Egypt: Picking up

Continuing to attract international attention and investment, Egypt’s real estate sector is performing well in what has been a turbulent year for the country’s economy. Unsurprisingly, given the country’s massive population, recent reports have emphasised the potential of Egypt’s property market, particularly in the residential, leisure and office segments, in the wake of the country’s political revolution. A deal inked by Qatari Diar, one of the region’s larger real estate companies, worth around half a billion dollars serves as a clear testimonial to investor confidence in its long-term future.

An October report by property firm Colliers noted that real estate investors were increasingly looking into Egypt, with the company noting, “cautious prospecting with an intention to buy”. While there are concerns over short-term volatility, as evidenced by the most recent round of violence in Tahrir Square in Cairo,, Egypt’s strong economic fundamentals are likely to influence long-term investment decisions.

The declarations of interest may come as a surprise to those familiar with the high levels of poverty that the country struggles with, as well as the ongoing uncertainty in the political sector, but the prospect of steadily recovering GDP growth after 2012, combined with the country’s young and growing population, should drive demand in the residential sector in particular.

While the IMF estimates GDP growth at a modest rate of 1.8% in 2012, a survey of economists by Reuters saw signs of faster expansion – upwards of 3.6% -- for the fiscal year ending in 2013. While this is still some way off Egypt’s potential, it would represent a resumption of momentum after a period of political turmoil and global economic uncertainty.

The country’s population is also growing – the World Bank estimated a rate of 1.8% in 2009, and almost half the population is under age 19. The young are expected to contribute to core housing demand over the coming decades as they take jobs, marry and move out of family homes and onto the housing ladder. The growing middle class is expected increasingly to use mortgages – currently a marginal practice in Egypt, accounting for less than 1% of GDP – to acquire property, thereby continuing to support market expansion.

“There is about a 1m unit shortage in Egypt and the number increases every year,” said Hassan Dorra, the chairman of the Dorra Group, one of the country’s largest construction companies. “With about 500,000 weddings each year this number continues to grow as married couples need their own housing.”

There is also cause for optimism in the leisure sector. Egypt’s tourism industry, which has suffered since the political unrest earlier this year and has seen visitor numbers drop, has proved robust in the past, often returning to growth after other significant political upheaval, and the country’s appeal to a wide range of visitors remains strong.

As the political situation stabilises and growth picks up, the expansion of commercial property is likely to return. This should see a resumption of the trend of commercial development migrating to the Cairo suburbs, away from the traffic, noise and pollution of the city centre. Areas such as New Cairo have started to meet their promise in recent years after a slow start, with more and more international and local companies establishing a presence and workers increasingly relocating with their offices.

As a result, major foreign investors have ploughed ahead with significant investments, in a bid to take advantage of the expected boom of the coming years. This was most clearly demonstrated by the inking of a $543.8m contract by Qatari Diar on October 23 for the construction of two major mixed-use developments: a $464.3m Nile Corniche project in central Cairo and $79.5m resort development in the Sinai Peninsula city of Sharm el Sheikh.

While these developments are aimed at the top of the market, other investors and developers are looking to meet the large and growing demand of lower- and middle-income groups for modern housing, retail and office space. These segments have not always been as well serviced as the high-income market, partly due to lower profitability, but are now attracting more attention, particularly in the areas around Cairo and other major cities.

Investors are naturally taking a cautious view of the Egyptian real estate market, but once a clearer political and economic path has emerged, the more aggressive developers will be well positioned to capitalise on its potential.