As the government channels state funds into its public housing programme, growing private interest is stoking growth in the higher-end residential segment of Algeria’s real estate market along with office and commercial real estate.
In terms of volume of units, the market is largely driven by the governmental efforts to reduce Algeria’s housing deficit, particularly in the lower three quintiles of the income spectrum. Although this leaves a lot of scope for more participation from private companies, one positive aspect of the housing programme has been that it has attracted more foreign contractors to help boost the number of houses Algeria is able to build every year. In addition, it has also expanded the pool of domestic construction firms and helped to increase the supply of building materials – both of which bring down overall costs.
Private developers continue to face challenges common to most of Algeria’s sectors, including restrictive foreign investment requirements, a burdensome bureaucracy and limited access to land, but the high demand of this 39m-person market and the ample liquidity – a result of the country’s large hydrocarbon reserves – helps maintain the sector’s appeal.
Looking For A Home
Successive government efforts have put housing at the forefront of state priorities since the country’s independence in 1962. The past 15 years have seen an acceleration of public housing efforts, with a rising number of homes being built under the government’s five-year development plans. In the past, the government has traditionally allocated building contracts to domestic builders, both state-owned and private. In order to increase building figures, though, housing authorities have increasingly relied on foreign companies, sometimes contracted through bilateral agreements, to accelerate the pace of construction.
In addition to capacity restraints, state efforts have been a struggle against the country’s geography and urban migration patterns. According to the Centre for Affordable Housing in Africa, a South Africa-based think tank, 90% of Algeria’s population lives on 10% of the available land. Cities on the northern coast of the country end up concentrating the majority of Algerians, increasing competition for land and available housing options. The result is a high level of density in urban and suburban centres.
Government figures indicate that the average number of people per home in Algeria has dropped from 6.4 persons in 2008 to 4.6 in 2014. Despite the improvements, they are still comparably higher than in neighbouring Morocco, which has an average of 3.8 people per home. Successive housing programmes have left a mark in the number of existing housing units, which increased from 5.4m in 2000 to 8m in 2014. This number is also set to grow further under the 2015-19 five-year development plan, with the government pledging to construct an ambitious 1.6m additional homes during that period.
Looking For Output
Despite the commitments that successive governments have put in increasing the amount of homes annually built in the country, the combination of private and public construction efforts account for around 80,000 units a year. Authorities have stated that in order to effectively tackle the housing gap 200,000-250,000 homes would have to be built annually. To a certain extent, the relatively modest home construction output is also the result of restrictive economic policy and red tape that has limited further growth of the private sector. “It is unthinkable that after 15 years of a housing programme we haven’t built any champions. There is not a company that is capable of building a large amount of homes. This tells you a lot about the negative impact that the administration has on the economic performance of several sectors,” Mohamed Larbi Merhoum, owner of MLM Architects, an architecture bureau based in Algiers, told OBG.
In an effort to accelerate the building process, and cut through red tape, the government recently announced a measure that will decentralise public housing construction resources throughout different wilayas (provinces).
In June 2014 authorities approved a restructuring of the state-owned SGP-Indjab group, which is in charge of public construction efforts for the country’s housing programme. The company, currently grouping together a total 56 construction sector subsidiaries and 13 consultancy bureaus, will be regrouped into five regional companies. Each of these will have a specific regional scope, in the eastern city of Annaba, the capital region of Algiers, in Ouargla in the south and Béchar and Oran to the west.
Affordable Housing
State housing programmes are segmented by income levels. Rental housing was developed for households making less than one and a half minimum wages, which was around AD24,000 (€223) in 2013. Construction of units are wholly financed by the government and rented at low prices. In 2010 the authorities developed an assisted housing programme in order to ease ownership. This programme is directed at households with an income of up to six times the minimum wage. Beneficiaries get a subsidy of €5881 for a down-payment, as well as state-financed home credit with interest rates ranging between 1% and 3%. Homes to supply the assisted housing programme are built on government land that has been sold to real estate developers at below-market prices. The government has also established a lease-to-own housing programme, in which the government contracts the building of homes on public land and then allows beneficiaries to get free financing without the need for a down-payment. A fourth type of assistance, the rural housing programme, targets the self-construction market outside urban areas by providing subsidies to build or renovate rural homes. Figures by the Centre for Affordable Housing in Africa put the value of these subsidies at €2940-3676 per household.
Despite a robust system to help finance housing in the country (see Banking and Financial Services chapter), waiting lists for these modalities are long, taking the government years to fill requests. Furthermore, rising construction and land costs have made some of the government housing plans ineffective given current housing prices. According to Larbi Merhoum, “Nowadays it is very hard to build any homes for less than AD50,000-60,000 (€465-558) per square metre, but this might go down to AD45,000-50,000 (€419-465) for the housing programmes.”
Stuck In The Middle
If waiting lists make owning a home difficult for Algerians dependant on state programmes, the exponential rise in prices over recent years is increasingly pricing middle-income Algerians out of the housing market.
This is especially visible in the capital’s most sought-after neighbourhoods. In Algiers prices have risen sixfold over the past decade, averaging about AD140,000 (€1302) per square metre, according to figures by the National Federation of Real Estate Brokers (Fédé ration Nationale des Agences Immobilières, FNAI). While a 90-sq-metre apartment can cost AD15m (€139,500) in some of the main cities, it can go up to as much as AD30m (€279,000) in Algiers.
According to the FNAI, the astronomical increases of the past years are caused by a conjunction of factors, including the chronically low availability of housing supply, but also an excess of liquidity arising from the informal market.
The market is also artificially impacted by the illegal flipping of units allocated by government public housing programmes. The Centre for Affordable Housing in Africa has estimated the mark up on these resold homes to be as high as 40%.
Government focus on the housing problem has understandably been on the poorest sections of the population, but housing development strategies are being expanded to target wider demand, especially for those Algerians that have medium-range incomes. As of March 2013, mortgages accounted for just 1% of GDP, and only 6% of total bank lending, which is not unusual for emerging markets, but the government has sought to expand housing finance programmes for middle-income segments (see Banking and Financial Services chapter).
Land Access
Even when financing is available, accessing urban land for construction remains an obstacle for the sector. In Algeria, most land is government property, making it difficult to find plots that are suited for urban development. Furthermore, scarcity has created a market condition within the real estate sector, with prices rising so much that undeveloped land has in some cases become a much more valuable asset than built developments.
“Land speculation is rife and it is creating a sort of a bubble. Nowadays, the weight of land in the final price of homes is huge, accounting for up to 25-30% of the final price,” Larbi Merhoum told OBG. “It is more interesting to hold on to land than to get involved in real estate operations, because land values are climbing up to 20% every year,” he added.
In the capital, the search for new land in which to build residential developments is pushing further and further towards the periphery of Algiers, where prices are sometimes even higher than in the central neighbourhoods of the capital, because it allows for a larger number of units to be built. “In the outskirts, the density allowed is much higher than in the centre. At some of the new projects in the surrounding areas of Algiers, density is about 250 homes per hectare. This is excessive. But it is a way for developers to get more out of the land they buy, so the returns can be much higher than in certain areas of central Algiers,” said Larbi Merhoum.
Office Space
The mismatch between the high demand and limited supply extends to other segments, with developers looking to expand offerings in office and industrial classes. A rising number of foreign companies coming into the country have helped move demand towards class-A office space, which remains limited, although this has also led to higher vacancy rates for older or non-purpose built buildings (such as converted villas).
A historical lack of sufficient quality office space in the past led some companies to build their own offices, such as maritime company CMA CGM and financial services operator Natixis.
In the capital Algiers, a large amount of the available office space has usually been located in the Hydra neighbourhood, where a number of companies have used large homes transformed to offices as business headquarters. However, according to a 2013 report by Jones Lang LaSalle (JLL), a global real estate consultancy, these have become obsolete, with no new stock additions to the area. Domestic developers that have invested in middle-market office space will need to upgrade standards to be able to compete for the more demanding customers. Neighbouring areas such as El Biar and Ben Akhnoun have also developed some amount of office space, although this is generally geared toward the middle-market.
In recent years, a lot of the focus for office space has moved towards the neighbourhood of Bab Ezzouar, close to the airport, where new office projects are under construction, focusing on the classA segment. One multi-purpose development under construction in the area since 2008 will include hotels, luxury apartments, a shopping centre and two office towers. The €514.6m project is managed by Real Estate Trust Investment Holding, a financial group, and it is scheduled to be completed by 2015.
Bab Ezzouar is expected to see more office space stock over the years, due to its location close to the airport. On the downside, heavy traffic makes connections to central Algiers cumbersome. More classA office space options are expected to emerge between Bab Ezzouar and the city centre as part of an effort to revitalise the Algiers bay.
According to 2013 figures by JLL, average monthly rent prices for class-A office space in Algeria is around €35 per square metre.
Commercial Segment
With a less established market demand and still nascent offer, the amount of commercial real estate for retail development has been growing in Algeria. This is led by rising incomes for middle-class urban Algerians, who generally wield a high level of purchasing power by regional standards and who have been largely unaffected by slowdowns in household consumption seen elsewhere in North Africa. Retailers have sought to take advantage of this (see Industry & Retail chapter) and new dedicated property is expanding to cater to that interest, such as the AD6bn (€55.8m) Bab Ezzouar shopping centre in Algiers, which opened in 2010, a large-scale contemporary facility with multinational brands and anchor venues. In its Africa 2013 Report, Knight Frank, a real estate consultancy, has estimated that the average rent per square metre per month for commercial real estate in Algeria is €36.76.
Industrial Segment
Industrial land – as in other property segments – has traditionally been difficult to come by; however industrial development has now begun to expand outside of traditional urban areas, in part thanks to new industrial zones rolled out by Algeria’s Land Registration Agency (Agence Nationale d’Intermédiation et de Régulation Fonciére, ANIREF) (see Industry chapter) which deliberately target less-developed wilayas, as well as improved infrastructure links which have helped open up space further away from the historically more attractive plots near cities and port installations.
In order to bypass the problems related to land acquisition laws, especially when attracting large investments, industrial zones are being set up. ANIREF is in charge of establishing 42 industrial zones across the country. The €735.1m project will be financed through the National Investment Fund. The industrial parks will be built across Algeria’s 34 wilayas, and the accumulated areas will cover 9572 ha. “This will make thing easier, as companies sometimes need up to five years to access a plot of land,” Rachid Hargas, general manager at Société Algerienne des Grandes Constructions, a construction company, told OBG. According to 2013 figures by Frank Knight, monthly rents for industrial land in the country average €6.62 per square metre. ANIREF reported a 40% rise in demand for industrial real estate for 2013.
Investment Options
Scarcity in some segments and in large cities such as Algiers, growing international interest in the Algerian economy as well as governmental efforts to open up key sectors have consistently pushed up real estate values. This has made the sector a good vehicle for investment, especially in an economy where liquidity is abundant. According to Knight Frank’s Africa 2013 Report, the most profitable segment of the sector is the industrial real estate segment, where monthly rates averaged €6.62 per square metre, and prime yields reached 12%. This was followed by the office space segment, which garnered an average monthly rate of €33 per square metre, and prime yields of 10% a year. Increasing development of retail options in the country, with an influx of international brands and increased purchasing capacity in certain sections of the population have pushed rents in prime retail locations upwards. According to Knight Frank, average monthly rents for retail space in the country reached €36.76 per square metre in 2013, and prime yields averaged 9%.
The secondary market in the residential sector has also seen an influx of investment, as middle- and high-income Algerians continue to view real estate as an investment option, especially considering the slow development of investment vehicles by the banking system and the benefits of high rental incomes.
However, yields on residential real estate investment depend heavily on the city and area. According to Knight Frank, for example, a four-bedroom home in the upmarket residential neighbourhood of Hydra in Algiers, a common choice for expatriate workers and diplomatic staff, can command a monthly rent of up to €2573 and an annual investor yield of 8% for the owner, but this may be lower elsewhere.
Challenges
Nonetheless, developers and investors continue to face operational challenges in Algeria. Accessing land can be difficult and registration processes can take a long time. The World Bank’s “Doing Business Report 2015”, compiled yearly to compare ease of doing business across countries, ranked Algeria 157th out of 189 countries in terms of ease of registering property. This represents a drop of one place on 2014 results, pointing to cumbersome processes related to dealing with the administration and consequent costs. Land registration costs in Algeria represent 7.1% of the total value of the property, considerably higher than the 5.7% average in the North Africa and Middle East region and 4.2% average seen in OECD countries.
National housing programmes remain one of the government’s biggest priorities. However, these are also one of its most pressing challenges, with long waiting lists for public housing.
In 2011, the Ministry of Housing and Urban Development established a commission charged with improving the process of housing allocation. No conclusions or policy changes have been publicised thus far, but a far-reaching inspection and improvement of current practices could help the government deal with the housing gap more swiftly.
Better tax legislation would also prevent the transfer of cash from the informal market towards housing, and slow down price inflation. Land constraints also continue to bottleneck the sector, but the construction of new roads and highways will make development of additional urban centres more feasible.
Outlook
Despite several challenges such as burdensome bureaucracy and land constraints, the real estate sector remains attractive due to high demand and limited supply seen in some segments. The authorities are committed to expanding affordable housing options, and ongoing private sector involvement in large-scale building projects will ensure that the Algerian housing market continues to expand.
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