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

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

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.

Cause and Effect

The reasons for enduring expected cutthroat cash constraints in the property sector are unequivocal.

For Egypt, Mahmoud Gad, a senior equity analyst at the Arab African International Securities (AAIS), affirms that the march of real estate developments continues apace, however, most companies are set to considerably face numerous challenges of undertaking off-plan sales as an ultimate financing strategy.

“Should property developers continue offering off-plan properties, with no down payments and installment terms of up to ten years, they would either have little cash to pay off land liabilities or find it almost impossible to adhere to set timeframes (i.e. late deliveries or incomplete projects), in light of the near-term illiquidity,” he is quoted as saying.

Alternatively, some businesses are pushed to scout for different property development financing options and often seek bank lending to hedge against the increased risk of defaulting on due payments and deliveries. Conversely, this is one omen for a fall of fire, Gad continues to say.

Even harder, “Only handpicked property developers, with low market leverage, get mortgages in Egypt, whereby provided with little funding and charged with mortgage rates of nearly 18-19%,” Karim Ghoniem, CEO and founder of the real estate consultancy and brokerage firm BYC Egypt, tells Invest-Gate. He stresses that state-backed financing is only extended to real estate companies for the feasibility study of a specific development, under strict conditions and implementation deadlines.

Along the same lines, Gad attributes the lack of relaxations in the North African country to the cataclysmic 2008 Great Recession, which had been triggered by the emergence of sloppy mortgage lending. It is reflecting in part on the existing regulations and is invariably impelling operators to climb a wall of worry to oust the blinking red flags of an epic credit crisis, he asserts.

After all, the takeaway of any liquidity stress scenario is the potential failure of small-sized companies to build the planned products when putting up with deficits. Gad is in awe that cash-starved businesses, which are already left holding high land costs and extra spending, will severely suffer due to their undercapitalization. He accentuates that they will either deliver poor quality of construction or will most likely collapse, hence troublesome to refund the clients’ ticket size.

If real estate developers go to the wall, the rate of sales and rentals pile on the pain by imposing a negative shock to price levels as soon as the property sector gets in a slump. Head of Capital Markets at JLL MENA Nida Raza tells Invest-Gate, “Consumers are affected in the short term by abundant supply, lower rents, and downward pressure on the overall market prices.

Ways to Not Spoil the Property Fiesta
To avoid reaching liquidity dry-ups, certain precautions and practices shall be implemented to tide over any market busts. JLL MENA’s head of capital markets sums up some of the possible escape routes to take the edge off cash shortfall risks in the property sector.

– Repricing of real estate assets to realistic market values

– Government intervention to alleviate funding liquidity concerns by bank lending

– Providing a vibrant securitization market to allow residential and commercial mortgages to be sold in the public debt markets

 Draw-up sound financial studies, with both past and future trends in mind

 Start with a well-thought-out budget, based on logical and practical assumptions

  Put special emphasis on examining spending visibility as mapping-out expenses help with the projection of future savings

– Analyze and control overhead expenses to monitor areas where costs can be cut or processes can be fixed to save up essential funds.

– Effectively maintain high-quality liquid assets, which have the greatest potential to be converted into cash quickly.

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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