Apprehension on real estate

Safeya Mounir , Monday 8 May 2023

Egypt’s real-estate developers are trying to find a way to survive following an unprecedented surge in the cost of building materials.

Real-estate

 

“Egypt’s real estate sector is in a shambles. Companies that sold units a year ago to be delivered at present or in the next two to three years are shouldering losses due to the rising cost of building materials,” said Alaa Fekri, a member of the board of the Real Estate Investment Division at the Federation of Egyptian Chambers of Commerce.

Fekri said that as it is impossible for developers to stock up on raw materials, they are buying building materials at prices much higher than those observed at the time they sold the units, inflating their expenses and eating up their profits.

The cost of building materials has risen by 300 per cent over the past year in Egypt. A ton of steel that sold for LE14,000 to LE15,000 a year ago now costs LE45,000. The price of a ton of cement has increased from LE700 to LE2,100, while internal doors that sold for LE2,000 are now offered for LE6,000. The cost of elevators has gone up from LE290,000 to LE750,000.

The majority of building materials contain imported components, Fekri said, adding that this and other factors had made it difficult for many real-estate developers to conduct their business.

The effects of this on the market would appear in the coming two to four years, as the profits companies announce always reflect work done over several years, he added.

Palm Hills Developments’ combined net profits rose to LE1.3 billion in December 2022, up from LE856 million in 2021, for example. The mother company Palm Hills said its net profits recorded LE992.5 million in 2022, up from LE856 million a year earlier.

Madinat Masr for Housing achieved record revenues and profits in 2022 with contractual sales reaching LE11.2 billion and an annual growth rate of 224.4 per cent supported by the launch of new projects in Taj City and Sarai.

Mahmoud Gad, a real-estate analyst at Arab African International Securities, expects some developers with low financial solvency to incur losses, especially small developers who sold buildings at previous prices and now find themselves having to deliver them after the cost of building materials has increased.

These developers may have to exit the market, while leading developers that have stocked up on land will be able to increase the price of units in future projects, he added.

Sales in the real-estate market will not come to a halt, but developers are re-pricing units based on the new cost of building materials to maintain their profits.

Mohamed Al-Bostani, Chair of New Cairo Developers, said that the real-estate market was relatively calm and that developers are closely monitoring it due to the rise in the prices of building materials.

Liquidity has shrunk, he noted, with the liquidity allocated to completing projects barely covering half of the planned work and some developers being required to deliver units to clients based on old prices and according to a timeframe set out by the New Urban Communities Authority to pay instalments due on the purchase of land.

Fekri said that despite the rise in the price of real-estate units since the 1980s, demand has not waned. The sector is still seeing demand from expatriates whose money has risen in value owing to the devaluation of the Egyptian pound. Such people find a safe haven for their savings in real estate, as do others, he noted.

The rising cost of construction materials has led many people to speed up their decision to buy units before the increases affect the actual prices of units, Gad pointed out, adding that the price of units has increased by 30 to 40 per cent compared to last year.

Due to the current difficulties, Al-Bostani stated, the problems faced by some developers have been submitted by the Real Estate Developers Division to the concerned state authorities, asking them to help to support the real-estate companies.

The developers have asked for dumping fees on steel and cement imports to be cancelled and interest rates on land instalments to be reduced, with these being currently calculated based on the corridor interest rate (the basic interest rate of the Central Bank of Egypt) plus two per cent.

They also suggest postponing the payment of instalments for a period until they have accumulated sufficient liquidity.

The developers are also demanding that clients take part in solving such problems by paying an additional 10 to 20 per cent of the price of the unit, regaining the money they paid plus interest in return for returning the unit to the company concerned, or increasing the instalments by a percentage equivalent to the rise in the cost of building materials.

Fekri said that with the exception of the demand to ask clients to help shoulder the cost of the increases, the state was unlikely to agree to the demands since the New Urban Communities Authority has already securitised the cheques due from real-estate development companies.

The securitisation involves converting the instalments due from the companies to the authority into bonds and selling them on the stock market to obtain their value immediately upon issuance, which provides liquidity.

The authority offered securitisation bonds to the tune of LE20 billion in 2022.

 

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