Cairo’s real estate market stabilises following year of adjustment
According to JLL’s Egypt Real Estate Market Overview for 2017
In 2017 Cairo's real estate market showed resilience in a 'year of adjustment,' with the majority of sectors bouncing back from effects of monetary policy changes and devaluation of the Egyptian pound in 2016, says JLL's latest report.
In lieu of these policies, according to Oxford Economics, Egypt's GDP grew by 4.2% in 2017, compared to the previous year's 4.3%. Stable positive performance on the back of strength in real export growth and FDI inflows increased the GDP forecast for FY 2017/2018 to 4.6%.
The overall positive outlook for the residential, office and tourism sectors overviewed in the report are owed to the increase of global competitiveness on the back of the policies devaluating the Egyptian pound and the government's extensive efforts to attract foreign investment, while supporting local investors' establishments.
"The first half of 2017 witnessed the major impact of these adjustments with both consumers and suppliers having to adapt to the new market conditions," said Ayman Sami, Country Head, Egypt, JLL.
"The overall business environment was affected and introduced short term volatility amongst key real estate stakeholders. However, in the second half of the year, market conditions generally stabilised boosting the real estate market's sentiment in a positive direction," he added.
The hotels and tourism sector of the real estate market experienced countercyclical growth during 2017. The Egyptian pound devaluation has resulted in increased room occupancy rates and on the investment side, the outlook for 2018 remains positive.
In the residential market, the majority of price hikes were transferred to the consumer, with prices increasing significantly in terms of the Egyptian pound. Revising the unit sizing and the extension of payment terms have been other responses to the varying market conditions. Despite challenges a strong pipeline of market transactions is proof of the sector's resilience.
"The apartment market has recovered extremely strongly in 2017, with prices for new projects spiking by more than 50% in EGP terms in New Cairo over the past 12 months (and by 20% over the quarter). Given that the EGP has strengthened marginally against the dollar over the past year, the gains in USD terms have been even more significant (+59%). This is in contrast to the rental market, where values have declined by 24% in New Cairo. These changes reflect a major shift in the residential market, with activity switching away from ex-pat Egyptians living abroad to local buyers. While rents are expected to soften further in some areas in the short term, the sales market is expected to record further gains in value in 2018" said Ayman
The office market experienced rental declines of between 10% and 25% in USD with tenants successfully negotiating rental reductions to achieve a more sustainable business model. Developers have taken the initiative in an attempt to retain tenants through offering fixed exchange rate caps or EGP based rentals. While office rents are expected to soften further in the short term, the longer term outlook remains relatively positive.
The currency devaluation posed the most challenges for the retail sector in 2017. The main impact was witnessed during the first half of the year, with signs of more optimism towards the end. The Central Bank of Egypt removed the previous strict caps placed on USD deposits and withdrawals for import activities. During the cap period some local retailers responded by sourcing more local alternatives, which has increased the competitiveness of Egyptian products.
Sector summary highlights – Cairo
Cairo's Grade A office supply remains at around 958,000 sq. m, with no significant completions recorded in 2017. Supply in 2018 will increase with the addition of Cairo Festival city's office buildings and the completion of Cairo Capital Center, also located in East Cairo. Tenant demand for office space continues to be skewed towards the east side of the city, due to the popularity of New Cairo and the effect of the New Capital City.
Looking further ahead (2020 and beyond), a significant amount of new office space will be delivered in the New Capital City located to the east of Cairo. The China State Construction & Engineering Corporation has been appointed as the lead contractor for the development of the 505,000 sq. m of land comprising phase 1 of the new capital project which includes 12 high-rise office buildings and a 345m tower, which will be the tallest in Africa.
Tenants have successfully managed to negotiate rents down in order to maintain their business cycles and maintain their performance during the period of volatility. Office occupiers have also become very selective, given the business environment, their price sensitivity and the ample choice of alternative premises available. Developers and landlords are offering a mix of fixed exchange rate caps and Egyptian pound based rentals. Grade A office rents have fallen on a Y-o-Y basis and are expected to remain under pressure in 2018 due to further increases in supply.
Approximately 10,000 units were added to the residential supply in 2017, with major completions including SODIC's Eastown and New Giza phase 1. Deliveries continue across additional phases of previously announced projects, which could deliver a further 70,000 units within gated residential communities over the next 3 years.
Major developers such as Talaat Mostafa Group and Misr Italia have entered the New Capital city residential zones. Misr Italia's IL Bosco residential compound is located on the boundary of the New Administrative Capital has completed its first phase sales and has launched the second phase in Q4 2017, which is expected to deliver in Q4 2020. Additional commitments near the New Capital City area include 'SODIC East' which will comprise of villas and town houses spread over 2.7 million sq m to be delivered into the market by Q2 2021. The project is being co-developed by SODIC and Heliopolis Housing & Development and is expected to add approximately 8,600 residential units upon delivery.
While the New Capital City effect has further increased developers' and home owners' interest in the East, West Cairo residential prices continue to be competitive with this area attracting the majority of budget conscious purchasers.
Residential sale prices witnessed sweeping increases in EGP terms in 2017 and this trend continued in the final quarter of the year. Given the decline in the value of local currency, prices have however declined in USD terms during 2017. Developers are adapting numerous measures to retain demand, such as offering extended payment term, zero interest on installments, and in some cases zero down payment. Higher construction costs, scarcity of sites and higher interest rates are imposing financial pressures on developers, many of whom are now seeking JVs, partnerships, and revenue sharing schemes.
Second home owners have become a more important sector of residential demand within Cairo during 2017. The previous trend for second home owners was to seek residential units in coastal areas for seasonal usage. Following the currency volatility and spike in inflation in 2017, demand for real estate as a hedge and investment opportunity within Cairo increased significantly. The guarantees of future performance being offered by developers have attracted further investors and supported an increase in off plan sales activity and prices during 2017. Moreover, the maturity of high interest certificates of deposit will contribute to a positive performance in the sector during 2018, on the back of increased liquidity.
Performance of the rental market is expected to be boosted in 2018 by the extended delays in delivery of products within gated compounds. The majority of deliveries in this sector have now been delayed until at least 2020 causing home buyers to seek temporary housing in the rental market. Demand is expected to be more focused on units outside of gated communities in 2018 due to budget constraints and the higher rentals typically achieved within compounds.
No additional retail projects were completed during Q4 with the total stock of mall based retail remaining at around 1.46 million sq m of GLA. The next major addition to Cairo's retail supply is Majid Al Futtaim's Almaza City Center (103, 000 sq m) which is due to complete in 2018.
Strip malls have become a growing phenomenon in the retail sector in Cairo, with a focus on food and beverages rather than fashion retail. 2018 is expected to see the completion of further strip malls within the vicinity of gated communities in both the East and West of the city.
Arkan Plaza in West Cairo, is expanding as part of the creation of a new fully integrated mixed use development including retail, entertainment, administrative, medical and hospitality components. To grow its strong brand equity, Arkan will be adding three further land parcels to its project, increasing its retail built up area by 45,200 sq. m, offices built up area by 24,400 sq. m. and leisure & entertainment built up area by 10,800 sq. m.
The retail sector was the most negatively impacted sector of the real estate market during 2017 as consumers and retailers faced numerous constraints.. The Egyptian Pound Devaluation has impacted the business models of retailers and developers simultaneously, coupled with increased inflation and tariff reductions that have reduced consumer spending and import bans that have reduced the ability of retailers to import overseas brands.. Demand for additional retail space has therefore been reduced.
Prospects for the retail sector are however now improving. By year end, income levels had begun to gradually catch up with increased prices and this gap is expected to narrow further throughout 2018. During Q4 2017 the Central Bank of Egypt announced the lifting of previous cash limits for companies importing non-priority products. This announcement is seen as positive act on behalf of the monetary authority, as it will alleviate business conditions for both international and local retailers. 2018 is expected to witness less hurdles for retailers along with increased expansions and new market entrants especially across value brands.
Retail effective rents have witnessed a period of volatility following the devaluation, with rents declining by around 50% in USD terms since the beginning of 2017. The EGP devaluation has also resulted in a series of changes in the nature of contacts offered by developers, with more flexible payment terms and fixed exchange rate caps now being more widely offered to tenants. A substantial number of developers have also resorted to quoting their rents in EGP given the continued limits on access to foreign currency and other pressures faced by retailers.
Vacancy rates increased from 13% to 15% on a Y-o-Y basis due to an increase in the supply, and this trend is expected to continue further in 2018 with the completion of more upcoming projects.
Hotel supply reached 24,000 rooms during 2017, with last major completion being Sheraton Giza during the final quarter of the year adding 650 rooms to the market. Construction of the Maadi twin tower Hilton continues and is due for opening in 2018, adding 256 hotel rooms to the future supply. The Intercontinental Hotel Group has signed to operate a new Crowne Plaza hotel in Sheikh Zayed City, West Cairo. This development, by Al Badr for Investment and Commercial spaces Company, is expected to add 187 hotel rooms within the Arkan Plaza project in 2021.
The hotel and tourism industry has experienced positive performance throughout the year in terms of the occupancy rates and increase in investment appetite. The devaluation of the Egyptian pound had a dual effect on the sector, firstly it has contributed to increased domestic tourism and secondly, increased price competitiveness of Egyptian hotels to foreigners.
The reduced value of the EGP has caused many Egyptians to seek local destinations as opposed to international ones. In USD terms, hotel rates have fallen substantially, making Egypt a competitive destination.
Both effects have contributed strongly to the pick-up in occupancy rates (which averaged 76% over the year to November 2017). Average room rates (ADR's) have also increased significantly over the year, but remain low by regional standards at around USD85 per night.
With continuous efforts being made to improve safety and security in response to the demands of international travel partners, the remaining flight bans that have not already been lifted are expected to be removed in 2018. This should result in a further growth in demand and hotel occupancies..