While it is impossible to predict the market’s exact direction during the upcoming period, Invest-Gate asks several senior property professionals to look into their crystal ball, thereby taking a deep dive into a pool of forecasts for 2020, as well as, scrutinizing the latest real estate trends and data. We also seek answers to the million-dollar question that will perhaps influence the local investors’ future plans: “How will the housing market shake out next year?”
Calm Year Ahead
Similar to last year, Egypt’s real estate sector is seen to witness further calmness in 2020, portrayed by a set of different factors. Mariam Elsaadany, a senior analyst at HC Brokerage, expects market growth to generally flatten in 2020, attributing her forecasts to the lack of “catalysts” to trigger an overall sector recovery.
The industry’s deceleration mode is partially reflected by the stifled demand, on the back of the weak consumer purchasing power. With a negative sector-based sentiment for two years now, buyers are warding away from real estate as an investment alternative, in the wake of the slowdown in the secondary/resale market, according to Arab African International Securities’ (AAIS) December 2019 report.
Consequently, Mahmoud Gad, a senior equity analyst at AAIS, sees affordability as the main impediment for real estate shoppers, notably those falling under the middle-income bracket. Hence, he anticipates demand to remain stationary in 2020. However, as the Central Bank of Egypt (CBE) resumes easing its monetary policies, he argues that the property sector might witness a recovery. But, unless interest rates decline to pre-flotation levels (below 10%), any improvement will not be “immediate.”
Notably, due to the excessive entrance of new players, coupled with the launch of new national and private developments, the foreseen default-conditional recovery may not necessarily be accompanied by growth in developers’ market share. For now, this partially resulted in an oversupply of high-end projects, which may hit saturation in the near-term, he underlines.
For this reason, market experts believe that property sales will remain subdued in 2020, with Pharos Holding’s sales projections for next year lower than the current targets of developers, according to its “Real Estate Sector: 2020 Valuation Update,” released in October 2019.
Meanwhile, property developers, which were able to meet the 2019 target sales, will maintain the same steady performance in the forthcoming year, with big players seemingly outdoing those with modest names, Gad and Elsaadny note.
HC Brokerage’s analyst notes that recurring assets are a huge boost to any company’s portfolio next year to balance risks and rewards in developers’ portfolios. This diversification is seen in the revenue breakdown of Talaat Moustafa Group (TMG) Holding and Orascom Development Egypt (ODE) – expected top listed performers – whereby their recurring revenues constitute around 31.4% and 58.7%, respectively of their total profits, compared to their peers’ average of only 5%, Pharos’ 2020 report highlighted.
Sundry Performance Across Subsectors
Residential: Secondary Market Wins?
– Primary Market: On the one hand, sale prices of Grade A and B apartments are expected to hike by 5-8% in 2020, while those of villas are likely to climb up at higher rates by 10-15%, Ian Albert, regional director at Colliers International MENA, reveals. On the different, an unprecedented increase in residential supply is possible in the forthcoming year, with 46,700 units proposed, JLL’s “Q3 Cairo Real Estate Market Overview” report showed. However, the US commercial real estate services firm is wary of the delivery of projects within the set timeframes.
Given the expected oversupply in New Cairo, the performance of the urban city’s residential chunk is to remain subdued and witness a stable/slight boost in sales, Colliers’ regional director notes. Moving to west Cairo, namely the 6th of October City and Sheikh Zayed, Albert predicts the area to further grow and witness a rise in sales. He attributes this to the fact that key developers are eying the establishment of new mixed-use communities in the former city, in specific, especially with the government’s plans to invest in expansions of the capital’s western side.
– Rental Market: Rates are expected to grow in New Cairo, yet anticipated to remain almost fixed in the 6th of October City, JLL uncovered in its Q3 2019 report. Besides, AAIS’ 2019 study highlighted that leasing may be deemed a better alternative up until income levels improve and/or there is access to mortgage finance at lower interest.
– Secondary Market: A stable demand for both leisure and investment purposes is foreseen, which is likely to uplift the market performance in 2020. Thus, the property cycle of the second-home market is expected to remain in a period of growth in that year as well, Albert elucidates. This is mainly backed by the majority of Egyptians’ tendency toward ownership instead of renting, he justifies. In addition, the increasing awareness on booking portals such as Airbnb made it easier for second homeowners to lease their properties when not occupied, he explains.
Commercial at Growth Stage
Commercial real estate has been growing to be a primary category of the property sector, with office and retail subsectors likely to see increased demand in the upcoming period. When viewed by any metric, the office market is expected to maintain a positive performance during 2020, spurred by the increasing demand for workspaces, especially in east Cairo, experts agree.
The market’s foreseen “growth stage” is mainly driven by the shift of traditional business hubs from the capital’s central districts to the outskirts of Cairo’s east and west edges, in parallel to the growth of residential developments in west Cairo and the development of new cities such as the New Administrative Capital (NAC) in the eastern side of Cairo, Colliers’ professional highlights.
A noticeable trend will be a shift in the office sector from leasing to selling in 2020. This is a result of developers seeking shorter payback periods as well as meeting the extensive demand of those drifting away from the residential market and became more inclined to invest in commercial assets, Albert continues.
In figures, the market will have a new supply of 156,000 square meters of gross leasable area (GLA), which are slated for completion next year, according to JLL’s Q3 Cairo report. Additionally, rental rates for Grade A and Grade B office spaces are set to mount by 3% to 5% in USD terms, he highlights.
As for the retail segment, it is poised for further expansion, driven by the increase in consumer confidence and spending. In this sense, Colliers’ regional director predicts rental rates to surge by approximately 10-15%.
However, a slowdown will most likely take place across the retail pipeline, which will stand at 180,000 square meters of GLA, according to JLL’s study. This reflects the market disruption in the wake of the growth of e-commerce and a shift of focus toward merging locations within Egypt, the report showed.
Hospitality Market Remains Healthy
Outlook for the hospitality sector remains optimistic, on the back of positive performance indicators, promotional campaigns abroad, as well as, regulatory reforms and initiatives taken to boost the Egyptian industry.
Last December, the CBE released an extensive financing plan to boost Egypt’s tourism sector, providing funds worth EGP 50 bn instead of the previously allocated EGP 5 bn. The program exempts tourism companies from paying compound interest, exceptionally those who entered the market before 2011, together with waiving part of their debt and contributing to the renovation of owned hotels.
Additionally, the recent renovations of tourist attractions, including the Baron Palace and the long-awaited opening of the Grand Egyptian Museum before the end of 2020, are likely to make Egypt more appealing to visitors, while further boosting the local hospitality sector in the coming period, JLL’s Q3 report underlined.
Better yet, the Cairo hotel market’s occupancy rates are likely to reach 81% in 2020, slightly higher than the 80% achieved a year ago, according to Colliers’ “MENA Hotel Market Forecast – Full Year 2019” report. This steady performance is attributed to the higher tourist arrivals and the addition of the limited pipeline, particularly via the 242-room Hyatt Regency Cairo West, JLL highlighted in the same report.
In terms of opportunities for hotel investors next year, there appears to be a considerable gap in the market for modern lifestyle products targeting millennials. Demand for these new products is backed by young travelers seeking excitement and adventure, with a special focus on new experiences, Albert says.
He sees developers and investors having a lucky chance to lure more international operators into Egypt, particularly with brands focalized on this evolving segment. Hence, home-grown boutique concepts will be further developed within this space.
Lately, the abundance of offerings amid the country’s growing trend of urbanization, supported by the construction of many new cities, property developers have been adopting a common tactic of offering relaxed payment facilities to maintain their market shares. But, some have gone to extremes with installment terms of up to ten years, with zero down payments. Although such terms are aimed at securing more customers and logging higher sales, cash flows of some companies started to tighten as a consequence, whilst ultimately eroding its profit margins, Gad notes.
Accordingly, Elsaadny believes that a possible liquidity crisis will unfold among small-sized developers due to their “unplanned” aggressive payment facilities, which might eventually lead to delays in project deliveries, and thus, compel their withdrawal for failure to compete and maintain their market shares. In short, Gad highlights that if companies, with high leverage and/or have large land liabilities, continue following the same financing strategy, they will collapse sooner or later.
As for big developers, in Elsaadny’s point of view, such a liquidity stress scenario is unlikely to leave a negative imprint on their portfolios for being backed by various retail components, which make up for the fluctuating performance of their businesses’ residential side.
However, some of these companies will see low-profit margins due to high-cost overruns, hence not adhering to the set timelines. Madinet Nasr for Housing and Development (MNHD), for example, endured delayed handovers and greater cost overruns after offering ten-year payment plans, she explains.
Another risk is that the sheer size of projects are concentrated in east Cairo, where several small developers debut and “immature” competition emerges as a result, both Gad and Elsaadany underline. Thereupon, Albert expects New Cairo to be oversupplied over the coming five years, which is likely to put pressure on the market performance.
Nevertheless, the entrance of many new players, including the public sector, is another challenge that has been leading to intense rivalry, and thus gradual loss of market share, Gad highlights. As an escape route, Gad remarks that some of the big developers of east Cairo such as Emaar Misr and Sixth of October Development and Investment (SODIC) have gone west with new gated communities, namely Emaar West and The Estates, respectively.
2020 in Short
There is a strong reform program being implemented by the government, which has driven foreign direct investments (FDIs) to record high levels – USD 45.35 bn (EGP 727.88 bn) at the end of November 2019, and the local currency to break through the USD 16 level in mid-December of the same year. On the other hand, there is a pending challenge of weak affordability, which will put the brakes on the housing market.
As a result, developers are forced now to overhaul traditional business models and sales techniques in response to the rapidly-changing market dynamics. However, they should have initially set a well-studied feasibility plan, while being on track with new on-the-rise trends to gloriously stand among the top achievers of the future real estate industry.
Wanna know what’s in the pipeline for Egypt’s real estate industry in 2020? Go through pages 28-31 at Invest-Gate January issue.