2020 Realty Bites: What if Next Cash Crash Hides in Plain Sight? – Part II

2020 Realty Bites: What if Next Cash Crash Hides in Plain Sight? – Part II

By Sara Mohamed

Everyone is welcoming the new year, whilst talks of a severe cash crunch in the Egyptian real estate industry are increasingly in the air. Lately, market experts have been pinpointing that there is enough evidence to suggest that several worrying signs could augur fresh strife for domestic businesses. Amid the varying payment facilities and flexible terms offered to lure as many buyers as possible, breakdowns are likely to formulate shortly before jeopardizing the developers’ growth prospects.

Against this backdrop, Invest-Gate draws reference lines on the indicators and reasons for a possible liquidity pothole across the local real estate sector. Better yet, we betoken ways of securing high reserves and evading the surge in cash outflows, ergo creating an ultra-leveraged business growth model for developers.

Liquidity Outlets for Egypt

When in the land of Pharaohs, the current housing market slowdown is the repercussion of a complex mix of factors, albeit many overlapping others; consumption sentiment itself has been deeply influenced in this sense. Therefore, abridging the right tools to tame the liquidity beast is necessary to avoid blowing out the real estate mania, especially in this stress-tested country, which tolerated many years of panic and financial turmoil following the 2011 uprising.

AAIS’ senior equity analyst Mahmoud Gad foregrounds the optimal way to avert solvency problems in Egypt’s real estate industry: Escrow accounts, wherein a third party holds funds in safekeeping, pending the completion of a certain transaction between two or more parties.

“Withdrawals from an escrow account are restricted, so funds are reserved or accumulated exclusively for a specific project and drawn accordingly, that too, in proportion to the completion rate of the entire development… Once applied, by law, a financing bank or other creditor of the venture cannot create an attachment or encumbrance over such an account,” according to Gad.

This strategic method, which is regionally and internationally widespread, is usually found among public-private partnerships (PPPs) and sometimes utilized by small-sized developers in Egypt, but less commonly by mega property companies, EGX- listed ones in specific. Conversely, all market players should take initiative and maintain escrow accounts right away, as it commits in avoiding diversion of funds, ensuring timely completion of projects, and regulating the overall real estate cycle, he claims.

Perhaps most importantly, since Egypt commonly sees millionaires build a real estate empire without a hitch, according to AAIS’ analyst, local authorities and administrative bodies should redress highly-selective criteria to cherry-pick the right projects in the growth corridor, along with reputed developers. At the outset, a nudge from the government is needed to take out these pretty risky bets.

On another note, for all the attention Egyptian policymakers recently placed on interest rates, the cost of borrowing is far from the problem. The current lending frameworks have done little, if anything, to prompt home purchases or refinances. The fact that the country does not have a proper project finance structure or even a large-scale mortgage system weighs heavily on the local market players. Contrariwise, the presence of such schemes is quite important for increasingly underpinning any developer’s ability to immediately generate a bunch of cash, let alone meeting the long-term obligations, BYC Egypt’s Ghoniem confirms.

For Now…

So far, a possible makeshift solution, as already pointed by Head of Capital Markets at JLL MENA Nida Raza, is the provision of active securitization markets, which ultimately palliate pressures on balance sheets. “Generally, property asset securitization, which refers to the pooling of various debts and selling the receivables to a third party, is a vital financial instrument. By transferring property off the balance sheet, as the bank finances the purchase of equities, it injects liquidity back into the company and indirectly dwindles its gearing with heavy borrowing liability,” Gad pinpoints.

In spite of being known for asset-liability management, securitization in Egypt comes with stringent return-on-equity requirements on developers by the CBE. This includes the obligatory collection of half of the unit value beforehand, whereas companies only receive 40% with the present payment terms, alongside the application of interest rates on all deals, which can sometimes result in lower bond prices.

Not only that, but the coverage of any transaction depends largely on getting the client’s credit score from the national credit rating agency, or “iScore”. In short, if a developer happens to have customers with low-credit history, the latter’s assets are unconditional for trading. In this respect, Gad calls on real estate companies to select homeowners wisely and look for those confident to repay debts to avoid any future shortcomings.

With the debt markets flush with liquidity and competition for transactions gets fiercer, the question to ask is whether Egypt is headed for rough waters. The good news is that the worst-case scenario, much like the historic housing crash, is a long way off, given the country’s International Monetary Fund (IMF)-backed economic reform program, which promises to restore macroeconomic stability as well as reinforce strong and sustainable growth, according to Gad and Ghoniem.

Notwithstanding, Raza emphasizes that jurisdictions must make full use of all traditional policies and table amendments based on market needs, not to mention having contingency plans to extend a helping hand to profit margins squeezing from liquidity tightness.

In the interim, Mena Group’s founder anticipates that amid the excessive debt, cash shortage, and failure to meet delivery deadlines, liquidity dry-ups might arise across the Egyptian real estate scene between 2022 and 2023. The government’s comeback to such circumstances is not foreseen, but some challenging episodes are foreseen in the near-term.

To know more about the what-if scenario of the next cash crush and possible liquidity outlets for Egypt’s real estate industry, read pages 32-34 at Invest-Gate January issue. 


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