Egypt’s real estate market is at a crossroads with construction costs exponentially increasing, sending shockwaves among the country’s real estate developers and contractors. Invest-Gate explores…

Experts say the jump in construction costs could force some contractors out of the market and threaten housing projects as property prices might remarkably increase in the coming months.

Fathallah Fawzi, a real estate developer, said that property prices have already jumped by 20% following the float of the local currency and they are expected to further increase by 30-40% in H2 of FY2016-2017. “The pound flotation, along with the rise in fuel prices, have had a dramatic effect on individuals and firms investing in the real estate market,” Fawzi told Invest-Gate.

“Individuals who bought land plots before the pound’s flotation did not expect such increases in construction costs, and so their calculations are all messed up. The same goes for real estate companies, which started projects before the pound flotation and were shocked by the move. It has caused them a lot of losses,” Fawzi said.

The prices of building materials, including steel and cement, have significantly increased since the EGP float, according to data released by the Building Materials Division at the Federation of Egyptian Chambers of Commerce (FEDCOC).

Steel prices have jumped by about 82.3% y-o-y, hitting EGP 8,750 per ton in February, compared to EGP 4,800 per ton in February a year earlier, according to data released by the Ministry of Housing, Utilities and Urban Development. Meanwhile, cement prices increased by about 28.1%, hitting EGP 730 per ton in February, compared to EGP 570 in the same month a year ago, the same data indicated.

“Projects under construction can be delayed or may take longer due to the unexpected spiraling costs of building materials,” Chairman of the Building Materials Division at the FEDCOC Ahmed el-Zaini told Invest-Gate.

El-Zaini also forecast a decline in the demand on units for the poor and lower medium class as prices will soar and citizens will not be able to afford such units.

In November, the Central Bank of Egypt allowed the pound to float freely, devaluing it to near EGP 19 per USD 1. Ditching its currency peg has helped the Egyptian government secure a USD 12 bn three-year loan from the International Monetary Fund to support a reform program, under which the government has introduced Value-Added Tax, cut electricity subsidies, and sharply raised import duties all in the space of a few months. The Egyptian pound was trading at EGP 17.65 per USD 1 on March 12.

Experts claim that developers will turn their focus to luxury housing at the expense of low and medium-cost apartments. “High-end real estate projects will be a safe haven for the country’s real estate developers and contractors in the coming months after the currency float,” Hassan Dorra, a contractor and a real estate expert, said.

Dorra also expected demand for high-end housing units to remain high regardless of price hikes. The contractor said that demand for luxury housing has even shot up in the past few months. Egyptian expatriates and foreigners have stoked demand for properties in districts like El-Tagammoa El-Khames (The Fifth Settlement), Hadayek El-Ahram, Maadi, Sheikh Zayed and 6th of October City, he added.

Dorra noted that Egyptian expatriates accounted for the majority of demand for housing units over the past few months. Prices of these units are in EGP 1.2 mn- EGP 1.5 mn range.

Dorra also forecasts that the prices of steel and cement will not decline in the coming months given the fluctuating value of the Egyptian pound.

“The manufacturing of steel depends on imported components. The increase in cement prices, meanwhile, is attributed to the fact that manufacturing is controlled by foreign companies, which have been affected by the rising value of the USD,” he said.

According to a 2016 report titled ‘Alternative Fuels for Egypt’s Cement Industry’ released by the International Finance Corporation, multinational cement firms own and operate 6% of Egypt’s installed production capacity. The country produces around 6.5 mn tons of steel per year and imports nearly 700,000 tons while cement output is estimated at 60 mn tons per year, which meets domestic demand.

“The pound floatation has pummeled the real estate market,” Chairman of the Building Materials Division at FEDCOC el-Zaini said. However, he added that it is still too early to decide about the scale of impact the pound floatation would have on the country’s construction sector.

“The picture remains unclear. The only fact is that prices have soared. Nobody knows whether the real estate sector will boom or decline in 2017,” el-Zaini added.

However, it seems that demand on housing units will always remain high given the country’s growing population and with consumers viewing real estate as a safe haven for investment.