2019 has been a quiet year for Egypt's real estate sector, unlike previous years that were riddled with big project launches and land acquisitions, Pharos Research said in a Tuesday research note. This year witnessed limited project launches and virtually no land replenishment. Indeed, Pharos research has described 2019 as a "calmer year." According to the note, this calmness is portrayed by a set of different factors, 10.0%-15.0% increase in selling prices compared to the 30.0%-40.0% increases during years before 2018, no extension in instalment schedules (with developers having already milked this option), limited project launches, and modest land bank replenishment. Pharos believes real estate sales in 2020 will remain subdued, with their 2020 sales projections lower than real estate developers' 2019 targets. Pharos added that they maintain their price and cost assumptions unchanged with a 5.0% increase in selling prices and a 10.0% increase in costs in 2020. "Similar to our expectation going into 2019, we still believe instalment schedules will not be extended in 2020. We use a discount rate of 24.0% in 2020, 22.0% in 2021, and 21.0% across the rest of the forecast horizon," the note explained. TMGH and ORHD remain Pharos' top picks Talaat Moustafa Group Holdings (TMGH) and Orascom Development, remain the top picks in the sector due to their notable non-residential operations that support their already robust residential sales performance. These non-residential operations encompass commercial sellable and leasable space and hotel offerings. This diversification is also seen in these two companies' revenue breakdown whereby Orascom's recurring revenue constitutes around 58.7% of total revenue and TMGH's recurring revenue constitutes around 31.4% of total revenue compared to their peers' average of only 5.0%. HELI is the way to go for cheap land According to Pharos, the market is pricing Heliopolis Company for Housing & Development's residual land bank, all located in East Cairo, at an attractive EGP 548 per sqm, showcasing a hefty discount to the current approximate EGP 3,800 per sqm price tag on residential East Cairo land and an approximate EGP 21,000 per sqm price tag on commercial East Cairo land. "That is why we stated in our Real Estate 2019 Valuation Update Report that this relatively low-multiple renders HELI an attractive acquisition target. Indeed, this is what is happening now, albeit at a lower degree, with a 10.0% HELI stake up for grabs," the note explained. Given that the stake in question is only 10.0%, Pharos does not expect the winning company to consolidate this stake into its financials, which is why the biggest beneficiary in this potential transaction. The note indicates that HELI gave that it should now have an experienced real estate developer/investor on board to finally unlock the value of its land bank that has been sitting almost idle, awaiting significant monetisation. SODIC's net cash-adjusted multiples rise on new project's land liabilities SODIC's net cash-adjusted multiples have significantly increased, with its (Market Cap-Net Cash) per sqm recording EGP 2,269, up from its three-year historical average of EGP 1,081. This is due to the rise in land liabilities associated with the new 500 feddan project that should be launched in the fourth quarter of 2019. Given that the land payment structure of this project involves fixed land payments amounting to EGP 8.8bn.
