In Cityscape’s 6th conference in Egypt, Invest-Gate speaks to leading researchers and developers about the outlook of Egypt’s real estate market and the challenges the business faces amid economic fluctuations and recent reform measures. Fatma Khaled and Leena Eldeeb speak to major key players in the sector.
Wouter Molman, Cityscape Group Director, Informa Exhibitions, UAE
What do you see in store for the real estate market in 2017?
The market is going through a transitional phase at the moment. The government has implemented major structural reform measures, including floating the EGP, gradually slashing subsidies, and increasing tax rates. These decisions would have had a more significant impact on everyone if taken earlier. No country has even witnessed such reform in this short period of time. The government’s reform steps have had a positive impact so far with regards to increasing foreign reserves. Despite the challenges that this phase poses on Egyptians, the government’s move was necessary.
I expect market performance to improve in the upcoming months and hopefully in the upcoming years as the hospitality market has been struggling due to security issues. Egypt is more affordable to tourists today than it was previously. The government is also assisting hotels with incentives and low interest rate to renovate the older hotels; however, we are not even close to the peak levels we saw in tourist inflows during 2009.
Craig Plumb, Head of Real Estate and Property Research at Jones Lang LaSalle (JLL) in Dubai, Abu Dhabi, and MENA region
Some argue that grants and funds from different countries and institutions could backfire in terms of sanctions if Egypt could not pay back, or that political and ideological influences would be imposed. We are sure you have seen cases like this during your work in JLL, how do you argue against or with this rhetoric?
History would suggest that countries need to attract foreign investments and I think that is definitely the case with Egypt at the moment. I think again many of the bigger developers here at Cityscape have recognized the need to perform joint ventures and attract investors, particularly from other countries in the GCC. The UAE and Saudi Arabia would like to invest in Egypt at the moment but they are put off by the regulatory framework. So, there is a number of aspects to that.
At the governmental level, with tariffs and capital repatriation, the ability to get the capital out of the country are still a problem. So I think there needs more to be done to make it easier for easing the flow of money in and out of the country.
Another factor is that some Egyptian developers are still a bit reluctant to enter into partnerships with overseas investors. We have seen a number of investors from Dubai and Abu Dhabi who came to work with families or with developers here in Egypt and they have not been able to do that because they have not been able to agree on financial terms. International developers would say they are being a bit inflexible in terms of what they are willing to give up.
Mohammad Abu Basha, Vice President of Research at EFG Hermes
When we talk to real estate developers, they tell us that the EGP devaluation followed by the flotation encouraged foreign purchasers and investors to buy from the Egyptian market. Is that true?
Generally in Egypt, we do not see much of purchases from foreign buyers. There used to be purchases in niche markets like El Gouna and the North Coast but these are not pushers to the market; it is not a trend. So, I think it greatly remains the same. The segment that witnessed a great boost in their purchasing power is that of the Egyptian expatriates. This is the segment that the real estate companies are aiming to target.
The media, side-by-side with the government, are making it clear that the Egyptian economy is currently relying on the grants and funds getting injected into the Egyptian wallet. On the other hand, how are production rates in the recent period?
Eventually, the size of the decline that happened in the currency improves the attractiveness and competitiveness of the economy of that currency, especially since no country has had a 60-70% decline in its currency in the last two years. That is a huge number that immediately reflects on the gains of businesses. In fact, four to five months is a very, very early stage to judge production rates. It is moving in the right direction but not with the magnitude we are aiming for. I do not think we will find a great magnitude in the relative terms before 2018.
Hossam Aboul Fotouh, Founder and Chairman of Aboul Fotouh Group
Why did you expand from automotive-oriented production to real estate?
Real estate is considered immortal, unlike cars. It was inevitable as I am originally an architect and my father founded the first company in 1940 in Egypt, which became among the top three leading development companies in the country. We later worked in Saudi Arabia and entered into partnerships with several Saudi investors, including Prince Mohamed bin Abdel Aziz and Abduallah Faisal at that time.
How can we guarantee sustainable construction?
Our M2 Building System in Aboul Fotouh has been experimented globally, proved to be sustainable and was able to previously renovate areas affected by the famous Tsunami. This construction system is strong enough to tolerate earthquakes and stands strong in tolerating 30 tons of dynamite explosions. The system also saves 30% to 40% of the traditional construction costs. M2 Building System can be used to develop anything and we plan to develop major projects in the upcoming period with this system.
Essam Hafez, retail country manager of Al-Futtaim Group
What are the challenges and opportunities in the retail sector?
We are not optimistic about 2017, mainly because of the new custom taxes. We have retail brands that have not been registered since June 2016 until this moment due to the complexity of registration processes and the long time they take for no reason. This implies that there is no one rule or law allowing you to predict the future of a certain business, which made us put our plans on hold until further notice. However, opportunities this year include brands that we will introduce in different sectors such fashion, accessories, food and beverage among others.
How would you describe commercial activity now?
There are two factors that have been affecting us since 2015, including the increase in custom taxes and curbing imports according to Law No. 43 where around 16 commodities were obliged to acquire registration. The complexity of submitting such documents constituted a major obstacle in commercial activity and was hard to provide. Such difficulties decreased the size of the retail market. The other problem is the dollar crunch. The more a certain company grows, the more it cannot function because of the custom taxes and import curbs. These challenges also resulted in companies cancelling their expansion plans. The flotation of the EGP caused a shock to clients but this shock will fade away over time. These situations happened before in Turkey and Lebanon. The retail market will revive again when companies learn how to work with market dynamics.
Karim Helal, Director of Colliers International, a leading real estate company operating in 68 countries
How would you describe the commercial sector following the flotation of the EGP?
The impact of the EGP flotation on the commercial sector has been very negative. There is tremendous pressure on rents valued in USD.This has created a massive problem to tenants, especially if they’re among the large malls who own great space of shops or offices. These tenants’ costs have been tripled so they go back to the landlords and renegotiate. Therefore, developers are making substantial reductions such as decreasing the price rate of USD to reach a fixed rate of EGP 12 or EGP 13 rather than EGP 18. The overall situation in the end includes increased costs for tenants and reduced revenues for the developer.
Do you think real estate prices will stabilize in the upcoming period?
I do not think I can generalize and say ‘real estate prices’ because I believe real estate contains several sectors and each sector has specific characteristics. For example, people seem to be obsessed with high-end gated compounds offering unreasonable payment terms. The prices of these properties have been increasing due to cost increases. Therefore, developers try to compensate the increase by offering extended payment terms, some are offering terms without down payment and these decisions have affected the prices. The real question, though, is how the transactions are actually being made, what was actually sold or bought at this level. If you think about low-income and middle-income housing, for example, we have a huge demand and no supply. Schools and hospitals have a very strong demand and no supply as well. Prices reflect on that; therefore, it depends on sector.