The Influence of FDI Investment on Egypt’s Commercial Real Estate

Monday, 15th August 2016

By Julian Nabil

Viewed as one of Egypt’s stronger industries, real estate ventures have been on the rise despite economic conditions. With state efforts in attracting investment to numerous sectors, many investors, especially foreigners, have begun directing capital towards one of the underserved segments of the industry, commercial property.

Including office buildings and retail developments, commercial real estate is considered by many as a promising sector as statistics have shown a significant demand supply gap. According to a report by Jones Lang LaSalle (JLL), demand for Gross Leasable Areas (GLA) in Egypt is expected to climb to 3.28 million square meters, while currently supply stands at only 1.3 million square meters, rendering the market a profitable venture, at least by figures.

In recent years, Egypt’s commercial real estate market became on more solid footing than it has been before, serving as a hedge against the stock market volatility. It is also largely seen as a safe haven against inflation and the devaluation of the Egyptian pound due to its high returns on investment (ROI).

The country has moved up to fourth place within the MENA region in the 2016 Global Real Estate Transparency Index (GRETI), reaching the Semi-Transparent category, which is a sound indicator of the positive trend the local market is currently experiencing. Among the contributing factors to the boost, is the flow of Foreign Direct Investment (FDI), namely from Gulf countries such as Saudi Arabia and the United Arab Emirates (UAE).

In terms of figures, public and private capital poured into the real estate market as a whole stood at a total of EGP 47.5 billion ($5.3billion) in the previous fiscal year of 2014/2015, according the Ministry of Housing. Similarly, the Central Bank of Egypt (CBE) reported that investments pumped in the real estate market by foreign investors, in the same fiscal year, account for 6% of total FDI in the Egyptian market.

Market Overview – FDI in Retail

The retail market, in terms of real estate, has continued to maintain a robust growth since 2015, with vacancy rates falling 14% year-on-year in the second quarter (Q2) of 2016, despite the rise of rental rates by 13% year-on-year during the same quarter, reflecting the persistently growing demand.

Being positioned in a very dynamic tier, Cairo saw the completion of around 93,000 square meters of additional retail space in 2015, increasing total mall-based retail space to around 1.3 million square meters, according to a report by JLL.

The market saw the launch of a number of large mixed-use commercial projects and the development of existing projects in the recent years.

One of the most known Saudi’s commercial projects is Citystars Heliopolis which was launched in 2004 with total investments over EGP 800 million. The mixed-use development, which includes Citystars, office buildings and other facilities, is managed by Golden Pyramids Plaza.

Launched late November 2013, Cairo Festival City (CFC) is another major project that contributed to the standing of the local commercial market. Developed by Al-Futtaim Group Real Estate, part of Dubai-based Al-Futtaim Group (MAF), the project was constructed with investments reaching EGP 7 billion.

Additionally, MAF is currently developing a mega retail project, Mall of Egypt, in 6th of October City with total investments of EGP 4.9 billion. The project is expected to be finalized in Q4 2016.

The UAE developer has also launched other landmark shopping destinations in Egypt; City Centre Maadi and City Centre Alexandria, with a total investment of around EGP 2.5 billion. The company is also in the preparation phase of a EGP 2 billion expansion of City Center Maadi, according to Mouien Al Madhoun, MAF Chief Human Capital Officer, interview with Daily News Egypt.

In early January 2016, the company unveiled plans to start a third City Centre project, the new City Centre Almaza, with an investment of over EGP 4 billion. The new project is expected to open its doors in 2019.

A similarly prominent commercial project is Mall of Arabia, with its phases one and two hitting EGP 5 billion in investments. The mall’s owner, Saudi-based Fawaz Abdulaziz Al Hokair, earlier announced plans for a third phase which is still under study.

Furthermore, Dubai’s Emaar Properties launched Emaar Square in the Mokattam area within its Uptown Cairo project, which is expected to be finalized in 2017. The venture  is worth EGP 12.8 billion in investments, EGP 3 billion of which will be directed towards construction of Egypt’s largest open mall.

The market has also started to see the entry of Arab investors outside the gulf region, such as Libyan HNS Group, owner of Sun City Mall; a project worth EGP 3 billion in investment.

Market Overview – FDI in Office Space

The office buildings market is also picking up, especially grade A offices in east and west Cairo, which have witnessed increasing demand during the past period. It is believed that tenants, when able to, tend to relocate to quality office space with better geographical locations.

The rise of entrepreneurial start-ups, especially ones focused on technology and mobile applications reflect a growing need for small office space. In 2015 alone 31,000 square meters were added to the market, bringing the current total to 92,000 square meters based on JLL estimates.

While the need for business space is increasing, supply is also growing as developers have ramped up their office projects. As part of CFC project worth EGP 19 billion in investments, the Business District was launched to address the growing need for business space. The project is divided to the Northern District and Southern District, offering a combined total of 250,000 square meters of premium office space.

Overlooking the main CFC Boulevard, the Southern Business District has been divided into several phases. The first of which was launched in 2012 and includes two buildings with an area of 40,000 square meters; while the second phase includes five buildings with around 50,000 square meters.

Challenges and Market Resilience

Although the Egyptian government is focused on fostering a better investment environment, foreign investment flow is still facing roadblocks.

Unlike the residential market where revenue stream begins with the announcement of the project, and ROI is relatively covered in a short period, commercial property requires longer periods to cover its initial capital investment. Part of this investment is land, and higher land prices offered by the state are straining profitability prospects. The price increase is mainly attributed to the state’s continued monopoly over the sale of land, Egyptian Businessmen’s Association’s (EBA) Chairman, Hussein Sabour said, adding that the state role should focus on monitoring and supervising land-offering procedures.

There are also some concerns that rising investment inflows into the commercial property market may lead to oversupply or a potential asset bubble. However, the market is backed by strong demand that will help to protect it from any steep fall, according to Oxford Business Group.FDI in Real Estate Inforgrapj

In order to better understand the perception of the impact of FDI on the sector, Invest-Gate asked its readers about the expected influence of the  currently flow of foreign investment on  the sector,  a whopping 62.5% believed that FDI is of moderate influence on the real estate sector’s performance.

Despite all the economic challenges facing Egypt, the commercial real estate sector has succeeded to maintain a buoyant performance with the capital it has continued to attract from investors both local and foreign. Being considered as a safe investment for many, such fast-expanding industry will contribute to the recovery of the overall economy by bringing in more inflows of hard currency, as well as securing more employment opportunities to balance out the recent rise in unemployment.

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