Growing value makes for attractive investments in Egypt

(Mediterranean Resort & Hotel Real Estate Forum)

At the upcoming Mediterranean Resort & Hotel Real Estate Forum in October, Ahmed Shalaby, CEO & managing director of Egyptian shareholding real estate company Tatweer Misr, will participate in a regional roundtable focused on supporting the recovery of Egypt’s hospitality market.

Drawing on his planning and business management experience, Shalaby supervises the day-to-day management of Tatweer Misr, including the business development and the strategic planning for the company’s major projects. 

Ahead of the Forum, Shalaby shared his insights on Egypt’s hospitality sector and how the country is rebounding as a tourism hotspot. Seven years after the Arab Spring changed the country forever, the seasons seem to be turning again for the country.

1. How would you characterize the overall state of hotel investment and development in the Mediterranean region?

Ahmed Shalaby,
CEO & managing director
of Tatweer Misr

The Mediterranean offers a wealth of opportunities for both investors as well as customers from all over the globe, thanks to the astounding range of cultures lining its borders. The market’s potential for growth and profitability make it a safer choice for investors; however, we can’t disregard the challenges that continue to arise in the area ranging from safety to economic instability. Investors—and consumers, for that matter—base their decisions on where there is opportunity for a better return on their investment; possessing a sturdy value proposition is of major significance. As developers, we need to consider the economic and social needs of potential customers and combine them with our strategic and innovative approach.

2. In what markets are you seeing the most amount of investment activity and why?

I believe that these days present a prime opportunity for developers to look to exporting real estate. Ownership of real estate is a sign of wealth and stability in virtually all emerging markets. It has always been symbolized as a real asset-based wealth stream compared to other investment vehicles such as stocks and bonds. Within this context (and given the overall business environment), it makes good business sense that Egyptian real estate companies focus on exporting real estate to potential buyers outside their borders. Potential overseas buyers have vastly different motivations for buying overseas properties—or, more specifically in our case, properties in Egypt, prime among them being a greater focus on capital appreciation in addition to value of purchase. Within today’s financial climate, the cost of prime property in Egypt is seen as a potential opportunity within a limited time frame and hence an incredible opportunity for those companies that wish to market their products abroad.

3. What is the biggest obstacle for a foreign investor searching for a project to invest in?

The main challenge for investors continues to be the financial crisis and its social consequences as costs and wages inflate, while there is no doubt that interest rates will also rise. Economic and political changes, whether positive or negative, have immediate effects on the industry. In an effort to attract investments and make land-owning less complicated, the government has issued a new investment law. We still haven’t seen profound outcomes but we’re motivated since it targets industrial investment; high priority industries and developmental areas to be specific. It offers a 10-year tax exemption, transfer of profits abroad without restrictions, and export of real estate by facilitating the selling of property to foreign investors, all of which will help in attracting investors as well as redefine the real estate sector in Egypt.

From an investment perspective, the value of units in the north coast and [the town of Ain] Sokhna has increased exponentially over the past period making this a lucrative investment. At the same time, the cost of the units versus global prices is among the lowest in the world. The devaluation of the Egyptian pound has contributed to promoting Egypt as an extremely affordable investment and touristic destination, in comparison to its neighbors in the Mediterranean, that provides premium-quality solutions, it has also been a key element for investors, who choose to spend money where there’s a better return on investment, in establishing Egypt as a safe location. Tourism has also gained consistent traction over the last five years; therefore, our job as developers is to examine and explore economic and social needs of potential customers and tailor solutions that fit into their criteria.

4. What are the types of hotels and resorts being built and what has the best ROI?

While seasonality is part of the story, developers must also consider pull factors in order to ensure success. These pull factors include schools, children’s recreational areas, hospitals, clinics, business centers, as well as essential community social infrastructure such as retail, F&B outlets, nightlife, wellness and spas—all of which are conducive to long stays. To succeed, developers must focus on creating destinations by providing essential community infrastructure. 

To ensure the success of Fouka Bay in the North Coast, for example, we needed to study our audience and their needs. And while we would like to fulfill all needs we need to juggle our priorities. For the North Coast, our owners are not looking so much for nightlife, which already exists to various degrees, but for other factors. In our case, every single unit in Fouka is a waterfront home. Instead of offering [this] to a select few at exorbitant prices, our design allows all homeowners that luxury. This is but one of the pull factors. We have also hired entertainment companies and partnered with a number of service providers who offer a diverse range of options that include a number of amenities and lifestyle options. 

Given that the company’s foremost objective is building value beyond housing, this project includes hotels, serviced apartments, a diverse range of lifestyle activities, be it on or off the beach, and finally a diverse array of F&B outlets, as well as wellness, fitness, and spa options. All these factors provide destinations with the essential elements that visitors find inviting.

5. Branded? Select- or Full-Service? Multi-use Developments?

I believe this depends on the market’s needs and the value a company can propose in order to compete in any type of development. As a developer, Tatweer Misr aims to create added value though providing a never-to-be-forgotten luxurious unique life for our customers. All the units of our projects [have]unique design and finishing. One of the main aspects we focused on achieving when creating an efficient multi-use development was the accessibility to all services our clients aspire to have in their neighborhood; starting from retail to entertainment, from nurseries to schools and universities in addition to daily life essentials such as clinics, supermarkets, etc.

6. How do you compare hotel development in the Mediterranean versus other classes of real estate? Is it a safer or riskier bet?

According to the MKG Mediterranean Hotel Industry Trend Report, hotels in Egypt, Croatia, and Turkey have recorded the highest increases in the average revenue per available room in January 2018 over the same month of 2017, so there’s no doubt that the hospitality industry is booming. As for Egypt, the recent inflation and increase in commodity and fuel prices have had a serious impact on the hospitality industry, due to its high level of capital investment; something that requires constant consideration from our side throughout the evaluation process. That turbulent phase has also witnessed a significant rise in operating costs, ultimately reducing profit margins. The inflation rate and the hospitality industry are greatly connected, and the current level of prices reflect the sum of all previous shocks to inflation and hospitality prices.

While RevPAR may rise over time during the next several years, it does not necessarily mean you will have higher net operating income because of rising costs, and it surely does not always mean values will rise proportionately. It’s not easy to make any predictions at this point, but I believe that we’re heading slowly towards a more encouraging direction as demand remains an element that influences the process. The North Coast is witnessing an increase in demand with not enough supply to back it up, which means there will continue to be a demand for rooms despite rising rates.

The Egyptian real estate market is currently witnessing several new factors, all of which will affect the market's movement. The most significant of these is the expiry of high-yield savings certificates, which is expected to drive consumers towards investment in real estate. Moreover, the upcoming cuts in fuel subsidies are also expected to have a direct impact on the cost of construction, and eventually, on unit prices. However, the appreciation in value of second-home destinations like Sokhna and North Coast and the constant demand both contribute to making this a secure investment since a re-sale market exists.

7. What are you most looking forward to at MR&H this year?

With more than 300 investors, developers, operators, and advisors meeting in one place sharing their latest projects and exploring various investment climates, MR&H provides industry experts with a bird’s-eye view of the market in this region and what it has to offer. Meanwhile, as CEO of Tatweer Misr, I recognize that the company must expand into new markets to stay at the forefront of real estate development. We have historically relied on the Egyptian market, which we will maintain, but we also want to expand our reach into new markets thereby increasing international brand recognition and in turn boosting international sales; and we regard MR&H as an ideal platform for us to maintain that vision.