Making Your Investment Count: Commercial vs. Residential Property

Wednesday, 21st September 2016

By Conor Sheils

The Egyptian economy is currently facing turbulent times, as the country remains locked in a currency crisis, while poor economic growth forecasts have sent investment tumbling in recent years. However, one sector which still remains buoyant during the country’s difficult times is Real Estate. The main reason behind its stability is the belief of many Egyptians that property investment one of the safest investments, as well as a hedge against inflation in the country.

As such, many investors are choosing to invest in residential and commercial projects, which are currently stable thanks to a stream of foreign and local projects spearheaded by big names.

Such is the popularity of real estate investment in Egypt that an Oxford Business Group report revealed that public and private investments in the property market totaled EGP 47.5 billion ($5.3 billion) in fiscal year 2014/15, which ended in June 2015, contributing approximately 5% of the total GDP. A decade earlier, investments stood at EGP 6.58 billion ($741 million) for the fiscal year ending in June 2005, according to figures from the Ministry of Housing, Utilities, and Urban Communities.

For some, however, the question remains over whether to invest in residential property, which includes many of the large-scale schemes, or instead to focus on commercial projects.

Both options offer numerous benefits to strategizing investors, provided one looks at various factors surrounding the choice.

Budget

In Egypt, whether purchasing commercial or residential property, there are a number of funding options available to potential buyers, including loans, mortgages, and off-plan payments offered by developers. However, any potential buyer who is considering such a move should be mindful of the fact that these loans, offered by financial institutions, are often time limited, and a buyer should examine the terms and conditions of any loan before acquiring it.

Commercial property prices tend to be higher than residential rates, and as such buyers should ensure that they will be able to make all repayments on a large commercial property loan using post-purchase income. However it should be noted that assuming the budget is large enough, the price of a commercial property can be re-earned through revenues earned from the property.

Residential developments are often less expensive, as they are generally smaller in size than commercial developments and are based in various locations, whereas commercial property is mainly concentrated around the Greater Cairo area and priced accordingly.

Market Status

Any experienced investor knows that a property’s true value can only really be measured based on its future earning potential. In this regard, both commercial and residential property potentially provide positive options for investors.

Residential property may be seen as a good choice, given the country’s housing shortage, coupled with a growing population.

Egypt’s fast-growing population of around 90 million – which increases by approximately 2.2% each year, according to the World Bank – also means that investing in residential property is often a financially sound move owing to increased demand for housing in the country.

Meanwhile, the country’s yearly weddings – nearly 900,000 – are also a major driver of demand, as newly married couples look to move into their own homes and invest in property for the future.

According to the September 2015 Greater Cairo Market Overview from Colliers International, a real estate services company, an extra 90,000 to 100,000 residential units will be needed per year through to 2020 to meet demand, which is well above the annual average of 45,000 units that have come on-line in recent years.

In the commercial market, a JLL report found that office rents remained stable during Q2 of 2016 as the market adjusts to current business conditions. On a year-on-year basis, central and west Cairo recorded an increase in rents, as a result of favorable base effects at the end of last year. Meanwhile, the market witnessed increased demand for Grade-A office space during the same period, as a result of tenant relocations to better quality office space and to more convenient geographical locations. Limited new supply of Grade-A office space in the short term has led vacancy rates to decline from 33% to 25% over the past year, according to the report.

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.

Demographics

Just over half of Cairenes are able to afford units in the EGP 230,000 to EGP 270,000 range, but there is little to no supply offered by the private sector at this price point, according to a 2016 report on Cairo’s real estate market by Colliers International.

The most affordable private developments, such as a 130-square meter unit in 6th of October City, tend to sell in the EGP 530,000 to EGP EGP 580,000 range.

The government is looking to address the shortfall in affordable housing partly through partnerships with the private sector.

One such partnership is the Dar Misr project for low-income housing. Moreover, the first phase of the social housing project is about to be finalized in eight new cities, according to media reports in Al Borsa. A total of 31,000 units have been finalized in the cities of 10th of Ramadan, Obour, Shorouk, Badr, 6th of October, New Cairo, Sadat, and New Damietta.

The New Urban Communities Authority (NUCA) is offering 15 land plots, part of a larger package of 44 land plots that have been offered through the General Authority for Investments and Free Zones (GAFI).

Outside of such schemes, many of the country’s residential schemes are aimed at the upper end of the economic market.

This trend is mirrored in the commercial market, where developments are mainly aimed at high-end clients, rather than clients from lower socioeconomic backgrounds. This may affect the potential post-purchase earning power of the property.

When purchasing either commercial or residential property, it is important to remember that taxes constitute 10% of the annual rental value. According to the property tax law No. 196 of 2008, taxes apply on all types of properties, whether they are vacant or not.

The buyer should also ensure that all taxes are paid up to the date of purchase by the previous owner, according to a report published by the UK government entitled ‘Guidance of buying property in Egypt’. The buyer must also ensure that all financial obligations, such as utilities and other payments to authorities, are fully paid up to the date of purchase, according to the same report.

Bottom Line

Given the instability of the Egyptian economy at the moment, commercial and residential properties can offer a safe investment during turbulent times. Both residential and commercial property sectors can offer attractive options for investors.

The current housing shortage, coupled with the the high marriage rate, allows for positive prospects for the residential property market. Meanwhile, stability and a demand for commercial property means that an investment in the commercial market could be a positive choice for many investors. Both sectors have the possibility of being a lucrative choice for discerning investors.

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