DUBAI/LONDON (Reuters) - A flight by foreign companies from violent unrest in Egypt threatens to drive up vacancy rates at offices and malls and prompt international investors to shift funds to sub-Saharan real estate.
The army overthrew and imprisoned President Mohamed Mursi in July and the ensuing crackdown on his Muslim Brotherhood movement has killed about 900 people. This has prompted many multinational companies to scale down their operations or pull out staff, particularly from central areas of the capital Cairo.
Weaker demand means property investors, who had been lured by Cairo’s established business district, could swap what was north Africa’s only viable property investment market for comparatively stable cities in sub-Saharan Africa, property experts said.
"The demand for Class A office space has almost disappeared overnight," said Ahmed Badrawi, managing director of SODIC OCDI.CA, one of Egypt's biggest developers and behind the Eastown scheme in New Cairo, a development of offices, shops and homes twice the size of London's 97-acre Canary Wharf district.
The list of firms that have cut or suspended operations in Egypt, sold off businesses or pulled out staff in recent months includes Apache Corp APA.N, Chevron CVX.N, General Motors GM.N, Electrolux ELUXb.ST, BASF BASFn.DE, BG Group BG.L and BP BP.L.
A series of developments that tried to capitalize on a shortage of high-quality offices in Cairo have recently been completed while others are under construction, but there are doubts over whether they will fill up.
About 25 percent of the best office space in Cairo is vacant, property consultant Jones Lang LaSalle JLL.N said in June, a figure that it said would grow by an unspecified amount. It compares with 7 or 8 percent in central Paris or London.
Rents for the best Cairo offices have fallen to $40 per square meter per month from $50 since 2009 while retail rents have plunged to $100 per square meter per month from $150, data from real estate consultant Knight Frank shows.
“If office leases in Cairo expire and tenants are looking to renew there are going to be some pretty frank discussions with the landlord and I’d expect a major impact on new deals,” said Peter Welborn, Knight Frank’s managing director of Africa, saying tenants may seek cuts of a third to a half.
There is no data for overseas investment into Egyptian property but the flow of recent years has ground to a halt since the military crackdown, property experts said.
South African funds led the charge buying existing buildings in Egypt, attracted by yields, or rent as a percentage of the property's value, of about 7 percent versus about 5 percent in the United Arab Emirates. Buyers included funds linked to Rand Merchant Bank and Stanbic Bank, a division of Standard Bank SBKJ.J.
Meanwhile, Gulf developers sought to capitalize on a lack of high-quality offices and malls and now risk getting their fingers burned by an excess of supply, said Habiba Hegab, an analyst at Cairo-based Beltone Financial.
They include Dubai's largest developer Emaar Properties EMAR.DU which is building the Uptown Cairo scheme, a luxury development of homes, hotels and golf courses in Mukkattam Hills, overlooking the sprawling capital.
Others include Dubai mall developer Majid Al Futtaim, privately-held Dubai firm DAMAC and state-owned Qatari Diar.
Emaar said Egypt remained a core market and its operations were “ongoing as scheduled”. Al Futtaim and DAMAC declined to comment, and Qatari Diar was not available for comment.
SWITCH TO RESIDENTIAL MARKET
It is a far cry from several years ago when retailers and mall developers were eager to tap into Egypt’s 85 million-plus predominantly-young population, many of who aspire to Western shopping habits, by building Dubai-style mega-malls.
Military curfews in a city that revels in late-night shopping means many retailers are revising plans and JLL estimates the current mall vacancy rate of 25 percent will rise as more developments complete.
Talks to bring luxury brands like Harrods, Gucci and Prada to Egypt, are also on hold, real estate sources said.
Egypt’s loss could be sub Saharan Africa’s gain, Knight Franks’ Welborn said, citing cities like Lusaka in Zambia, Accra in Ghana, Lagos in Nigeria and Nairobi in Kenya.
“There is a lot of Gulf money looking for a home in North Africa and sub-Saharan Africa. I’ll suggest you’ll now see more going into sub-Saharan Africa,” he said.
Egypt’s housing sector has proved more resilient and could soften the blow for developers able to convert schemes.
Helped by a weak currency and a volatile stock market .EGX30, people are investing in housing to preserve wealth, a note by bank HSBC HSBA.L said earlier this year. Residential sale prices and rentals increased by 8 percent in the second quarter versus 2012, JLL said.
Developers hastily redesigning projects include SODIC, which has cut the office and retail space at its Eastown scheme. “That (residential) will be our bread and butter for a little while,” Badrawi said.
It will not be enough on its own to lure back foreign money, Welborn said.
“The Arab Spring was supposed to bring a higher level of interface between the man in the street and the politicians but has effectively chased away overseas investors.”
Additional reporting by Asma Alsharif in Cairo; Editing by Pravin Char
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