Equity Analysis /
Egypt

Egypt Real Estate 2023: Expected stability amid a supportive macro environment

  • We expect real estate to continue to be viewed as a store of value, especially in light of EGP depreciation.

  • Valuation gaps are confirmed when comparing our Value/Sqm to (EV - Discounted Receivables)/Sqm multiples.

  • ORHD and TMGH are our sector top picks.

Al Ahly Pharos Securities Brokerage
21 November 2022

Real estate to continue to be viewed as a store of value now more than ever

We expect real estate to continue to be viewed as a store of value, especially in light of EGP depreciation and expected higher inflation in 2023. Indeed, precedence indicates that EGP devaluation is conducive to higher real estate sales. Following the November 2016 EGP devaluation, real estate sales grew 34.9% y/y in 2017, the highest annual sales growth rate in the past seven years (with the exception of 2021 that had been supported by a pandemic-induced favorable base effect and pushed further by the launch of TMGH’s Noor project). Given the October 2022 EGP devaluation, we expect real estate sales to be supported in 2023. 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 2023 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 increase in selling prices; no extension in installment schedules expected in 2023

Given the rise in raw material costs, we expect construction and infrastructure costs to increase by 15.0% y/y in 2023. In order for developers to mitigate the effect of this expected cost increase, we expect them to increase selling prices by 15.0% y/y in 2023. We expect sales to grow by around 15.7% y/y in 2023, in line with the 15.0% y/y expected increase in selling prices. We expect a stable sales cancellation rate and stable delinquency rate. We do not expect installment schedules to be lengthened in 2023. We expect the average eight-year installment schedule to continue into 2023, 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.

Limited land replenishment by big listed developers expected in 2023 due to lack of need

We expect land acquisitions or new co-development agreements by big listed developers to be limited in 2023 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. Given limited expected new project launches in 2023, the effect of sector regulation on big listed names is expected to be limited in 2023. Regulation essentially requires developers to deposit in the bank an amount of money as a reserve proportional to the size of the project and calculated as a percentage (3.0%-20.0%) of the construction cost of the project. In the event new projects are launched, we expect regulation to prompt developers to resort to debt and receivables securitization/discounting as sources of funding to finance this reserve. Since only receivables associated with delivered units can be securitized, this would translate into a pickup in delivery pace to allow for more receivables securitization. Valuations would be pressured, but regulation could prompt developers to charge higher down payments or collect installments faster, thereby relieving some of that pressure.