By Fatma Khaled
Despite the economic instability over the past few years. post-revolutionary Egypt remains, in economic terms, a strategic area in the region filled with resources worthy of investing in. Several businesses have chosen to expand, locals and foreigners are further boosting projects across the country, and the real estate market in Egypt has been dubbed by experts as safe haven for investments that is welcoming to new opportunities and investment methods.
Among these are commercial properties, which some real estate experts describe as the “ultimate investment”. A commercial property is commonly defined as a real estate property that is used for business activities and fosters several categories, including shopping centers, offices, among others. Retail investors can put their money in commercial properties and get involved in several Real Estate Investment Trust (REIT).
Sales in Cairo have maintained a strong performance in the second quarter of the year, according to the Cairo Real Estate Market Overview, a report published by the Oxford Business Group. Demand has increased, mostly coming from companies that are relocating from downtown to New Cairo or 6th of October City.
The report also stated that New Cairo is currently the most sought after commercial area in the capital after witnessing major residential, retail, and educational development. Well-established business owners have opted to move from primarily residential spaces in downtown to far more spacious properties in New Cairo.
Muhammed Al Haggan, a lawyer focused on real estate industries at Hegazy & Partners law firm, stated that commercial properties are scarce compared to residential and tourism properties, and that the only benefit behind them is a long-term investment whereby the owner can lease the property later on, creating recurring revenue. The owner will also be able to sell it for profit later on, as real estate values in Egypt are constantly on the constant rise, he told Invest-Gate in an interview.
Al Haggan mentioned that not only can commercial properties boost their surroundings by creating further opportunities for more commercial properties to be built and managed by business owners and investors; they also combat currency devaluation and inflation in Egypt, hence also boosting economy.
“Investment in property in Egypt is the ultimate investment option, because real estate prices are continuously on the rise, and in that way, buyers are able to retain value of their liquid money by locking them into a property, so it would be almost immune to inflation and currency devaluation” added Al Haggan.
Despite the proven success of such investments, there is still some risk associated with them, as Egypt is currently facing a low demand on commercial properties due to what Haggan described as “a stagnant economic period”.
“The current economic status of the country is not at its best and the decline in demand for commercial property is a by-product of this status. Business profitability is at jeopardy due to several factors, and, hence, business operation has been significantly low for a while,” explained Al Haggan.
In order to outweigh the risks involved, an investor should consider several factors when rendering the decision to purchase a commercial property.
Budget
One of the crucial things to consider when purchasing a commercial property is your budget. Budget allocation for commercial properties depends on how a buyer seeks to appear in the market; there are several grades for commercial property, and the higher the grade, the higher the price.
“Budgets for Class B+ to A+ properties could range anywhere between EGP 10,000 to 30,000 per square meter, therefore budget estimation is dependent on how much the buyer is willing and able to invest in a property and very much connected to the financial status of the buyer,” said Al Haggan.
He added that commercial properties in particular tend to be higher in price than others due to scarcity in supply and high demand.
Taxes
Real estate taxes are 10% of the annual rental value if you plan to rent the commercial property for your own personal purpose or post it for rent, according to the property tax law No. 196 of 2008 that implies on all types of properties whether they are vacant or not.
The buyer should also make sure that all taxes are paid up to the date of purchase by the previous owner, according to a report published by the UK government titled ‘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 date of purchase.
“The property should be registered in the name of the seller after the transaction closing, mainly for tax issues, so that the owner would no longer be liable for taxes to a property he/she no longer owns”, Al Haggan added.
Ownership
The report also stated that the buyer should verify the legality and rightfulness of the ownership and permissions provided to the real estate developer, in efforts to avoid any actions of fraud. This also includes the seller’s ownership of the land on which the building is built, and ensuring that it was built with a legal construction license issued from Egyptian government.
Moataz Yaken, former consultant to the president of the General Assembly of Investments and Managing of Small and Medium projects, told Invest-Gate that a buyer should make sure that the seller is the original owner as a major priority. This could include inquiring about the owner in the area of the property and the through legal offices, while the owner should be formally asked to sign a contract of giving up the property to buyer.
The status of foreign investors differs in the purchase process, whereby the UK government’s report also states that Egyptian law does not allow a foreigner to own a non-residential property except through joining a company to carry on a business, administrative or industrial activity in Egypt.
Location
Al Haggan mentioned that location is one of the major factors to consider when purchasing a commercial property because business owners tend to locate themselves close to their clients/customers.
Location is also affected by tenure and the type of property you are looking for; therefore, determining your location first will help shape your future decisions. The location is also crucial to ensure that it will bring about a good rental income or a profitable value when sold later on.
“Commercial properties are concentrated in Greater Cairo and it would not be difficult for potential buyers to buy property in Cairo, regardless of nationality,” added Al Haggan.
Market Status
The country’s economic status also factors into the decision to buy a commercial property, according to Al Haggan.
“The best time to buy property is during periods of stagnation, where real estate transactions are on a low tide. The current period, for example, is a stagnation period, where property prices tend to stabilize at a slightly low rate,” he said.
Egypt’s GDP growth output is expected to be lower in 2017, according to CBRE a worldwide leader in real estate services; during that time the country’s real estate market will be facing fresh challenges among low tourism revenues and currency shortages.
“According to the IMF, the country is currently seeking a solution to this with a proposed loan facility being considered to bridge the gap in finances. Unfortunately, consumer inflation levels also remain very high, with Oxford economics forecasting a CPI of around 12.3% during 2016 and will rise to 12.6% in 2017”, Mat Green, Head of Research and Consulting, CBRE Middle East, told Invest-Gate in an interview.
Green also stated that investors are looking for long term income generation in the Egyptian real estate market; therefore commercial properties are more promising in the market as investors can buy long-term revenues streams with a strong corporate agreement, thus offering more certainty regarding tenure.
“The value of commercial property is often driven by the quality of the occupier and the security of the lease rather than the actual asset” added Green.
Registration
This is considered the official step towards transferring property ownership to the buyer. Egyptian law states that registration costs a fee of 3% of the property’s value, and if an investor avoids this vital step is he/she will be obliged to fewer and weaker protections which will lead eventually require a long term lease rather than true ownership, according to the Oxford Business Group report.
Registration also requires that the purchase money must be transferred into the country through specific banks, while owners are forbidden to rent or sell until five years from the registration date.
“To open a commercial property, [investors] must have a commercial license, which is proof of the type of business and that the buyer is debt free in order to prove the authenticity of the buyer’s business activities and identity, one also needs to consider on the type of business he/she will conduct because its one of the trivial consideration before deciding to buy a commercial”, said Yaken, commenting on legal matters during the purchase process.
Financial Considerations
Buyers can always enjoy several funding options, including loans, mortgages, and off-plan investments offered by developers. Some developers offer loans to help finance the purchase of a property through financial leasing and contracting with a bank or company that is licensed.
These loans, however, are time-limited, and therefore a buyer should carefully examine the interest rates, the terms and conditions, and rights and obligations that are in place to acquire a loan.
Another factor influencing the purchase decision is the high price of commercial properties in the Egyptian market, which could exceed your budget.
“The major disadvantage is that investing in commercial property requires high investment capital due to high prices. However, the buyer has several payment options. It could be self-financed through equity, debt, or a combination of both,” said Haggan.
He further elaborated that properties in Egypt in general tend to increase in value, but the drop in demand translates to a drop in commercial property prices, and during times of challenging economic conditions, demand for commercial property drops, hence impacting commercial property prices.
“Business profitability is at jeopardy due to several factors, and hence, business operation has been significantly low for a while,” Al Haggan said, commenting on the demand on commercial properties
On the other hand, others believe there is a high investment potential, such as Yaken, who contends that there is increasing investment potential in the governorate of Suez, where there are several commercial and residential projects in planning.
“Commercial units in Suez of C grade cost EGP 18,000 per meter and this depends on location, while the overall price of a retail space will cost around EGP 800,000 to 1.5 million,” exclaimed Yaken.
Irrespective of the purpose behind buying a commercial property whether for retail or office, a commercial property is only a successful endeavor to investment if one fully analyzes the factors that determine his/her decision including taxes, mortgages, registration, budget, business type, market status, location, and ownership.
Egypt has a good potential in the investment market, according to CBRE, and a great number of government-owned properties that could work as an attractive investment offer, depending on the quality and tenure. Regardless of the stagnant economic stature in Egypt, this could also be a good time, according to Green, to meet the government’s search for new avenues that could operate capital; where investment in commercial properties van boost the real estate market and also possibly act as a new way to capitalize the country; all depicted in predicting the future of commercial properties in Egypt.