Many of you might brace when you read this as real estate and the Middle East may compute as a bad thing in the mind of most investors thanks to the fact that Dubai made so much headlines. Nothing could be less true and we take this opportunity to try to dismiss another myth.
Anyone who takes the time for a closer look will realize that the Dubai real estate ‘poster boy’ is home to just over 2 million people, compare that to the odd 27 million people living in Saudi Arabia and the 78 million Egyptians. Both nations have a high rate of population growth, a rising GDP per capital and a strong demand for better housing.
This week’s update takes us to Egypt, where they have been building things for over 5000 years!
The Egyptian real estate market offers attractive long-term prospects in an acutely undersupplied real estate environment. It is supported by solid fundamentals such as a large and rapidly growing population, by far the largest in the MENA region. The fundamental are essentially again all about the recurring trend of rising GDP per capita propelled by a high proportion of young people and gradually increasing disposable income.
The enormous and crowded urban monster of Cairo, only further enhances the value proposition for the development of satellite cities (East/West Cairo) with their promise of more breathing space and high quality of life. In Cairo, there are always people about 24/7, someone once jokingly explained there weren’t enough beds for everyone so there are families that take turns sleeping. Regardless of the real informative value of this explanation and the fact that the reason for hanging out in the middle of the night may also have much to do with wanting to escape the scorching heat of the day, there is a desire to live in the air-conditioned and more manicured suburbs.
The Egyptian real estate sector continues to hint at ongoing buoyancy thanks to the strong estimated economic growth of 5.2% for 2010 and 5.8% in 2011, this is the ideal habitat for real estate developers.
The Sixth of October Development & Investment Company (SODIC) is an Egypt-based real estate development company. Its activities cover the full spectrum from construction to operating both commercial and residential projects.
Amongst its landmark achievements are the Forty West residential project, The Polygon Business Park, the Allegria signature golf course resort development, Autoville’s one stop destination for car enthusiasts, the large-scale Beverly Hills compounds, and a handful of others.
We like SODIC because it has managed to have one of the most solid balance sheets in the Egyptian Real Estate sector, it has high levels of liquidity with very little leverage. It is transparent and relatively free of non-core investments.
We believe that the mix of of SODIC’s large land bank, its Cairo-based location, its diversified land utilization, the proven project execution capabilities, and its market positioning should enable SODIC to realize its full potential ahead of its peers. SODIC has been able to extract higher premiums within its industry, thanks to a strategy of keeping the number of project launches at exclusive levels and as a result of careful brand positioning.
The recent sales in its residential and commercial projects of Forty West and Polygon are being closed at a 50% premium to their previous launches, this only further demonstrates the effectiveness of the company’s strategy.
SODIC’s Q2 2010 results mark a transition in the company’s profitability, as well as gradual net asset value expansion. For Q2 2010, for the first time since 2008, SODIC has reported quarterly net income rather than a net loss. Total revenues jumped to EUR 15 million in Q2 2010 compared to EUR 2.12 million in Q1 2010. The company made a net profit of EUR 7 million in H1 2010 compared to a net loss of EUR 2.9 million in H1 2009, which is also an improvement from the net loss of EUR 1.5 million incurred in Q1 2009.
There is also a plan for regional expansion. During Q2 2010, SODIC acquired Syrian real estate developer, Palmyra Real Estate Development Company (Palmyra). Palmyra’s major project is Jasmine Hills, located on 200,000 square meters in the suburbs of Damascus, and is comprised of 169 villas. The project is expected to be delivered in 2012. There is another project on the way for the Syrian subsidiary in 2011. In addition, a SODIC-led consortium was awarded a development contract for a commercial mall with a gross leasable area of 28,000 square meters in Mansoura, Egypt.
Is this another one of those debt laden real estate accidents waiting to happen? We don’t think so. So far, the company has confirmed not only its ability to efficiently execute large-scale projects, such as Allegria. It has also proven it ability to sell the projects from a plan prior to construction, and therefore it was able to develop Allegria without having to resort to debt financing. We have also been impressed by SODICs management team, so as long as that stays in place, this could be a winner.
The company plans to deliver 800-900 units in its flagship project Allegria over the next 12 months. According to the company’s historical profile, it expects to deliver around 300 units 2010, which will be ahead of its contractual obligations for delivery in 2011. Deliveries are expected to commence in October 2010. Prices in Allegria were increased twice this year and, on average, have moved upwards by 20-25% YTD.
However, there may be some volatility in the Egyptian real estate sector in the next few weeks as some investors may decide to focus on the decision of the High Administrative court to reverse a direct allocation of land by the government to TMG, another leading Egyptian real estate developer. The reversal was based on the fact that the court ruled that the allocation should have been made in the form of a public auction. While this is a positive development in favor of improving standards of governance overall, investors are likely to focus more on the risk of land ownership in the short term. These are buying opportunities for building positions in solid real estate stocks. Local insight is now, and as always, very important as you need to be able to do the homework and ensure that the land that was acquired was in accordance with regulations.
I hope the next time you hear ‘Middle East real estate’ you will associate it with ‘opportunity’ rather than ‘trouble’
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