For both burgeoning and established investors, the Egyptian market currently offers a multitude of opportunities. The recent depreciation of the Egyptian pound, despite still not being close to reflecting its real market value, along with a number of recent reforms, has brought forth many changes in the real estate market.

While the government started with economic reforms more than a year ago, many of their effects have only begun to be felt now: amid efforts to stimulate foreign investment, the figures for foreign direct investment in the real estate sector started to skyrocket in 2016. Other measures, such as the introduction of a value-added-tax (VAT), have yet to show their impact on the market.

Overview

The current market conditions have emerged from a mixture of various events and measures, among which are government measures to stimulate economic growth and increase tax revenues, such as amendments to the investment law, as well as the introduction of the VAT. On the side of recent events, we can observe the consequences from the currency depreciation, as well as the results of the aforementioned government reforms.

The currency depreciation translates into a rise in purchasing power for Egyptian expatriates, foreign investors, and anyone with a salary fixed in dollars or another foreign currency. The negative side of this is a relative rise in prices for any imported goods, which also means a rise in property development costs. According to real estate consultancy Colliers International, this might lead to developers adjusting their prices accordingly, which in turn is “likely to depress middle class purchasing appetite.”

artly in reaction to the foreign currency crisis, the Egyptian government has negotiated a $12 bn loan with the International Monetary Fund (IMF). Consultancy JLL projects that the Central Bank of Egypt (CBE) will use the first tranche of the loan the stem the recent currency devaluation. With the IMF loan mandating the Egyptian government to obtain additional foreign funds and proceed with economic reforms, the government has started to work on the issuance of a global Eurobond of at least $3 bn, while it has already previously acquired generous funding from its GCC allies, especially Saudi Arabia. Nonetheless, it has so far has only raised about 60% of the funds required to qualify for the IMF loan.

In terms of economic reforms, the government has begun to slash subsidies, as well as proceeding with the aforementioned economically-friendly reforms to some aspects of the legal framework, especially the investment law and the introduction of the VAT.

The impact of the amendments to the investment law can already be seen: According to the Ministry of Investment’s General Authority for Investment and Free Zones (GAFI) the number of foreign companies, as well as the amount of investments, have increased six-fold and more than tenfold respectively.

The recent introduction of a value-added-tax will however have a negative impact on the purchasing power, which will likely also have a negative impact in the short-term on the economy in general, and the real estate sector in particular, according to JLL. Adding to these negative effects are also higher import prices due to the currency depreciation as well as subsidy cuts.

The Residential Sector: Undersupply as an Opportunity

The residential market might not immediately come to mind when thinking of private investment; however, the low to mid-income segments of the Egyptian market in particular are heavily undersupplied due to an ever-widening housing gap of around 3 mn units. Since most private investments in the residential sector so far mostly focus on the upper segments of the market, according to Colliers International, there is still plenty of opportunity in the undersupplied segments, which are mostly driven by government projects and building projects for own use.

This is something that can be done on any scale: either as a large-scale investment in order to obtain profits or as a hedge against inflation. Skyrocketing profits however are not to be expected here for private investors, due to the rather steady nature of the residential sector. Nonetheless, profitable and especially safe investment opportunities can be found in this segment.

The Retail Market: Struck by the VAT

The retail sector is probably one of the most negatively affected by the currency depreciation, due to the fact that many luxury goods have to be imported at a higher price, while some rents for retail space are fixed in dollars, which greatly pressures retailers. The introduction of the VAT is also being felt especially by this segment. JLL estimates these negative factors combined will apply “downward pressure” on the market, and that any recovery would be dependent on the success of the recent economic reforms and a possible renewed access to foreign currency.

While vacancy rates in the retail sector remain largely unchanged, JLL says some major projects were delayed, including Ski Egypt’s delay until the first quarter of 2017 and the postponement of the opening of Madinaty Mega Mall by one year to the first quarter of 2018. Investments in the retail sector at the current time might be risky, but this does not necessarily mean that there are no opportunities to capitalize on.

The Office Sector and International Standards

With regard to the market for office space, there are few changes to rents and vacancy rates. JLL expects a negative short-term impact from the VAT, but nonetheless the market could still be a sound investment opportunity as the consultancy also expects a positive medium-term impact of the recent reforms and the expected influx of foreign currency.

Colliers identifies a shortage of office space in Egypt that meets international levels of quality, noting that the office market in general is undersupplied. One willing to invest in the office market must have an eye on international building standards required by most multinational companies, as well as the development’s location, surroundings, infrastructure, and nearby amenities, such as parking, restaurants and convenience retail, all of which can have a positive impact on the rental price of the property.

Hotels and Serviced Apartments: Finally, a Revival?

Lastly there is the hospitality market, mainly comprised of hotels as well as serviced apartments. This sector has stagnated over recent years due to political instability and security concerns as well as due to the suspension of flights from Russia to Egypt, the main origin country of tourists visiting Egypt, with around 3 mn Russians coming to Egypt annually prior to the ban. Recently, an influx of tourists from the GCC, along with improvements in airport security, have led to increased occupancy rates in 2016, rising by 6%, according to JLL’s Cairo Real Estate Market Overview for the third quarter of 2016.

While this seems to signal an upwards trend in the market, making it an interesting investment opportunity, it is still imperative to identify which sub-segments might yield the largest profit. Colliers identifies two gaps in the market: Firstly a lack of internationally branded three-star-hotels. While the market for four- to five-star-hotels is well developed in Egypt in general, and specifically in Cairo, the consultancy points to a lack of three-star properties that live up to international standards and appeal to the more price-sensitive domestic tourists, as well as GCC tourists who might additionally prefer three-star brands that are already established in the GCC.

The second gap is the serviced apartments market – this however is different, although also linked to GCC tourism. Colliers puts the figure for “quality serviced apartments” at less than 500 for Cairo, compared to Dubai’s 30,000. The main advantage the consultancy perceives in the serviced apartments sector is that it is often a preferred type of accommodation for tourists from the Gulf, as well as from the Arab world in general. Coupling this kind of accommodation with traditional hotels means the apartments can be serviced by the structures already in place by the hotels. Colliers also notes that the serviced apartments sector is less affected by market downtrends since it is much more reliant on long-stay guests from the corporate segment in particular.

A further major advantage of the hospitality sector is that its main influx of money is foreign currency, thus reducing the negative impact of the currency crisis. This means that investments in the hospitality sector, which has traditionally been a strong market in Egypt, might yield interesting investment opportunities since the market seems to be experiencing a revival.

Finally, while the current market situation cannot be described as especially attractive for most markets, there are still several opportunities to either utilize real estate as a hedge against inflation or reap a profit off of market segments that are experiencing a revival.

On top of that, an investment is of course a highly individual deal. Even in sectors that might seem unattractive at the moment, there surely are profitable investments to be made there too while the same of course applies to upwards trending markets where losses will inevitably occur at times. However, given the main indicators for profitable investments on which investors should keep an eye, the current environment still yields space to be optimally tapped into.