Construction Costs to Further Escalate On Fuel Price Hikes

Construction Costs to Further Escalate On Fuel Price Hikes

Egypt’s construction costs are to see a further increase after the government hiked fuel prices by up to 50% in order to help meet the terms of a USD 12 bn IMF loan deal, real estate developers and contractors anticipate. Invest-Gate explores the effects of the government’s recent decision to increase fuel prices on Egypt’s real estate market.

“Any increase in fuel prices has a direct and dramatic effect on construction costs, prices of residential units, and the country’s real estate market as a whole,” Ahmed el-Zeini, Chairman of the Building Materials Division at the Federation of Egyptian Chambers of Commerce (FEDCOC), tells Invest-Gate.

According to Invest-Gate’s meeting with El-Zaini, some cement companies have pushed up cement prices by EGP 50 to stand at EGP 800 per ton compared to EGP 750 a month earlier. “The increase came shortly after the fuel price increase,” the official says, expecting that prices of other construction materials will remarkably increase in the coming period with the rise of transport costs, especially for factories making long-distance commutes.

Prices of construction materials have been soaring since the flotation of the Egyptian pound last year. In November 2016, the Central Bank of Egypt allowed the local currency to float freely, with greenbacks changing hands at near EGP 19 per USD 1. Ditching its currency peg has helped the Egyptian government to secure a- USD 12bn- three-year loan from the International Monetary Fund (IMF) to support a reform program, under which the government introduced a Value Added Tax, cut electricity subsidies, and sharply raised import duties all in the pace of a few months.

According to data released by the Building Materials Division at FEDCOC, steel prices jumped by about 100%, hitting EGP 10,900 per ton in June 2017, compared to EGP 4,500 during the same month last year. Meanwhile, cement prices increased by approximately 20%, hitting EGP 780 per ton in June 2017, compared to EGP 600 a year earlier, the FEDCOC data shows.

According to the recent government decision, fuel prices to cement factories will rise by 40% to EGP 3,500 per ton from EGP 2, 500 a ton; “however, gas prices will remain stable to the industrial sector,” Minister of Petroleum Tarek el-Mulla earlier announced.

The fuel price hikes come as part of the government’s ambitious reform program to revive the economy, which has gone through its toughest times since the January 25 Uprising.

Hussein Sabbour, Chairman of Al-Ahly for Real Estate Development, says “The economic reform measures, including the fuel price hikes, are crucial at the moment and should have been taken several years ago,” adding that the negative effects of those decisions, manifested in the rise of goods and services prices, will vanish on the long term.

According to Sabbour, the country’s real estate sector will be the least affected by those measures as “there is an increasing demand on properties from Egyptian expats, whose appetite has grown for owning residential units in Egypt following the devaluation of the Egyptian pound.”

Meanwhile, Sabbour calls upon the government to increase promotional campaigns for Egyptian properties abroad, especially in the Gulf countries, in order to attract new clients and keep the sales of real estate companies intact, as well as, secure expansion capabilities.

Mamdouh Badr El-Deen, Chairman of the Real Estate Investment Division at FEDCOC, sees further hikes in residential units within the Egyptian real estate market in the upcoming few months due to such recent decisions; “interest rates are to further increase by 4% in a few months’ time,” he claims.

In June, the CBE raised key interest rates by 200 basis points for the second policy meeting in a row. During its Monetary Policy Committee meeting, the bank raised the overnight deposit rate to 18.75% from 16.75% and its overnight lending rate to 19.75% from 17.75%, last May 2017.

“All these measures will contribute to a further rise in construction costs and accordingly, a remarkable rise in prices of residential units,” Badr El-Deen says.

However, some real estate experts and developers are urging investors and real estate companies not to increase the prices of residential units in order to avoid any decline in the market demand.

Chief Executive Officer of Wadi Degla Developments Maged Helmy says, “The recent fuel price increase will directly affect the costs of carrying out real estate projects as the costs of raw materials and transport will increase, accordingly pushing up the price of residential units.”

Nonetheless, he adds, “It would be wise if real estate developers do not increase the prices of residential units in accordance with the recent fuel price hikes because that would largely affect public demand on properties.”

It seems that although the recent fuel price increases would largely push up construction costs, some real estate developers would keep prices of residential units almost intact in order to maintain growth of their clients’ appetite for properties.

Menna A. Farouk 368 Posts

Menna A. Farouk is a Cairo-based reporter. She has contributed to several international news organizations, including Deutsche Welle, Al-Monitor and Global Voices.


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