Diversified business in the real estate sector has been one primary practice that helps investors avoid relying on a single investment, and rather spread capital across a wider spectrum for balancing all returns and risks alike, and thus hedge against market volatility. In Egypt, with the rising concerns over a slowdown in the residential sector, which is dragged down by the stifled demand amid the weakened purchasing power, the absolute investment mantra became: “One should never put all eggs in one basket.” Accordingly, an abundance of investors started to react.
Having said that, Invest-Gate walks through the possible ways of diversification, which would essentially help investors eschew “success dependency on a single business,” while looking for the ultimate real estate portfolio excelling in that sense in today’s Egyptian market. We also explore the hurdles stumbling developers to adopt this strategic business model in the North African country.
Perfect Diversified Portfolio
The real question that initially arises for many real estate investors or seasoned veterans is what a diversified investment portfolio should include. Antoine El Khoury, managing director of Tameer, believes that there is no perfect example or fixed formula of a diversified portfolio, yet he sees the model that can be successfully and swiftly implemented in Egypt within the coming ten to 15 years is the professionally asset-managed “mixed-use” type offered for rent.
This paradigm of portfolio diversification should be structured under stock-listed companies such as real estate investment trusts (REITs), through which the value of assets is then transformed into liquidity securities, El Khoury underlines.
He explains that this model is deemed to be appealing for investors and developers alike, whereby meeting their real needs. This is due to the fact that funds offer regular income streams, coming in the form of dividends and long-term capital appreciation, and, needless to say, a proper diversification.
Non-residential real estate is another path developers can fold into their portfolio. Tatweer Misr’s President and CEO Ahmed Shalaby, as well as El Khoury, agree that such component is another great aspect for development. In effect, many companies, including theirs, recently started to tap into it.
The benefits of diversifying with non-residential properties vary from increasing monetary assets to getting a leg up in the competition as well as earning a relatively steady and reliable stream of monthly income. Besides, investors get to enjoy financial breaks by having tenants pay out taxes, property insurance, and maintenance costs, JD Esajian, project manager at CT Homes, said in an article titled, “Three Ways to Diversify Your Real Estate Investment Portfolio.”
Experts also see that geography is a key factor to determine the successfulness of the diversified portfolio. Iwan Developments CEO Waleed Mokhtar remarks, “It is all about seeking opportunities and catering to locations that are in need of a specific product, whether it is a mall, a medical center, or a school.” He adds that diversification should not necessarily be within a single community, but rather across a much broader sphere nationwide as specific areas can be favorable for some fields more than others.
Manifold Advantages
The distribution of capital and diversification across different areas with various types of real estate properties might help any investor build a portfolio of uncorrelated assets, and this comes with multiple benefits.
– Easy Maneuver Across Businesses: Tameer’s El Khoury notes that diversification allows developers, who are continuously looking for good shots, to move out of saturated areas and get into other wider, less congested, and sometimes underpenetrated markets. This contributes to minimizing the impact of defective assets on the overall real estate investment portfolio, including the ability to counterbalance the loss that might be associated with one type of property investment, according to CT Homes’ Esajian.
– Sustainable Performance: With diversification, there is also less likelihood of one investment skewing the overall returns of the entire portfolio. Having multiple assets, especially those with flexible and reliable rental fees, means non-stop income generation and recurring revenues, Mokhtar and Shalaby agree.
“In turn, this gives developers the feasibility to remain more consistent and sustainable over the medium- to longer-term, even at times of overall economic stagnation,” Tatweer Misr’s CEO highlights.
– Capital Preservation: Another key benefit of diversification is the preservation of capital over a long term horizon by limiting both volatility and overall portfolio risk. “This reduces the odds of loss and capital erosion due to poor investments,” Edward Canty, a financial planner at Canty Financial Management, said in an article titled “Seven Ways to Diversify Your Real Estate Investments.”
Some Bumps on the Road
Although the pluses of diversification are numerous, whereby helping to neutralize the negative performance of some investments by other ones, there are also many drawbacks involved.
– Long-Term vs. Easy Money: Tameer’s managing director explains that developers have been compelled to play the role of banks or mortgage companies by funding their customers through extended payment plans to facilitate real estate exposure. Accordingly, profitability and liquidity ratios are ought to be negatively impacted, which should originally be pumped into new investments, he says, adding that this led to a shift in the investor’s mindset toward diversification to generate higher yields.
– Financing Dilemma: Although there is also an existing funding gap in today’s Egyptian market, which may stand as an obstacle to portfolio diversification, El Khoury believes the way out is banks offering lower interest rates and easing restrictions on lending so developers can establish different kinds of projects, generate revenues, and repay debts. Besides, Shalaby sees that money chases ideal opportunities. Entering into partnerships with foreign and Arab investors – with massive appetite – can be another solution to lift the financial burdens off developers’ shoulders.
– Strategic Demand-Supply Map: Iwan Developments’ CEO suggests that each developer should conduct proper market research to find out all potential risks and opportunities, while also standing ahead of the competition.
– Some Industries Difficult to Penetrate: Diversification across some fields such as the healthcare sector can be challenging to opt for, as it may lack the ultimate model of specialized industry-related management companies. Most investors, including Tatweer Misr, have the mentality of “we build, we invest, but we do not operate.”
There is no way set in stone to go about diversification, but any investor is advised to fully understand the ins and outs of new markets, locations, and model management to determine the possibility of its application. Each of the diversified investments will draw a new challenge in terms of learning, so developers must take an active role in their investment by analyzing and conducting their in-depth research to minimize the risks.
Most importantly, investors must call to mind that a diversified portfolio does not mean more assets, but instead more differentiated property types!
Delve deeper into diversification, while also learning all the essential tactics and strategies, by reading pages 24-26 at Invest-Gate’s December issue.