Equity Analysis /

Egypt Real Estate 2022: Macro supportive, but operational challenges ahead

  • Macro backdrop is supportive of real estate, but operational hurdles lie ahead.

  • Potential regulation is positive for the sector and will differentiate between solid developers and inexperienced ones.

  • ORHD and TMGH are our sector top picks.

Al Ahly Pharos Securities Brokerage
25 November 2021

Real estate to continue to be viewed as a store of value

We believe real estate will continue to be viewed as a store of value, especially in light of expected higher inflation in 2022. In terms of interest rates, we continue to view the relationship between real estate and interest rates as one based on market sentiment, whereby expected higher interest rates in 2022 would be negative, and reiterate our view that, while certificates of deposit may present competition to real estate as an investment vehicle, these are two investment vehicles with different liquidity profiles rendering their comparison limited, especially since the interest income of one may be used to fuel the installment payment of the other, thereby exposing a complementary relationship in some cases.

Increase in costs to be tackled by increasing selling prices; sales expected to remain stable

Given the rise in raw material costs, we expect construction and infrastructure costs to increase by 15.0% y/y in 2022, which is higher than the 10.0% y/y increase we had previously assumed in our valuations. In order for developers to mitigate the effect of this expected cost increase, we expect them to increase selling prices by 10.0% y/y in 2022, which is higher than the 5.0% y/y increase we had previously assumed in our valuations. We expect sales to grow by around 10.0% y/y in 2022, in line with the 10.0% y/y expected increase in selling prices. We expect an increase in ready-to-move unit sales, especially in light of the amended middle-income mortgage program that now covers units priced at up to EGP2.5 million. We expect a stable sales cancellation rate and stable delinquency rate.

No extension in installment schedules expected in 2022

We do not expect installment schedules to be lengthened in 2022, especially in light of potential regulation (which we discuss on the next page) that may prompt developers to collect faster to compensate for initial outflow. We expect the average eight-year installment schedule to continue into 2022, and, if a change from the average eight-year installment schedule were to happen, we expect that change to be a slight shortening, especially in cases of ready-to-move units.

No land replenishment by big listed developers expected in 2022 due to lack of need

We do not expect big listed real estate developers to acquire land or sign co-development agreements as developer in 2022 since most developers’ residual land banks provide a pipeline of at least ten years of sales. We expect land sales by land bank players to be made to small/non-listed real estate companies.