Egypt’s Commercial Real Estate a Cost-Effective Investment

BY Realty+

Egypt’s real estate for the second quarter (2Q) of 2022, the country’s commercial real estate stock maintains its position as a cost-effective investment, which is positive for foreign direct investment. It added that government efforts to increase foreign investment and boost private sector activity in the economy should prove positive for the commercial real estate market.

The strength and overall situation of Egypt’s commercial real estate sector are encouraging investment in the market due to the ongoing development and construction of 20 new cities, in addition to the development of the 23 existing new cities.

The new cities — like the New Administrative Capital (NAC), New Alamein, and New Mansoura to name a few — provide potential investors with attractive, large-scale real estate project opportunities. Demand is predominantly for income-producing office and retail assets, though there is increasing interest in industrial facilities on the back of positive market conditions.

FDI has been a major driver of market investment. It is expected to continue as domestic institutions adopt strategies to mitigate economic risks on the global and domestic fronts. The authorities’ business-friendly reforms to improve the business environment and increase the private sector’s participation in the economy, along with the materialisation of more than $25bn in investment pledges by the UAE, Saudi Arabia, and Qatar will partly offset slowing public investment. However, more is needed to attract additional foreign investment, reduce the footprint of the state in the economy, and improve the business environment.

Cairo continues to be the main focus of commercial real estate investment activity, with moderate demand across the board, particularly for prime office and retail space. Meanwhile, a strong tourism sector boosts demand for retail facilities in Giza. However, as commodity prices rise and inflation soars, Rentals are expected to fall across all three sectors in 2023. However, the office market in Egypt will decline in the short-to-medium term, but a lack of supply of prime space will be supporting the top of the market. Meanwhile, the NAC and New Alamein will experience moderate demand for office space in the medium term.

Furthermore, real household spending will slow in 2023, driven by favorable base effects (which were created by easing inflation and a rise in public-sector wages) wearing off. The phasing out of subsidies is likely to have an adverse impact on real household spending over 2023. Although there is still a high proportion of informal retail in Egypt, the large young population will create long-term demand for modern retail space, which will drive the growth of the retail real estate market. It added that Egypt’s industrial real estate market activity continues to be focused heavily on the industrial hubs close to Alexandria and Cairo.

Rental rates are expected to fall across all three cities but less so in Alexandria. Meanwhile, in the long run, the growth of online retail will support demand for modern warehouse space. The Egyptian retail real estate sector benefits from the continuing popularity of brick-and-mortar stores, despite a recent rise in e-commerce. With many Egyptians having low income, consumption is still focused on essential products and informal retail is still prevalent.

Informal retail formats remain prevalent in Egypt, particularly in non-urban areas. However, the retail landscape is becoming increasingly formalised. International retailers continue to enter and expand in the country, particularly through franchise agreements with regional firms. Egypt’s large, growing, and youthful population is driving modernisation, resulting in the growing demand for foreign brands across a number of sectors.

Regarding the residential sector, the inability to match supply with demand has resulted in a housing shortage estimated at 500,000 units a year. A major factor behind the limited supply is the lack of low-income housing expertise among the country’s largest housing developers as well as inadequate incentives to undertake low-income projects over more lucrative mid- to high-end developments. With an underdeveloped mortgage market (the share of mortgages to GDP is only 0.5%), there is little to attract private developers to the affordable housing sector.

Egypt’s residential sector will continue to derive support from government policy that aims to deliver social housing as a means to address the country’s persistent housing shortage. Furthermore, it pointed out the strength of Egypt’s property market in some elements, namely the government’s support for construction projects across the country, favorable price points for foreign investors that support good demand for domestic commercial real estate stock, and great land capacity allows for the development of new stock.

Also, improving the regulatory backdrop is a welcome development for investors, and close links and investment from Saudi Arabia and the UAE have resulted in the proliferation of regional brands. Meanwhile, the weaknesses are summarised in a lack of quality supply undermining occupier demand; a number of occupiers are resorting to alternatives such as expanding current premises or holding on for the arrival of fresh stock.

A bunch of opportunities that the local property market enjoys, particularly the dearth of investment-grade assets and growing demand for prime income-producing assets provide room for capitalised developers.

There is also the introduction of a new logistics facility in Cairo and the integration of more modern stock is boosting demand for industrial assets, which place upward pressure on industrial property rental rates.

Furthermore, the country has ambitions to become a central logistics hub in Africa as evidenced by investment in road, port, and airport projects and strong demand for industrial space in the port city of Alexandria, as well as the development of new cities and industrial areas.

There are some threats that the market may face, which are elevated commodity prices, the weakening of the EGP, and rising domestic interest rates will take their toll on households’ purchasing power and cause social unrest.

Tags : Egypt real estate commercial stock investment foreign direct investment New Administrative Capital UAE Saudi Arabia Qatar