Cairo – Decypha: The Egyptian state, in an effort to secure a $12 billion IMF loan, adobted an economic reform program. Deemed as one of the strongest reform approaches in the country’s history, the program includes increasing the Value Added Tax (VAT) to 14%, gradually lifting subsidies of fuel and electricity, floating of the Egyptian pound, and amendment to food subsidies, just to name a few.
As a result of the ambitious plan, the real estate sector was one of the most affected, with reports of a 52% loss of industry value, raising questions within the sector, according to an article by Cairo Chamber.
Despite the downfall of the sector performance and demand that increased only to 1.5%, according to Aqarmap, after the devaluation, the sector is said to have witness a positive performance in the first quarter of 2017 as the currency stabilizes, attracting foreign currency inflows according to real estate consultancy firm JLL.
Although there might be healing signs for the sector, experts opinion on a real estate bubble burst vary. Investopedia defines real estate bubble occurs when demand rises as price rises in front of a limited supply, the bubble tends to burst if the demand decreases thus prices decrease and supply increase. Several determinants estimate the statue of a bubble burst including market performance.
Market Performance & Price Hikes
As a local demand has slowed down, a rising demand among Egyptian expats and foreigners are said to have increase where sales have increased by 70% within the past months, according to Al Arabiya. Developers confirm that the high turnout occurred during the first three months of 2017. Real estate prices have increased 15% to 20% following the devaluation. The increase came as a result in the increase of building materials by 20% to 100% which triggered companies to increase prices of their units 20% at the beginning of 2017 and will reach an additional 40% by year end, according to an article by stated-owned Ahram Weekly.
As prices have increased, feasible payment plans were introduced where buyers were allowed to pay through installments over seven to 12 years instead of the previously agreed upon five years. The devaluation has also property owners who wish to re-sell their homes to increase their prices when they realized that their properties has lost 55% of its value in dollar terms, therefore they double their prices despite the fact that local buyers couldn’t afford purchasing these properties as incomes didn’t increase.
The supply gap in Cairo has recorded 33% of demand in 2016, as it was considered a crowded year for real estate projects where it witnessed the completion of several new projects across 6th of October and New Cairo including Ashgar City, Grand Heights, and Palm Hills’ Village Garden Katameya, Mivida and Eastown presented the third quarter supply of 2016 according to a report by JLL. The demand for twinhouses and townhouses were mostly high in New Cairo which grew as a post-devaluation trend and attempt by developers to build small and affordable villas. The report also stated that sales have decreased by 5% in 6th of October City as rentals declined due to economic uncertainty and the decrease in tenants’ purchasing power because of the high dollar prices. Approximately two million units were provided in 2016 and is expected to increase by 30% moving the stagnant supply that was present during the past years, according to Arab Finance, however around 80% of the lands are not developed and the year-on-year growth in the sectors is estimated to be around 7%.
Demand for real estate projects have continued to be on the rise based on the increasing population that believes investing in residential units meets primary accommodation needs and protects against inflation and capital appreciation according to experts. Demand within middle to high income segments is described as “underserved” which creates more opportunities for developers to cater these demands according to Egypt Director of Colliers International Karim Helal.
“There is also demand from the upper-mid and high income segment for residential units in order to hedge against inflation and currency fluctuations. There is un-met demand of approximately 460,000 units by 2021,” Helal told Decypha.
The sector’s demand was also driven by lower and mid-end projects that range in price between $ 40,890 and $ 81,780; however the low-end projects such as social housing are build by state only and the mid-end projects are built by the private sector due to land prices, according to Oxford Business Group. The government has announced an ambitious plan to provide low-end supply in 2014 as it signed agreements with UAE-based contractor Arabtec to build one million houses across the country over the next decade worth of $ 40 billion.
Is the sector reaching a potential bubble burst?
Some developers tend to protect themselves from potential bubble as Egypt’s leading developers are said to have healthy balance sheets with little debts including Madinet Nasr Holding Company as an example that hold assets worth $ 216.7 million and current liabilities of $ 108.5 million. Another example is Talat Mostafa group that has total assets of $ 5.2 billion and current liabilities of $ 3.9 billion in 2015.
Experts opinions on a real estate bubble varies whereas Managing Director of SODIC Magued Sherif stated that a real estate bubble doesn’t exist as there is a strong demand in the sector where half of the population are victims of a housing gap and land scarcity remained the only obstacle in front of catering this demand, according to Arab Finance.
Orascom Construction CEO Samih Sawaris however believes that the market is approaching a bubble despite potential growth in the upcoming two years due to what he describes as “crazy profit margins” and that the sector holds several competitors. He believes that a crisis may occur due to the decline on trading in real estate sector amid increasing prices, according to an article by Daily News Egypt. He also told the English newspaper that supply is much high that demand which creates market stagnation and causing buyers to be reluctant in purchases.
Board Contractor in Rowad Modern Engineering Company Ahmed Shafiq disagreed with Sawris’s opinion, mentioning that the Egyptian real estate market is unpredictable and that despite the increasing prices over the past year, there is still an undersupply.
“The market is not approaching a bubble in the first place because people still think of real estate as a safe investment haven and potential buyers are either storing their extra cash usually invested in a second home or meeting their primary accommodation needs,” Shafiq told Decypha.
He stated that the only case a real estate bubble could occur is when for example young people, that are provided social housing project are offered a loan to purchase these units and pay for the loan from the monthly salary with the guarantee of the property itself, become unemployed and are no longer able to pay for the loan.
Mortgage System
The market has experienced an increase in real estate investments and the private sector shared the major part of the contribution however lands remain the main challenge given today therefore the country is in dire need for mortgages, according to Ian Albert, regional director of Colliers International who mentioned in Euromoney conference, according to Arab Finance.
Approximately EGP 5 to 6 billion were lent from banks to low-income people through expanded mortgages funds in the past period according to the managing director of El- Taamir Mortgage Finance Co- Al- Oula.; while leasing companies’ total financing reached EGP 40 billion.
The country lacks a long term mortgage system, which Helal mentioned to Decypha, will lead to a healthy and sustainable residential market.
“The current mortgage fiancé market as it stands in Egypt is till way short of the level needed to sustain the flurry in developments that we are witnessing where the trend of developers acting as mortgage lenders is not only continuing but actually accelerating , with ever increasingly aggressive payment terms,” he added.
Mortgage systems tend to benefit end-users on the short term however Helal questions the ability of developers to maintain this business model which was created originally due to the lack of finances and funds for buyers.
“What is needed for the well being and continuity of healthy and growing real estate market particularly residential , is a support system that is built around the availability and accessibility of long term (15-20 years) mortgage at affordable cost that keeps in mind as the main target the lower income youth population which is the engine for growth in practically all sectors of the economy starting with real estate based upon the premise that it is every young man’s dream if not right to own his or her home,” he explained.
Despite the stirred controversy about a housing bubble burst and fears of further increase in real estate prices, investors remain optimistic about the market for holding to the mere belief of considering property as a safe investment haven even in dire circumstances. A survey was conducted by the director of the Middle East and Africa Euromoney Conferences Victoria Behn about whether they would still invest in real estate and 63% answered “yes”, mentioning it was a safe asset. Despite land scarcity, price hikes, among other challenges, Egyptians will continue to pump their savings in real estate if longer and relaxed payment plans were provided.
By Fatma Khaled
