Tuesday 5, April 2016

Cairo – MENA Herald: JLL, the world’s leading real estate investment and advisory firm, has today released its ‘2016 Top Trends for the Cairo Real Estate’. Modelled on similar MENA reports, this inaugural Cairo real estate study assesses and forecasts the major trends which JLL anticipates are likely to impact and shape Cairo’s real estate sector over the next 12 months. The JLL 2016 Cairo Top Trends is being released at Cityscape Cairo in conjunction with JLL’s Q1 2016 Cairo Real Estate Market Overview report.

Commenting on the 2016 trends, Mr. Craig Plumb, Head of Research, JLL MENA, said: “Egypt’s currency devaluation is the biggest single issue currently facing the Egyptian real estate market. While this will create both opportunities and challenges, on balance we expect the impact to be positive, with more winners than losers. Real Estate is one of the few sectors that has benefitted from the uncertainty of post-revolutionary Egypt, as the government has introduced capital controls which are likely to indirectly channel more money into real estate.

With a negative real interest rate and a devalued Egyptian pound, domestic investors are likely to increasingly turn to real estate, which they perceive as a relatively safe investment option that provides a hedge against inflation and further currency fluctuation. The devaluation of the EGP also makes the Cairo market more attractive for Egyptians living abroad and overseas investors..”

Ayman Sami, Head of Egypt Office at JLL MENA added about Cairo in Q1 2016: “Over the last year, we have seen a substantial shift in investor confidence towards Cairo’s real estate market. The infrastructure and real estate megaprojects driven by the government and international investors have undoubtedly had a positive impact on overall sentiment, although this remains mixed across different sectors.

The recent devaluation of the EGP should provide a boost to Cairo’s tourism and hospitality sectors but further growth in this sector is heavily dependent on improvements to Egypt’s security situation. With a cheaper Egyptian pound, there could be increased demand from foreign investors and overseas Egyptians to purchase residential real estate in Cairo, which could boost this sector of the market.

The immediate impact of the currency devaluation are however more challenging for the office and retail sectors, with many tenants facing problems with sourcing dollars in order to pay their rentals, as rentals are typically quoted in dollars while many business derive their revenue in the local currency”.

JLL outlines six key trends that will impact the Cairo’s real estate market in 2016 and beyond: Currency Devaluation has mixed impact: Over the past few years, demand has outstripped supply and residential prices have been increasing by an average of 5 to 15 per cent each year. The devaluation may boost investor demand for residential real estate and could also be beneficial for hotels, by making Egypt a cheaper destination for overseas tourists. However, the office and retail markets could be negatively impacted as rental prices are often agreed in US dollars and imports of foreign goods becomes more expensive.

Capital City Cairo Progresses: The government signed a new agreement with China State Construction Engineering Corporation for the first phase of this project that is scheduled for completion within just two years. As Egyptian law requires 90% percent of a project’s labour to be Egyptians, up to 1.5 million new job opportunities will arise for locals as a result of the construction of the first phase of Egypt’s new capital city which will help decrease the unemployment rate. The new capital city promises housing to five million people and will also include a new central business district with hotels, shopping centres, theme parks etc.

Funding becomes more problematic: Last year, the Central Bank of Egypt announced plans to provide financial support to the banking sector to enable it to offer discounted mortgage loans. However, currency devaluations has escalated the government deficit from 10.5% to 11.5% and reduced demand especially for larger properties (e.g. standalone villas) by end consumers has slowed down the flow of investments in certain unit offerings.

Continued Legislative Reforms: The new law announced early this year could have major impact on the market. The law will lower mortgage interest rates to 5 percent for people earning up to LE1,400 per month. Additionally, individuals earning LE15,000 per month or families earning LE20,000 per month will be eligible for mortgages with 10 percent annual interest under the scheme. This new reform will require freeing up the mortgage market.

Retail offers long term opportunities: Given Cairo’s growing population, young demographics and an emerging middle class, premium shopping malls with family entertainment will attract a high volume of visitors, occupancy rates and rentals compared to less competitive malls. It is estimated that the Cairo market could absorb a further 800,000 sq.m of retail space by 2020, with around 60% of this currently scheduled to complete before the end of 2018. The retail sector is seeing increased levels of foreign investment, particularly in value brands and the supermarket & hypermarket segments. The LuLu Group announced in December 2015 that it plans to invest $300m to launch 10 new hypermarkets in Egypt over the next two years, having first entering the Egyptian market in 2010. The UAE-based company cited Egypt’s strong economy and market potential as the primary factors behind its decision, announcing it will also triple its agricultural exports from the country in 2016 and set up food processing centres within the country.

More focus on management and maintenance of existing buildings: Another trend that can be expected in 2016 is a renewed focus on adding value to buildings in the old town. With old rental laws in place, owners are not investing in maintaining the buildings which have caused a lot of casualties due to disasters resulting from poor maintenance.

Office: Cairo’s office supply reached 941,000 square meters of GLA by Q1 2016, after the completion of Citadel Plaza in the Mokattam Area added nearly 20,000 square meters to current stock. Even though there is still demand for “Grade A” office space, there is currently a slowdown in activity compared to same period last year. Vacancy rates are still below the rates witnessed in the beginning of 2015, signalling a healthy market. Performance of the office market in terms of rentals was negatively affected by the prevailing economic conditions of the country. Inability of tenants to source dollars to pay rentals, as well as the severe devaluation of the EGP against the USD, has exerted downward pressure on rentals. The means used by tenants to mitigate the currency risk they face includes negotiating rentals in EGP and the increased use of rental capping.
Residential: Q1 saw the completion of several units in New Cairo, with most of the deliveries in Mivida and Waterway. There were no major completions in 6th October during the first quarter of the year. The devaluation of the Egyptian Pound has resulted in a decrease in sales prices of apartments and villas in 6th October, as well as villas in New Cairo, in terms of USD valuations. The only exception was for apartments in New Cairo, where the launch of new projects and increased demand has resulted in a modest price increase (4%), despite the currency devaluation. The sharp decrease in villa sales is mainly due to the lack of new offerings of villas which has resulted from a decrease in demand for larger properties; mainly due to affordability. The rental market continues to show a mixed trend due to the absence of a structured rental market where rentals are quoted in USD in certain areas and in EGP at others.
Retail: Q1 2016 did not witness the completion of any additional malls offering retail. Further additions to the retail supply in 2016 will include Capital Mall in Heliopolis. The long-anticipated opening of the Mall of Egypt has been pushed out to 2017. Vacancy rates in existing retail malls remained largely stable and unchanged compared to previous quarter. On a Y-o-Y basis, vacancy rates have decreased to 14% compared to 17% in Q1 2015. Average retail rents have followed the same pattern as vacancies. While witnessing no change on a Q-o-Q basis, rents have increased by 10% over the past year (since Q1 2015).
Hotels: With limited construction activity in this sector, no additional hotels were completed in Q1 2016. An additional 1,300 rooms is expected to be added in 2016, with the St. Regis Cairo being one of the hotels to be delivered in the downtown area. Occupancy rates (57% in year to February) have increased marginally from the same period of 2015 as the sector is exerting efforts to recover from a series of security incidents . Once airport safety assessments are complete, coupled with a cheaper pound, this can drive occupancy rates to approach the pre-2011 levels. While occupancies have increased in the Cairo market over the first 2 months of 2016 (at 57%, compared to 53% in the same period of 2015), average daily rates (ADR) have declined marginally (down by 2% to US$102)..