New regulations and a pro-business environment combine with huge demand for real estate to enable private sector developers, such as Palm Hill Developments, to reach new agreements and post landmark returns, highlighting the vast potential for international investors in the Egyptian real estate industry
Throughout Egypt’s political and economic states of flux, its real estate sector has remained resilient, as constant drives to tackle the nation’s housing shortage and the limited supply of land available for new builds, as well as investors seeking security in bricks and mortar over fluctuating markets, keep demand high. Recent regulatory changes and outstanding results reported by private developers this year bear testament to the rising opportunities in Egyptian real estate.
The industry gained a boost earlier this year with the introduction of rules enabling the government to contribute to new property developments by selling land on a revenue sharing basis rather than the traditional auction format. “This means that real estate developers are able to take on larger projects because they do not have a fixed cash payment for the land,” says Tarek Abdel-Rahman, Co-CEO of leading realtor Palm Hills Developments. “Auctions meant you had to pay 25 per cent as a down payment and the rest over four years. This would often increase prices and even the larger developers would not be able to purchase lands. But now the government has listened to the private sector and this will increase the
private sector’s capacity to produce units.”
The government brought the sector’s potential into the spotlight for international investors at the three-day Egypt Economic Development Conference (EEDC) in Sharm el-Sheikh on March 13th. During the event, Palm Hills Developments was among the Egyptian developers able to showcase the sector with its portfolio of quality integrated residential and commercial real estate and resort projects. Furthermore, it signed two of the 14 real estate Memorandums of Understanding (MoUs) agreed with the government and will develop two plots of land measuring 500 and 10,000 feddans (2.1 million and 42 million square metres) respectively.
“The EEDC was able to prove to the world that Egypt is once again open for foreign direct investment (FDI) and that the country is willing and capable of doing the necessary reforms to attract FDI,” says Mr Abdel-Rahman. “One of the most important aspects was that there was a very high level of dignitaries, not only from governments but also from the private sector, with the presence of CEOs of some of the largest corporations in the world including BP, Siemens and General Electric, among many others. It is very difficult to be able to gather such an array of personalities and also include supranational institutions, such as Christine Lagarde from the IMF or the World Bank. The presence of these distinguished guests also had the effect of showing that the international community is once again interested in Egypt and that they believe that there are many opportunities for investments.”
Palm Hills Developments has been communicat-ing Egypt’s business climate to institutional investors from around the world through its corporate access program and most recently during the EGP 1.6 billion capital increase related roadshow which included London, New York, Washington DC, Dubai, Abu Dhabi, Cape Town and Johannesburg.
“While visiting the UK, the US and South Africa, at times we found a cautious investment appetite coming from the international community,” comments Mr Abdel-Rahman. “The main motive behind this cautiousness was some pending issues that hadn’t been settled yet, which include capital gains tax, foreign exchange and the tax rate had yet to be addressed.”
A few days ahead of the EEDC, the Egyptian government announced plans to cut its top tax rate in bid to heighten its appeal to investors, from 25 per cent to 22.5 per cent. It will also abolish the additional 5 per cent “millionaire’s tax” on annual incomes above EGP 1 million (£83,000), which it introduced last year as a temporary measure (intended for three years only) and upped the top tax rate from 25 to 30 per cent.
Listed on the Cairo and London stock exchanges, Palm Hills Developments’ international tour also enabled the company to promote its share issuance that closed on May 21 and led to a substantial increase in its capital, from EGP 2.69 billion to EGP 4.34 billion “Our capital increase was a great success, raising some EGP 1.6 billion with new shareholders coming from the UK, US and UAE,” explains Mr Abdel-Rahman, adding, “Cairo is our main listing and ours is one of the most liquid stocks on the exchange, doing anywhere from 5-10 per cent of the daily turnover of the market. In London it has been a different experience, as we do not have much liquidity. So we just comply with the regulations, but there is not much activity. That being said, one of the things we will focus on is reviving our GDR (global depositary receipt) program in London to increase liquidity. Our intention is to start in the short term.”
The company’s activities and results this year are building on an impressive set of returns for 2014. Revenues increased by 74.2 per cent compared to 2013, reaching EGP 2.1 billion in 2014 compared to EGP 1.2 billion the previous year. In 2014 gross sales leapt by 166 per cent to register EGP 3.94 billion. Furthermore, net profits also jumped by 47.9 per cent year on year, reaching EGP 353.3 billion, and the rising trend continues. Palm Hills Developments reported a consolidated net profit before minority interest of EGP 218 million in the first quarter of 2015, compared to EGP 60.6 million for the same period last year.
“The truth is that our profits in the first quarter were four times of those of 2014,” says Mr Abdel-Rahman. “We do foresee a steady growth, especially if we manage to finalise the deals for new land. We currently have 13 projects that will be finalised by 2017, so we are now working to incorporate more projects into our pipeline. These projects are located in New Cairo, Sixth of October and the North Coast and we would like to expand in these areas, while at the same time looking for potential new zones. Our most pressing need is in East Cairo because it is the area where our inventory is getting depleted and where we are looking to expand the land bank, including the 500-feddan MoU.”
In addition to the two MoUs signed this year, in July, the company inked a co-development agreement with Madinet Nasr Housing and Development for an integrated residential community spreading over 433,643m2 (107 acres) in East Cairo.
With the government pulling out all the stops to create an attractive business environment and the private sector posting rising activity and results, Egypt is proving that the potential for returns on investments in its real estate sector to be far from built on sand.