Hedging on real estate

Ahmed Abdel-Hafez, Saturday 24 Feb 2024

Egypt’s real-estate developers are resorting to new implementation schedules and pricing policies to navigate market challenges.

Hedging on real estate

 

Market volatility in 2023 due to increases in dollar prices and the resulting hikes in the cost of construction materials led to price hikes on properties ranging between 60 and 80 per cent.

Egypt’s leading real-estate developers made substantial profits in 2023, surpassing their gains in 2022. However, they also acknowledged that these were driven by an increase in unit prices rather than a rise in the number of units sold.

The sudden surge in steel rebar prices in early 2024 has now also affected the pricing dynamics in Egypt’s real estate market. Steel prices surged during December and January to reach unprecedented levels, hovering around LE62,000 per ton.

The jump has shocked many developers, leading them to halt the introduction of new units as they cannot calculate their costs. Instead, they have adopted new pricing policies.

Rimon Ahdi, president of the Wadi Degla Real Estate Development Company, said it had raised its unit prices by 80 per cent in 2023 and revised its pricing strategy, shifting away from periodic adjustments that do not take into account sudden increases in costs within these periods.

Under the new approach, pricing is linked to the number of units the company can commit to implementing at the announced price. After completing this number of units, the pricing is recalculated for a new set of units, Ahdi explained.

“The company has implemented a monitoring system of construction materials affected by market fluctuations, such as rebars and electrical components. Early bulk purchases of these materials serve as a hedging mechanism to mitigate shocks in construction cost increases during implementation,” he added.

The new strategy emphasizes the speed of implementation and delivery to customers. Some projects introduced last year are slated for delivery in 2024, Ahdi said.

He also said that his company relies on various sources of financing starting with the value of the units purchased by clients. It exploits the advantage of the assets it owns by the financial leasing of these assets. The company is part of a larger holding company that has other activities that generate profits that can be directed to the real estate sector.  

Ahdi said that securitisation is employed as part of the company’s financial strategy. It analyses each project to assess the potential of each securitisation deal to achieve the needed liquidity, particularly given the heightened pace of implementation and delivery in the sector.

The successful delivery of 1,500 units in the past year has facilitated the securitisation process, he said.

Abdallah Sallam, managing director of the Madinet Masr Company, has a different perspective on purchasing and storing building materials in large quantities. He sees this as an additional burden, leading to increased storage and transportation costs.

Moreover, there is a higher risk of damage to raw materials during prolonged storage periods, he said. Sallam believes that expediting construction and implementation is the ideal solution, saying so at a recent workshop on the “Optimal Path to Successful Real Estate Investments.”

In 2023, the company increased the prices of its units by 60 per cent. Its hedging strategy prioritises accelerating construction, offering flexible payment plans tailored to customers’ income, and offering diversified products, such as commercial, administrative, and residential units.

Sallam advocates a “healthy increase in real-estate prices”, emphasising that “clients who use real estate as an investment are seeking such increases.” He expressed the hope that “2024 will not witness the significant inflationary spikes of 2023 and that only moderate and healthy appreciation will take place.”

Omar Al-Sisi, head of the Trust Real Estate Development, said some developers have recently adopted new hedging procedures, such as delayed payments with interest to contractors. Alternatively, developers may opt to allocate a share of their units, whether commercial or residential, equivalent to the value of the implementation contract to the contractor.

Last week, the New Cairo Developers Association issued a statement stressing the importance of caution among developers amid current price fluctuations and warning of sales based on zero or less than 15 per cent down payments.

Developers were advised to discontinue sales with extended payment periods and to speed up construction once they signed a contract with a client.

Mohamed Rashed, a member of the Board of Directors of the Real Estate Development Chamber, said the majority of real-estate developers in Egypt are reducing the number of units offered at each stage of their proposed projects to ensure a commitment to implementation without incurring high risks.

Developers have also increased the hedging percentage in feasibility studies from eight to 10 per cent, factoring in annual rises in the prices of building materials, he added.

Rashed said that while selling real estate in foreign currency is not legally permissible at present, it is considered a hedging policy nonetheless, though not in isolation.

He called for legislative amendments allowing real-estate sales in dollars or the establishment of a company specialising in export properties. These steps would help to address challenges during construction, he noted.

Bumper sales
 

Despite numerous challenges, Egypt’s real-estate market has remained resilient, a report released earlier this month has shown.

Prepared by consultancy firm Board Consulting, the report said that sales by 20 leading developers had more than doubled to reach LE700 billion. According to the report, external and internal factors have contributed to the surge in sales. Externally, global inflation, exacerbated by geopolitical tensions and a rise in US interest rates, has played a significant role, the report said.

Internally, Egypt has experienced its economic pressures, including a 25 per cent depreciation of the currency leading to increased inflation and economic uncertainty. “These conditions have spurred individuals to seek refuge in real-estate investments as a means to protect their assets amidst financial instability,” the report said.

This has been the case despite rising prices. According to Ahmed Zaki, managing director of the Board Consulting, global unrest and disruptions on commercial routes have significantly impacted raw material prices, particularly steel for construction, which has soared to LE55,000 per ton in the black market, a notable increase from the official price of LE39,000 per ton.

As a result, construction materials have seen an average 80 per cent increase in costs, excluding finishing materials, resulting in a corresponding 60 per cent rise in overall construction expenses. As these costs typically represent about 35 per cent of project investments, selling prices have also seen an average 80 per cent increase, Zaki said.

Among the popular locations that have seen increased sales, East Cairo has emerged as the top destination, buoyed by expansions in the Al-Mostaqbal city and the establishment of government offices in the New Administrative Capital.

West Cairo has also witnessed substantial growth, with over 70 residential projects sold in 2023 and driven by developments in Sphinx and New Zayed cities, the report showed. The North Coast has become the trendiest second-home destination, experiencing a surge in land acquisitions and investor interest. The Red Sea region has also seen significant development, with destinations like Makadi Bay and El Gouna evolving into attractive options for primary residences.

To ensure sustainable growth in the sector, the report stressed the critical role of government intervention in maintaining exchange-rate stability and shielding the market from external volatilities. It recommended the implementation of strategic measures for sustainable development, such as promoting real-estate exports and bolstering the involvement of brokers.

It also advocated measures to support the secondary market and implement a robust mortgage system to effectively manage resale risks. Furthermore, it urged developers to prioritise timely construction and embrace innovation in the rental market to tackle affordability challenges and remain adaptable to the evolving dynamics of the market landscape.


* A version of this article appears in print in the 22 February 2024 edition of Al-Ahram Weekly

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