Revolution and Real Estate in Egypt
Heavily reliant on the tourism sector, this industry was a major casualty following the political upheaval in Egypt witnessed earlier this year. Once crowded museums, attractions and hotels became deserted over night. But despite the short term negative impact the revolution had on the economy, Jones Lang LaSalle’s (JLLS) recent research ‘Revolution and Real Estate: Cairo,’ reveals how experts believe Egypt’s economy will continue to grow. The reports states, in the short term, real estate activity in Cairo will remain depressed due to the on-going uncertainties dominating the post-revolution period. 2011 could therefore represent something of a ‘lost year’ with decisions to lease or purchase real estate delayed until the ‘dust settles’ and greater certainty returns to the market after the elections later in the year.
JLLS now predicts a positive medium to long term outlook for the Cairo real estate market. Mr Ayman Sami, head of Egypt office, Jones Lang LaSalle Misr LLC, says initially, the country’s economy ‘came close to a standstill, whereby food was one of the few areas that showed signs of economic activity.’
Mr Sami says: “Tourism was hit very hard in the short term and new construction projects were put on hold or delayed with uncertainties around long term investment decisions. Commercial leasing activity has slowed down. Some estimates have brought down the GDP growth forecasts from the expected 5.8% to approximately 1%.”
With regards to attracting international investment, Mr Sami says: “At the moment we are looking at a period of uncertainty, however, Egypt still has strong fundamentals.” He says these include: a large, young and fast growing population, a large number of marriages, a diversified economy, shortage of quality real estate, cost advantages over other regional or European countries.
“With several investigations underway especially in the real estate sector, the investors have attached a higher risk rating to Egypt in the medium term, but there are several investors who are waiting on the side-lines to pick up any attractive opportunity as they feel that the medium to long term prospects are brighter,” he continued.
However, Mr Sami notes that on the other hand there are a ‘multitude of investors who are in the wait and see mode.’
“The current environment has held investors back from acquiring new lands for project development. They are however committed to deliver existing housing projects that commenced prior to the uprising as they are linked to installments from end users.” Since President Hosni Mubarak was ousted, Mr Sami says security is being restored – an important factor he says will ‘assist in the growth of tourism to achieve pre-turmoil levels.’
“The interim government is also looking at generating investor interest from regional countries, however, this will require that the government secures investors with their investments in terms of titles and land ownership. We can say that the country is moving in the right direction as the government has asked people to invest and that the reasons behind the recent investigations were linked to corruption. As the country becomes more transparent, then the investments will eventually achieve that.”
Tourism on the road to recovery
According to the Oxford Business Group, the tourism sector contributed 11.5% of GDP and provided jobs directly or indirectly for one in seven working Egyptians. In 2010 tourism brought $13bn into the economy, due to the 14.2m overseas visitors that arrived. While Egypt received only a fraction of the 1.2m visitors it would welcome in a normal February, with arrivals down by 80%, the OBG, says ‘the age-old appeal of the land of the pharaohs is reasserting itself.’
And Mr Sami agrees, that while tourism hasn’t fully returned, it is showing positive signs. He says: “It has improved over the first month following the uprising, where we were looking at an 80% reduction in number of tourists – then it started to rebound back and Q1 results are showing a 45% reduction over 2010. So we can say that tourism will rebound in the short term.”
With regards to the construction industry, Mr Sami says it has been affected ‘dramatically.’ “We expect a 25 - 30% reduction in new supply in 2011 of commercial and residential space. This, I believe is a positive sign as we were worrying about a potential oversupply before the uprising. We are optimistic that the medium to long term is positive as life returns to normal, investments start flowing back through the various sectors and transparency levels improve. Egypt is a country that is a driver of real demand and will remain an attractive place to invest.”
Mohamed Galal, chairman of Tasweeq Shopping Malls, Egypt, notes that prior to the protests, there was a tremendous amount of construction and development being carried out in the country.
“Major real estate developers and players froze their expansions, but are proceeding with their developments to meet their commitments to handover promptly. The Government of Egypt is now taking actions against governmental-land speculators by revoking the designation of land to non-serious developers – which is a very legitimate reaction. But there is an increased demand for middle income housing, and the slow track must take on speed.”
JLLS research shows residential transactions remain subdued because of the ongoing legal challenges to titles offered by several large developers. In the commercial sector – including office and retail – leasing decisions have been delayed, but certainly not shelved. Many large corporate occupiers are actively proceeding with planned relocations, while retailers reaffirm their long term plans for entrance/expansion into the market.
According to JLLS, short term challenges include: persistent uncertainty that may stifle real estate leasing and sales volumes in Cairo and uncertainty regarding validity of legal title offered by major developers. The ability of developers and investors to raise finance for real estate projects will be limited by the prolonged closure and fluctuations in the stock exchange aswell as liquidity constraints from banks’ conservative lending policies.
Mr Galal, says the Revolution of January 25, had a devastating impact on the economy, and the growth.
“The Revolution caused a very sudden freeze of all business activities and of course jeopardized all future plans by investors for expansion, development and investment in Egypt, for until the election of a new President in the first quarter of 2012. Total direct losses of more than USD 8 billion were reported in the fields of exports, tourism, Suez Canal proceeds and trade, and the total opportunity loss was more than USD 4 billion.”
Mr Galal, says unfortunately Egypt is no longer an attractive country to local and international investors at present. “Total FDI during the first quarter of 2011 was expected to be USD 2 billion, and the actual FDI was less than USD 10million. The overcharge against some foreign investors is not accepted by most businessmen in Egypt, but it was a Revolution and the after-shocks are expected and usually uncontrollable.”
Mr Galal notes that it will take some time for matters to rest. “It is still very cloudy but we all are doing our best endeavors to push development and growth, and to accelerate normalization of safety and conformity to laws and rules. Like all other industries, real estate development and real estate trade were greatly hit. But real estate trading in Egypt is like water, Egyptians cannot live without. Real estate trading is back on a very slow track, with over EGP 200m worth of transactions in sale of residential apartments and development residential small plots of land in Cairo city centre.”
“We hope that The Revolution of January 25, 2011, will make Egypt stronger as an emerging economy, with definitively more opportunities for investors and investments with less favoritism,” Mr Galal concludes.