The crisis of the weak pound affects the stability of the real estate market in Egypt (Al Jazeera)
Cairo
- New debt and loans, repayment difficulties, and high risks. This is how the real estate market in Egypt appears to be suffering, despite the prices of residential and commercial units reaching record levels, amid fears of a real estate bubble.
What are the roots of the real estate sector’s suffering in Egypt?
Since the start of the recent economic crisis in Egypt about two years ago, the real estate sector has witnessed great activity after it attracted the capital of investors and savers in order to hedge against the decline in the value of the pound as it is a traditional store of wealth alongside gold and foreign currencies.
Buyers competed to reserve real estate units in installments through down payments ranging between 5% and 10% of their value, and over various payment periods ranging from 5 years to 7 years to 10 years, but the fluctuations in the dollar exchange rate were greater than expected, and perhaps exceeded feasibility studies. For many companies.
The rapid decline in the value of the Egyptian pound led to significant jumps in costs, the erosion of the profits of some developers, and the loss of others, which threatens the halt of a number of projects and the exit of real estate developers from the market.
Egyptian billionaire Naguib Sawiris is one of those most disturbed by exchange rate fluctuations and rising costs. He is working on implementing huge real estate projects with investments amounting to 55 billion pounds ($1.8 billion). He described the market as a “time bomb” due to the high cost of construction, especially since about 35% of these Cost is a real estate component.
Sawiris warned in press statements at the end of last year that every real estate developer who was late in construction would face a major problem, noting that he does not sleep at night because of the real estate sector, and he did not profit a single pound from one of his huge real estate projects as a result of the high prices compared to what was contracted with him. Customers 3 years ago.
The price of building materials increased between 100% and 300% in two years in Egypt (Al Jazeera)
What is the situation of real estate developers in Egypt with loans?
The situation of real estate developers in Egypt with loans is divided into several sections:
Major real estate companies tended to arrange loans worth billions of pounds for their investment projects.
Real estate development companies are seeking to reach an agreement with creditor banks to adjust the dates for payment of debt installments.
Companies intend to submit a memorandum to schedule installments for the lands they acquired, especially in the New Administrative Capital.
Companies are trying to extend the implementation period for their real estate projects, but postponement may exacerbate the crisis.
Other companies could not keep up with the new, dramatic and sudden highs, and stopped or exited the market.
How do we understand the crisis of real estate developers in Egypt?
The crisis facing real estate developers and development companies lies in three basic points:
The exchange rate of the dollar against the pound increased from the level of 18 pounds two years ago to 65 pounds in the parallel market, and the existence of more than one exchange rate and the scarcity of the dollar. Interest rates rise from about 10% in March 2022 to more than 21%, which constitutes an additional cost to the unit price. The age-old pricing dilemma during contracting due to rising costs of building materials, import restrictions and increasing demand.
Although large and medium-sized real estate companies have obtained billions of pounds in loans to finance their investment projects, there is no official data regarding the value of these loans or the rate of default or failure in them, or a statement of the numbers of companies that exited the market as a result of their inability to fulfill their obligations or their bankruptcy.
One of the real estate projects in Egypt (Al Jazeera)
What are the solutions for real estate developers in Egypt?
Some major real estate development companies became aware early of the crisis of exchange rate fluctuations, and launched major projects in partnership with the New Urban Communities Authority (governmental), to obtain greater advantages or flexibility in dealing with any future crisis.
Real estate developers are studying some new ways to deal with economic variables, such as including in contracts conditions requiring customers to bear part of the increased cost to hedge against any significant increases in the prices of building materials, but some question their acceptance and application due to customers’ fears of companies being exploited.
Others, including Egyptian billionaire Sawiris, called on the government to open the door to selling units in dollars to ensure market stability, provide financial liquidity, and adherence to contracts signed between the company and customers.
The construction sector is one of the largest productive sectors in Egypt, contributing about 18.7% of the gross domestic product, and includes 6 million workers working in more than 25,000 companies, according to the Egyptian Ministry of Labor.
How does the weakness of the pound put pressure on the real estate market?
Fathallah Fawzi, Vice President of the Egyptian Businessmen Association and Head of the Association’s Construction Committee, attributed developers’ resort to borrowing or debt rescheduling to “the more than doubling of the cost after changing the exchange rate of the pound last year since March 2022,” noting that many companies have contracted to Prices are now lower than cost prices, and therefore companies need financing to fill this gap.
As for whether these pressures will reduce the appetite for buying and investing in real estate, Fawzi explained in statements to Al Jazeera Net that they will not have a significant impact, because demand is still higher than supply.
He pointed out that there are two types of demand, the first for housing and the second for investment as a savings pot. He said, "The challenge exists with the companies themselves, and hence one must be careful when contracting and not rush after companies that do not have a large balance of trust and previous work."
Regarding the possible scenarios that could face real estate developers in light of the current economic conditions, Fawzi considered that those most affected are the real estate developers who do not have strong financial solvency, or face difficulties in borrowing, indicating that stopping some projects is possible, and there are companies that are exiting... The market every period, and that every market carries out a process of liquidation and survival of the fittest and most financially worthy, according to his expression.
Are we facing a real estate bubble?
In light of the winds blowing strongly on the real estate market, Egyptian businessman Yassin Mansour - one of the largest real estate developers in the country - expects real estate prices to rise by about 60% in 2024, and he explained that his company raised its prices in 2023 by values ranging between 70% and 80%.
For his part, the head of the Building Materials Division at the Cairo Chamber of Commerce, Ahmed Al-Zeini, believes that the continued rise in prices has led to a decline in the activity of selling building materials, which he considers to be an indication of a decline in the pace of construction by real estate companies due to the increase in costs.
Speaking to Al Jazeera Net, he said that any phenomena resulting from these data, such as borrowing, debt rescheduling, or extending implementation periods, are normal as a result of their being affected by the rise in the price of the dollar, interest, and import restrictions, adding that these factors led to an increase in the prices of building materials between 100% and 300% during the two years. The last two.
Al-Zeini expressed his fears of the occurrence of a real estate bubble, due to the significant rise in prices, and that the return of stability to the real estate market is contingent on the unification of the price of the pound.
He said, "The instability of the real estate market means continued turmoil in all markets."
The size of the residential real estate market in Egypt is expected to grow from $18.04 billion in 2023 to $30.34 billion by 2028, at a compound annual growth rate of 11% during the expected period (2023-2028), driven by an increasing demand for residential units in the main cities in Egypt, according to the Information and Decision Support Center of the Council of Ministers, quoted by the Mordor Intelligence website.
Source: Al Jazeera