Egyptian investors look to real estate to hedge against inflation

Reuters

• Investor options limited to deposits with banks or bricks-and-mortar
• Ministry of Housing puts demand at 1 million residential units a year
• Off-plan and completed residential property prices increased

Egyptian investors are looking to real estate as a hedge against inflation and a depreciating pound, while landlords are increasingly pricing in US dollars.

Merna Arafat, an analyst at Beltone, a Cairo-based brokerage, said that many investors had begun moving into property in March this year when the government started allowing the Egyptian pound to depreciate in the wake of Russia’s invasion of Ukraine. 

“People are still investing and actually the devaluation of March 2022 acted as a trigger for the sector,” Arafat told AGBI. 

“We are seeing the same thing now. There is a type of investor who targets property to hedge against inflation and devaluation.”

Egyptian investors have limited options other than deposits with banks or bricks-and-mortar. The Ministry of Housing has put demand at one million residential units a year, according to Arafat. 

• Egypt’s ‘Golden License’ bonanza aims to plug ailing private sector
• Cairo is the tech hub of Africa – and it’s just getting started
• Pyramid selling: Egypt wants to get tourism back on its feet

Given that only 350,000 dwellings have been built each year over the past eight years and the ministry’s target is to develop an average of around 317,000 a year over the coming three years, there is a sizeable demand gap. 

Egypt has however been hard hit by Russia’s invasion of Ukraine and persistent foreign exchange shortages.

Last month Cairo reached an agreement on a long-awaited $3 billion extended fund facility with the International Monetary Fund. As part of the agreement Cairo has agreed to adopt a flexible exchange rate regime.

Despite the Central Bank raising its main interest rate by 200 basis points to 13.25 percent, the pound fell last week by up to 17 percent against the US dollar to trade at $1 = EGP23 level and 19 percent against the euro. 

Egypt’s inflation accelerated faster than expected in October, climbing to a four-year high of 16.2 percent, Reuters reported on Thursday, citing data from the statistics agency CAPMAS.

Year-on-year inflation increased to its highest since October 2018, when it hit 17.68 percent, from 15.0 percent in September.

Many residential property developers increased prices by double-digits in Q3 on both off-plan and completed properties, real estate consultants JLL, reported in its quarterly survey of the Egyptian property market. 

JLL said that buyers were being selective and had mainly opted to purchase from established developers with strong balance sheets.

“The sales market in the Egyptian capital witnessed higher levels of activity in Q3 as buyers looked to hedge against inflation and the currency devaluation by investing in real estate,” JLL said. It added that the price of some construction materials had doubled over the past year. 

Data released last week from S&P Global’s Purchasing Manager’s Index (PMI) suggested Egyptian private sector activity was the slowest it has been in months. 

In a bid to spur private investment, President Abdel Fateh Al-Sisi announced this month that Egypt will accept all applications from investors for “Golden Licenses” for the next three months. 

The licenses allow foreign investors to buy or rent land, operate and manage projects, and allocate the necessary facilities for them, all with a single approval. 

JLL said in its report that the third quarter saw average asking office rents in Cairo rise by 5 percent year-on-year, below the rate of inflation, to around $347 per sq m per annum.

Beltone’s Arafat said that developers in Cairo are still offering payment plans in Egyptian pounds, but that the balance sheets of big property developers like Talat Mustafa Group and Orascom Development Holding were strong. 

Given that the mortgage sector in Egypt is under-developed, the developers effectively act as mortgage providers.

“We continue to see good demand. We have spoken to key developers, and they are in good shape.” she said. 

Investors normally have to put down a deposit of 5 percent and repayments terms range up to 14 years. However, some developers are now offering properties with a zero percent downpayment, although contractors typically do not start construction in the first year of a purchase contract, she said. 

In terms of offices, the vacancy rate in Cairo increased to 10 percent in the quarter ending September 30, compared to 8 percent in Q3 2021, JLL said.

However, the third quarter saw more enquiries, primarily from information and communication technology outsourcing companies seeking to operate in Cairo.

Interest from new market entrants for larger offices also increased compared to three months earlier, JLL said. 

The vacancy rate in retail property in the third quarter remained stable at 11 percent. Average retail rents increased slightly by 1 percent for both primary and secondary malls.