While real estate has been traditionally seen as a safe haven against the devaluation of the local currency, as developers have been further pressured and more price hikes are on the horizon, this view may no longer be the case. Invest-Gate looks into recent market developments.
Most sectors in the real estate market have been negatively impacted by the float of the EGP of last November, according to JLL’s Cairo 2016 Real Estate Market Overview, noting that only the hotels and tourism segment have benefitted from such a move. As the cost of raw materials and construction spiked, prices of units rose by 25-30% on developers transferring said increases to the consumer. The likes of Chairman and CEO of El Mostakbal Company for Urban Development Fathallah Fawzy expect a further 30% increase during the first half of 2017, and a full 100% increase from today’s prices within the upcoming three to five years.
“I believe that the market will absorb the increases in real estate prices by the end of this year…[losses are limited] since most developers only begin building once they have received a downpayment; their only costs before signing with consumers are that of marketing and whatnot,” says Fawzy, who also established and headed the Egyptian Real Estate Association for over 10 years. However, Fawzy adds that the secondary market will certainly suffer, given the low incentive consumers have to pay in cash upfront when most developers offer increasingly flexible payment terms.
Another market opportunity is the sale of units to foreigners and Egyptians overseas, for whom units have become extremely cheap in comparison to the rest of the region. “If we take a premier developer such as Emaar as an example, the selling price for their projects in Egypt is about USD 1,000 per square meter,” he clarifies. “In Dubai, or Beirut, or Jeddah, a similar unit may be sold for USD 4,000 per square meter. In Turkey, the selling price could be USD 3,000-4,000 per square meter,” Fawzy elaborates, stressing the need for increased efforts by developers to market their units abroad.
The Ministry of Housing, Utilities, and Urban Development is currently mulling legislation that would grant residence in Egypt to foreigners purchasing property worth USD 250,000 or more, with sources close to the matter stating that President Abdelfattah El-Sisi has already granted the ministry preliminary approval, according to Chief Projects Officer at Capital Group Properties Amgad Hassanein. “If the law passes, and amendments are made to the mortgage finance law, I believe the market with flourish,” he says.
Hassanein had previously stated that a new mortgage law to replace the current could double Egypt’s real estate market within less than one year, the Daily News Egypt reported in November. As Vice Chairman of the Real Estate Development Chamber, Hassanein states that 25% of the sector’s sales this year will be inflows from foreigners and Egyptians living abroad.
One of the market’s major challenges remains the legal and regulatory framework, as the process of receiving a license and approvals take several months whereas the standard in other countries is merely a matter of weeks. “Returns are highest in Egypt than a lot of other countries, but what ruins things is this grey area when it comes to legalities,” Hassanein states.
While the purchasing power of consumers nationwide is in a staggering decline, head of the Federation of Egyptian Industries’ Real Estate Development Chamber Tarek Shoukry sees that demand is already picking up from Egyptians living abroad, although he notes that marketing efforts abroad for units in Egypt remain to be insufficient. The discrepancy in the USD:EGP exchange rate on a day-to-day basis is another challenge under the current environment, in his view if resolved, should the central bank set a partially-fixed rate to be amended on a quarterly basis, in a similar manner to the recent decision to fix the customs dollar.
Once the imminent lifting of Egypt travel bans by the governments of Russia among others is complete, the overall sentiment should improve, Orascom Development Holding (ODH) Head of Investor Relations Sara El Gawahergy notes. “It used to be that foreigners constituted 60-65% of the portfolio in terms of purchasing vacation homes in El Gouna,” she says, speaking about the demand in the resort town pre-2011.
El Gawahergy is optimistic, especially since large developers have collectively achieved over EGP 50 bn in sales during 2016 and greater numbers targeted by many developers for 2017. “I do not really see that we are approaching a bubble–The numbers give no indication of a saturation…I think developers are going to continue to play with payment terms to keep the sector as attractive as possible [despite the imminent slowdown],” she tells Invest-Gate.
Another trend she mentions is a changed product mix, with developers offering smaller units so as to offer consumers a lower ticket price while not compromising the price per square meter. El Gawahergy expects a further 10-20% spike in the prices of units in EGP terms during the upcoming period as heightened construction costs continue to be transferred to the end consumer. Also, developers’ margins would significantly decline from the 50-60% rate some had achieved in previous years.
As Egypt’s population continues to grow at an annual rate of 2.5% and upwards of 400,000 marriages take place every year, the likes of SODIC, Heliopolis Housing, and ODH reportedly “fight over land” to meet the demands of the market. Yet, while housing demand may have been a rare bright spot with the economy suffering during the dollar crunch that defined most of 2016, a different outlook for 2017 is undeniable.