Egypt Real Estate to revive and peak by 2013-15

09/02/2010

After going through the moderate impact of the economic slowdown, Egypt real estate sector is expected to provide with a healthy long term prospects in all of its sub-segments says the new real estate report from Kuwait Financial Centre S.A.K “Markaz” on the Egypt Real Estate sector. The authors of the report also examine the effect of the recent slowdown on the real estate fundamentals and the demand and supply for residential, retail and hospitality sub-segments.

Macro Trends and Outlook : The report studies the economic cycles in Egypt back from 1986 and argues that the average real GDP growth rate has been on the rise from 3-4% range during the 1990s to 4-5% range in the past decade. The forecasts for the forthcoming cycle suggests that the cycle would last till 2014-15 with an average growth rate of 6%. The possibility of a double dip in global economic growth trends could create a temporary glitch in this expected growth pattern.

Egypt’s population is expected to grow at its natural growth rate of 2% per annum during the forthcoming cycle. The demographics is positive as well with more than half of the current population aged below 25, however income growth is the key driver for real estate demand. It is only during the period between 2006-08, when the real GDP growth was at 6-7% levels, job creation in organized sector surpassed 150,000 jobs per annum. This signals a key level of job creation to ensure that the annual addition to workforce gets adequately catered with jobs. This level of job creation lead to income growth both for job seekers and the self employed and unleashed the dormant pent-up demand for housing leading to a higher supply absorption. It also explains one of the major reason behind a lackluster real estate market that prevailed before the recent boom and the current slump in sector activity while the market has often been assessed as undersupplied. The take up levels would return to the vibrancy of  2006-08 starting from fiscal 2012 when the average real GDP growth rate is expected to reach 6-7% again.

Due to the low mortgage penetration, which stands at 0.4% of nominal GDP, the source of funds to purchase a house has essentially been savings and sale of existing assets. Savings got leveraged by the growth in mortgage financing during the recent boom. However, the growth in lending has slowed down of late and the report  expects mortgage financing by banks to recover during 2010-11 aided by an 8% average growth in deposits. It also expects lending by MFCs to stabilize at the current 7% quarterly growth rate unless more capital is infused.  The report also notes that mortgages extended to properties in and around Cairo accounts for 90% the 6th of October alone accounts for 64% of all mortgages extended as of Sep-09 supporting demand for mid-income residential demand. FDI into real estate contracted heavily during the fiscal year 2008-09. However, the authors expect FDIs to start flowing from 2010-11 as the development plans are still in place and as investors seek regional diversification given the lost luster in Dubai.

Residential : Activity levels contracted due to the economic slowdown citing fall in reservations and rise in cancellations of property offerings by major developers. These trends indicate that the downtrend turned around during Q3-09.  The advertised prices contracted on an average by 8% during 2009 in and around Cairo with a higher contraction in luxury and high end segments. Major developers have recalibrated their focus to mid-end segments which remains undersupplied backed by concerns of oversupply in high/luxury segments. The report expects the shortfall in mid-income housing to remain undersupplied during 2010-12, however, it expects developers to focus back on the high and luxury segments when the economy strengthens from 2012 though not to the past extent. The authors expect rental trends to reflect the inflationary trends in the long run. However, they opine that the current high inflation would not percolate down to rental rate growth during 2010-11 as it is  essentially driven by volatile food items and not due to cyclical inflationary fundamentals.

Retail : Consumption accounts for 70-75% of Egypt’s economic activity and this lead to a higher average nominal growth rate in internal trade during 2003-09. Seasonally adjusted trade establishment formation data indicates a sustained uptrend in number of establishments formed while overall establishment data is yet in plateaus.  Supply data suggests that there is one supermarket for every 53510 people in Cairo, which indicates the healthy prospects for development in this segment. The average prime rentals are at EGP 150-250 per sqm per month and asking yields are at 12-15%.

Hospitality : The difference between growth in tourist nights and number of hotels and beds stood at 11-15 % during the past five years compared to the 3-6% long term average. This signifies the considerable long term investment potential offered by this segment. The authors expect the average occupancy rates to be at 70-80% during 2010-11, down from the 88% levels experienced during 2008 due to the cyclical downtrend in tourism caused by the global economic slowdown. However, the low near term supply backed by recovery in demand aided by the low rates among its regional peers would drive up occupancy levels from 2011-12.

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About Markaz

Kuwait Financial Centre 'Markaz', with total assets under management of over KD960 million as of September 30, 2010, was established in 1974 has become one of the leading asset management and investment banking institutions in the Arabian Gulf Region. Markaz was listed on the Kuwait Stock Exchange (KSE) in 1997.