are below the actual market rate.

7.Family MembersOn a year-on-year basis, office rents stabilised—at least in US dollar terms—as the market is still adjusting to the current business conditions; however, New Cairo was the exception, as a 7% decrease was witnessed. A further lowering of office rent prices might occur during the medium term. A stronger demand could, however, be generated by improved business conditions as a result of the structural and economic reforms being introduced.

No additional retail space was completed in 2016 for the retail sector, leaving the stock at 1.3 million square metres. But in March 2017, the opening of Mall of Egypt took place—a project worth EGP 6bn. The opening of Madinaty’s Mega Mall has been postponed from Q1 2017 to 2018.

On the other hand, vacancy rates have marginally increased year-on-year in 2016 on the back of limited new completions, and are still expected to increase in the short term. While rents for prime units remained stable at $1,600 annually per square metre, the number of units that are being developed and can achieve this level is stagnating.

Further decline in the average price of rent is expected as a result of diminishing purchasing power. A possible recovery in the second half of 2017 is expected in case sufficient foreign currency is available and the adopted economic programme bears fruit.

According to the JLL report, rent to the retail sector was doubled, also quoted in US dollars. Retail tenants faced import restrictions and a diminished demand from customers as a result of the skyrocketing levels of inflation post flotation. Some mall developers have capped the exchange rate in order to alleviate pressures faced by retail tenants while other developers changed their quoting currency to EGP.

During 2016, 500 hotel rooms were added to Cairo’s hotel sector. The opening of the refurbished and rebranded Steigenberger in Tahrir Square, the St. Regis Cairo, and the Radisson Blu Nasr City have been delayed and are now scheduled to enter the market in the first half of 2017.

According to the report, to create value from more efficient operations rather than investing in new buildings during the current volatile business climate, it is forecast that older buildings will be renovated in the short term.

Although Cairo’s occupancy rate was being forecast to be high in Q1 2017 and has increased in comparison to 2016, a pronounced drop in hotel revenues per available room (RevPAR) is expected as a result of the devaluation of the Egyptian currency in November, according to Colliers International’s “The MENA Hotel Forecasts” February report.

9.Purchasing objectiveEven though occupancy rates are increasing, average daily rates (ADRs) did not increase at the same rates due to the current reliance of hotels on the local market, and a ceiling to price increases was established to attract visitors. Once travel bans are lifted and foreign tourists and currency begin to flow, ADRs are expected to increase.

The hotel and tourism industry is the sector of the market that should benefit the most from the currency flotation. Demand in this sector is expected to increase as visiting Egypt has now become 52% cheaper. This has helped increase occupancies in the hotel market. However, the travel ban imposed by Russia and the UK took a significant toll on tourism inflows, especially in Hurghada and Sharm El-Sheikh.

What’s next? 

JLL has released data on construction costs for different asset classes in Cairo, with this data collected from their growing project and development management teams. The devaluation of the pound has resulted in a major spike in construction costs in 2016, and this is expected to result in double-digit increases in tender price inflation over the next two years.

Furthermore, there is a higher risk of approaching a real estate bubble, following the current boom witnessed within the sector, as a result of the incredibly high profit margins, decreasing demand, and increasing prices, Samih Sawiris, head of Orascom Development Holding, told Daily News Egypt.

One of the main issues facing Egypt’s real estate resale market is the fact that it is still underdeveloped, and most property owners ask for the requested amount as an upfront payment. During the current environment of volatility and uncertainty, buyers will avoid paying large amounts of cash. As a result, buyers tend to buy new properties with long-payment plans.

If Egypt’s real estate market indicators are measured in Egyptian pounds, prices will show a general increase. Yet in US dollar terms, prices will show a decrease. The decrease, however, does not equal the 52% devaluation of the pound caused by the flotation in November but is slightly lower due to the value indicators’ increase in pounds.

In the near future, real estate market prices are forecast to increase further to match the value lost by the Egyptian pound and rising inflation. However, in US dollar terms, prices of real estate properties have witnessed a significant drop, and they are not expected to reach pre-devaluation levels. While in regards to the resale market, it is expected to take a few months to stabilise but will eventually increase by percentages comparable to the new sale market.

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http://www.dailynewsegypt.com/2017/03/30/620348/
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