How Egypt’s Real Estate Sector Compares To Counterparts In Africa

February 26, 2023


With a vision to double Egypt’s livable area to house a fast-growing population, the government is building new cities and promoting them to private developers. The New Urban Communities Authority lists eight new cities as its “most important” projects. The flagship is the New Administrative Capital. Others include New Alamein overlooking the Mediterranean, East Port Said, New Toushka and New Luxor.

However, Egypt faces tough competition from African countries. A report from Knight Frank, a real estate consultancy, titled “The Africa Report 2022/2023,” says the continent is witnessing a real estate resurgence. “We are optimistic about the fortunes of the continent’s real estate markets. Although … lingering … legacy challenges remain and are in some cases being exacerbated by global geopolitical events,” said James Lewis, managing director of Knight Frank for the Middle East and Africa.

Market dynamics

The Knight Frank report noted that oil price volatility has diverse effects on the sector’s outlook in Africa. According to an IMF report published in March 2021, eight of the 54 African nations are oil exporters. That means they enjoy a rising influx of foreign currency when prices are high. The other 46 nations import oil, increasing their dollar outflows and hurting government finances.

The other major factor affecting demand in the continent is the “extreme resilience” of the “industrial market” and the “permanent pivot by consumers to online shopping, turbocharging warehouse” developments. That rising demand for property mainly comes from international parties.

The Knight Frank report also noted that “rising inflation and a sharp increase in the cost of borrowing … curb demand among domestic house hunters.” The IMF reported in October the average inflation rates across Africa quadrupled from December 2019 to June 2022.

Office development in some African countries must contend with more employees working part-time in offices and preferring to shop online. “Office spaces are grappling with fallout from the pandemic as hybrid work patterns become increasingly mainstream.”

The retail landscape has been mixed. “Some markets [enjoy] resilient demand for space in smaller, community shopping centers, while other locations face the threat of oversupply and depressed rents.”

Disruptions outside the continent significantly suppress “meaningful volumes of institutional capital into Africa.” Significant factors are interest rate hikes in the United States, the strengthening of the dollar, and the Ukraine war. However, the IMF predicts inflation in Africa should cool from an average of 12.2% in 2022 to 9.6% in 2023.

“The next few years will see a boost in investment volume,” said the report. That is mainly due to the “immature” nature of the African real estate market, which is “providing investors with the opportunity to rebalance portfolios, execute business plans and further strategic goals.”

However, that influx could vary from one country to another for reasons unrelated to the economy. “Factors that influence capital flows include political outlooks and environmental risks,” the report said, adding that “investment managers and institutional investors are expected to lead the demand for [the real estate] sector, particularly into the more stable markets, such as South Africa and Kenya.”

Unpredictable extreme weather will play a “separate role” in the continent’s ability to attract developers. “Climate change … poses extreme challenges for the region given its exposure to weather-related events and reliance on rain-fed agriculture. New real estate projects need to integrate adaptation measures. That “green transition … provides new opportunities for Africa, given its potential for renewable energy.”

The other related factor is compliance with environmental, social, and governance (ESG) guidelines. “[There] is an increasingly global focus for real estate investors, and we expect this to spur capital flows toward green-rated buildings.” South Africa is in pole position to attract more investors as the country has 641 of Africa’s 785 green-rated buildings.

Egypt’s market

As the third most populous country in Africa, with population growth of 1.7% in 2021, the Egyptian government has ambitious plans to “expand the boundaries of the urban area of Cairo by 100%.” That would be financed by an “influx of substantial equity from the Gulf … ushering in a period of intense development activity and urban regeneration.”

The other opportunity in Egypt is industrial real estate, which is “growing rapidly, supported by government initiatives.” In addition to lowering the cost of land acquisitions, the government is “expanding transport infrastructure, [creating] new free trade zones, and single-digit interest loans.”

The Knight Frank report said businesses in Egypt “gravitate to new, modern office stock, citing the New Administrative Capital as their prime target. That “creates challenges for landlords in Cairo who are struggling to contain [the resulting] rising voids.”

The report said the cost of that relocation takes a back seat to quality, modern, convenient spaces. “Monthly rents in the New Administrative Capital average $30 per square meter, while older buildings in Cairo command rents as low as $12.”

The residential sector is witnessing a similar trend: “High-rise developments in new cities around Cairo draw younger tenants and first-time buyers.” Retail spaces also “remain strong, [as] neighborhood malls have enjoyed steady and resilient levels of footfall.”

 Competition: Nigeria

With Africa’s largest economy and population in 2021, Nigeria’s real estate boom is happening in the residential sector. The report says it “is roaring back to life” since COVID-19 lockdowns were lifted. “There has been a steady increase in residential transactions in Lagos and Abuja [the country’s two biggest cities].” That has increased residential construction despite high costs.

Conversely, “the office market continues to remain subdued.” The country’s National Bureau of Statistics reported GDP quarterly growth rates dropped by half between July 2021 and August 2022. The report said, “the Grade A office market has not been spared” as corporations rethink their office space amid implementing a hybrid work model.

The industrial real estate sector is struggling to recover, “plagued by poor infrastructure … and unreliable transportation networks.” However, there is increasing demand for distribution and storage facilities, “particularly … high-quality warehouses.”

Commercial real estate is “still adjusting,” with luxury goods one of the worst-hit sectors. Demand is dwindling as retailers of international brands face “difficulty” securing foreign currencies. According to the report, the key to attracting retail and investors in Nigeria is its “rapidly growing population,” which rose 2.4% in 2021. Most opportunities will be in “smaller neighborhood malls.”

Competition: South Africa

In 2021, South Africa’s GDP grew 4.9%, the most since 2007, according to the World Bank. That has spurred real estate investment in logistics, manufacturing, and retail. “Industrial property, including logistics, is enjoying its lowest vacancy rate since mid-2020,” said the report. The majority of tenants are in e-commerce, manufacturing, and retail sales.

The main reason for that growth is South Africa’s favorable business environment, which allowed it to benefit from “spiking global inflation and COVID-linked supply chain disruptions … prompting some importers to manufacture goods locally.” The report expects logistics investments to “continue outperforming other sectors.”

Retail properties recovered strongly in 2021 and 2022. “Larger regional centers in densely populated cities are experiencing trading levels that are almost back to pre-pandemic levels,” the report said. “As a result, improving demand is driving down vacancy rates, and major retailers continue to report improved headline earnings.” Rural areas prefer “smaller, open-air convenience shopping, as well as neighborhood and community retail centers.”

Despite the economic boom in South Africa, the office market has been “subdued.” “Many companies [are] still reworking existing space, or in some cases downsizing, due to the adoption of flexible work hours.” Contrary to industrial property, office space vacancy was at “an all-time high of 17.9% in … 2022.”

The Knight Frank report forecasts this poor performance would “stabilize [and improve] in the medium term as business confidence returns … There is already evidence of this in some submarkets where landlords have begun to retract generous incentives offered” in 2021.

However, the report expects a recovery in Grade B and Grade C office buildings. They are usually multipurpose facilities serving as apartments, student accommodations, storage space, and medical facilities.

Residential properties also are witnessing few gains. “In 2020, first-time buyers were notably active, buoyed by all-time low lending rate. This year … we expect this trend [to] moderate as the interest rate [rises], which we expect will be sustained for the next three years.”

Competition: Algeria and Tunisia

The Knight Frank report said Algeria and Tunisia had seen similar real estate trends since the COVID-19 lockdowns ended. Both countries have high rates of urban population at 74% (Algeria) and 70% (Tunisia). Their GDP growth rates are also close: 3.5% and 4.3%.

Both nations are witnessing tough times for residential real estate development. In Algeria, “the pandemic, devaluation of the dinar and general drop in purchasing power have added to the residential market’s malaise … Transactional volumes [slipped] to near record low levels.” The long-term outlook is also bleak. “There is no evidence to suggest any imminent bounce-back in demand for home purchases.”

In Tunisia, homes are becoming unaffordable, but for different reasons. “Unfavorable borrowing conditions and an oversupply of luxury homes … is starting to negatively impact house price growth … many buyers remain … locked out of home ownership, with little option but to continue renting.”

On the flip side, office demand in both countries remains resilient. In Algeria, the private sector dominates that segment, with indigenous developers constructing offices in city centers with small floor plates and little or no parking.” On the outskirts, “these buildings tend to be … higher quality than elsewhere in the city, as they are built to international specifications.”

In Tunisia, companies renting office space have had the upper hand in negotiations with landlords to lower rent — the latter fearing companies implement “a shift in occupational strategies which now factor greater remote working.”

Meanwhile, the prime office market has seen “little … development activity in recent years, and the supply pipeline is very limited.” That makes it a prime candidate for local and international investors, as “occupancy levels are generally very high for best-in-class buildings.”

Retail real estate investment prospects in both countries are similar. “The retail sector has developed significantly in Algeria over the past decade. Although it was hit hard by the coronavirus pandemic and recent economic headwinds, the sector is generally buoyant and outlook positive.”

In Tunisia, retail investment is expanding with the construction of the Mall of Sousse, the largest in the country, which enjoys high occupancy because it positions itself as a “lifestyle destination, rather than just another collection of stores.”

Smaller traditional malls suffer “declining footfall … stemming from the pandemic and the rise in online shopping.” That means “retailers [are] either downsizing or renegotiating leases. Further expansion is being hampered by FX regulations, which spook international investors.”

The report stressed that in Tunisia, “offering consumers experiences will continue to be key to the success of physical stores and malls.”