Adapting to change: Commercial property developers focus on the long-term outlook

Commercial real estate developers in Egypt currently face a number of key challenges. Since the 2011 revolution, demand for grade-A office and high-end retail space has fluctuated dramatically. As of the second half of 2013, a considerable percentage of the country’s high-quality commercial space had been recently vacated, according to data from the global property management and research firm Jones Lang LaSalle, as foreign property investors and other market participants halted local operations amid ongoing political unrest. In a related development, a number of new commercial real estate projects have been put on hold in recent years, primarily as a result of volatile market conditions, according to developers.

SUPPLY & DEMAND: Foreign corporates account for much of the demand for grade-A office space in Egypt. When demonstrations began in late January 2011, many of these multinationals shut down their offices and put both new and ongoing business on hold in an effort to wait out the unrest. By April 2011 the political situation appeared to have stabilised somewhat, and most of these firms had reopened for business. By the end of the year, however, no new grade-A space had been completed, as a result of ongoing instability and related delays. Since then, the market has improved somewhat. Data provided by Jones Lang LaSalle showed that, as of the end of the second quarter of 2013, around 108,000 sq metres of new grade-A office space had been added since the end of 2011. Nearly all of it was built outside the highly congested centre of Cairo.

While office supply has increased in recent years, as of the third quarter of 2013 demand for grade-A space had dropped off, as a number of major foreign firms – including Chevron, General Motors, BASF and BP, among others – suspended their operations in Egypt amid renewed political unrest. According to Jones Lang LaSalle, as of the end of June 2013, some 25% of the grade-A space in Cairo was unoccupied, despite falling rents throughout the market. In an effort to recoup a portion of their losses, some developers are currently looking into the efficacy of converting existing office space into other types of space.

A similar narrative has played out in the retail segment. Over the course of 2011 and 2012 retail spending dropped off significantly, both as a result of Egypt’s weakening domestic financial situation and falling visitor numbers. While an additional 183,000 sq metres of retail space was added over the course of 2011, just 12,000 sq metres was completed in 2012 and no space was added in the first half of 2013, according to research from Jones Lang LaSalle. Declining demand has resulted in falling rents, particularly in high-end regional-level malls. As of the end of June 2013 Egypt was home to 773,000 sq metres of retail space in total, while some 715,000 sq metres of space was currently either under construction or in the planning stages. As of mid-2013 much of this future supply was on hold as developers waited for the political situation to calm down.

LONG-TERM POTENTIAL: Despite the negative impact the recent unrest has had on commercial real estate activity, Egypt’s property market fundamentals have remained strong. The country is considerably under-supplied in terms of both office and retail space compared to similarly sized markets elsewhere in the region and around the world. With a population of 92m according to the 2012 census, Egypt had just 819,000 sq metres of office space and 773,000 sq metres of retail space at the end of June 2013, according to Jones Lang LaSalle. Turkey, meanwhile, with a population of around 74m, had 3.41m sq metres of office space and 8.9m sq metres of retail space in the same period. With these figures in mind, and taking into account Egypt’s reputation as a major economic centre in the Middle East and North Africa, demand for commercial space is likely to improve in the future.

Indeed, while the political situation since 2011 has clearly had a negative short-term impact on the property market, many local players consider the country’s long-term outlook to be more encouraging, particularly in the Greater Cairo region and other key urban areas.