May 11, 2013
- In spite of investor disquiet in the wake of Egypt's revolution and in the face of its looming energy crisis, many investors still see short- and long-term opportunities in the real estate market, with some believing now is precisely the best time to enter.
- The corporate and residential sectors in and around Cairo are seeing high demand.
- Investors should partner with or buy a local company that already owns land, or approach the government directly regarding a land purchase. The government is generally receptive of development plans, and is selling some valuable land at discounted prices.
- In spite of these opportunities, investors must be wary and well-informed regarding the current risks in the market before entering it.
The Egyptian revolution of 2011 that caused the overthrow of the Mubarak regime was disquieting for investors, with a precipitous drop in FDI that year accompanying an abrupt slowdown of the economy as a whole. Even as FDI begin rising again in the first half of 2012, the times remain uncertain in Egypt, with the fallout of the revolution still unclear and an apparent energy crisis in the offing.But many investors believe that Egypt is suffering from the same fate that other countries in Africa suffer perpetually: a widespread misperception of the real risks in the markets. They see wealth of short and long-term investment opportunities against the grain of prevailing wisdom.
"Many investors are a bit discouraged by Egypt's revolution and the instability that came after it, which still exits," says Hatem El Sayed, CEO of North Africa Co. for Real Estate Investment. "But there are many experts who believe that that once Egypt stabilizes, it will grow very fast and there will be a huge opportunity."
Indeed, some investors believe precisely now is the best time to invest, he says, "before the dust clears and everyone knows exactly what they should be doing." He notes that current discrepancies and inefficiencies in the market are creating arbitrage opportunities. "Every price you see in Egypt is a Revolution price: Egypt has been exposed to some devaluation in its currency, by almost 20%, and this hasn't been reflected in the market so far. With some inflation coming up, whatever it is worth right now is actually a great discount."
Corporate and Residential Demand
North Africa Co. for Real Estate Investment is one of a handful of investors seeking opportunities behind the headlines in a country with close to 90 million people, plentiful resources and a highly skilled labor force. Founded in 2005, the firm focuses on the residential and commercial sectors, as well as hospitality, including hotels and hotel-apartments. It was listed on the Cairo stock exchange last December. The majority of investors are from Egypt, Dr. El Sayed says, except in the case of some major projects such as large hotels, resorts and malls, when Gulf investors will participate.
Currently Dr. El Sayed is managing the development of 2 major projects: a residential/commercial project in Cairo, and a resort comprising six different components including hotels, commercial areas, educational institutions, wellness and medical facilities, in Marsa Alam on the Red Sea coast of Egypt.
He says some of the best opportunities currently are in the commercial sector.
"Egypt has the fewest square meters per capita for commercial space in the region, which means there’s a lot of room growth in that area and good potential for profits."
According to a recent report by Knight Frank Research on African real estate, office sector demand in Egypt has moved to areas peripheral to central Cairo, including 6th of October City and New Cairo, due to congestion and instability in the city. Rents are about half the prime office rents in central Cairo, according to the report.
Supply is a problem in the residential sector, as well, where much of the current development has likewise moved to Cairo's satellite cities. "Egypt has a demand for 500,000 units for year and the current supply does not exceed 200,000 units per year," Dr. El Sayed explains. "So there is a huge gap, and that’s why projects in that area would do very well."
According to the same Knight Frank report, the high-end subsector is coming saturated, and investors are turning toward low- and middle-income residential for greater growth. The report also highlights development in the retail sector, with the large Cairo Festival City Mall set to open in 2013, joining Cairo's already operating City Stars Mall and Mall of Arabia.
How to Enter the Market
Dr. El Sayed explains that there are several ways for investors to enter the Egyptian market: by approaching the government; by acquiring land directly; and by acquiring an existing company that already has land.
"It is not difficult to own land," he stresses. "Any foreign investor can acquire land. If you want land for a resort, for instance, you just have to submit your idea to the Ministry of Tourism and specify how much land you want, and they will give you a schedule to implement your plan. If you implement your plan, then the land is yours; if you don't, they take back the land. All they want to see is implementation. The same is true of the Ministry of Housing."
The Knight Frank report notes that Egypt has also been trying to attract investment to its industrial sector, with government land selling for half the usual price of other corporate land, at about US$15-25 per square meter. Investors must apply to the Industrial Development Authority. Most industrial development is occurring in 6th of October City and 10th of Ramadan City.
"Each of these alternatives has a great benefit and some disadvantage," he says. "If you partner with people already in the business, you tend to make less of a profit; if you go from the very beginning, there will be a hassle with the government, but the profits will probably be higher."
His advice, at the current time, is to team up with a local, respectable company, or to buy an existing company. "In doing that, investors would be buying the experience and the market knowledge and everything that comes with it. There are actually great bargains in the market right now for major companies."
He says investors must be deeply aware of the current political situation, the political bureaucracy and the market situation -- including not only the ongoing fallout of the revolution of 2011, but the current energy crisis. "I’m not saying investors should be discouraged, but they shouldn't discover it when they arrive in Egypt; they should know exactly what they’re getting into, otherwise they might be surprised and discouraged later on."