2018/04/11 18:33 , Author: House Solution
The drop of the Egyptian pound in November 2016, resulted in a major slowdown in the real estate market. Walid Salah-Ahmed, who is a real estate developer himself, sounded the alarm in February 2017. He spoke of a ‘crash’. Real estate development, is providing 10% of Egypt’s annual GDP growth. Because of its significant value to the GDP growth, Egypt’s already struggling economy could be in trouble.
Due to the rising of costs, there could arise a problem of affordability on the supply line. The price of bricks and other building materials increased significantly. Another problem was that many of the new apartments and compounds were not affordable for Egypt’s middle class and lower class. This resulted in empty apartments and huge unfinished building projects. Samih Sawiris, director of one of the biggest real estate development companies in Egypt, added that: “the real estate market in Egypt is approaching a bubble, because of the crazy profit margins and a large number of developers that are operating in the sector” (Alghad, 2016).
Now, one year later, it is time to make up the balance for the real estate market. What happened in the past year, and what will be happening in the future? Is the real estate market heading towards a bubble?
The real estate market of the past decennial :
Analyses of the real estate market, show that the real estate market was booming significantly over last year. Before the revolution, growth rates of real estate values topped up to 15% annual growth. The financial crisis and the revolution led to a downturn in the Egyptian stock market. The stock market has been struggling until the exchange rate policy changed in November 2016.
The real estate market didn’t remain untouched, as investors avoided to market for a short period of time. Between 2013 and 2014, investments in real estate decreased by 7%. However, this decrease, the real estate market started to expand rapidly. With a negative interest rate and all the political turmoil, investing in real estate turned out to be the safest option for many investors. With the result of tremendous growth. In the first quarter of 2015, property investments increased with 30% in Egypt. In the same period, residential prices and land prices have increased by 20% and 35% respectively. This is only an example of the strong continuation of the market since its good performance in 2014 (Oxford Business Group, 2016).
Price rises and high demand :
The great boom in real estate has led to enormous price rises. For example, the 6th of October and New Cairo development has seen a doubling of the square meter prices in two years ($ 750 - $ 1500). During the period between 2014 and 2016, the estimated demand for houses decreased from 45% to 33% (Oxford Business Group, 2016). In general, the demand for properties for sale or rent, increased by 180% in the first quarter of 2017, compared to the same quarter in 2016. The supply of properties increased to 55% in comparison to 2016
The devaluation of the pound :
It only required less one month, to lose half of the value of the Egyptian pound compared to the American Dollar. Where 1 American Dollar could be exchanged for 8 Egyptian pounds at the beginning of November 2017, the exchange rate was changed to 1:18 at the end of the same month. As part of the strategy to reform the Egyptian economy, the government of Egypt decided to stop the currency control and float the Egyptian pound. With good reason. The currency control policy resulted in a huge black market that priced dollars at almost twice of the official exchange rate. This uncertainty about the true value of the Egyptian pound, made it very unattractive for investors, to import or invest in Egypt. The idea of floating the exchange rate is that the foreign investors now will come, helping to expand the Egyptian economy with their investments. IMF Mission Chief for Egypt, Chris Jarvis, expects that “The flexible exchange rate regime will improve Egypt’s external competitiveness, support tourism and attract foreign investment.’’ The central bank of Egypt said that the floating of the currency will “allow market demand and supply dynamics to work effectively (Alkhalisi, 2016).”
After the drop of the pound, the real estate market got a new relapse. It was unclear to real estate developers what prices they should determine. A low increment of prices resulted in fast sales, selling out many real estate developers. After a while, most property owners started asking double prices, in order to catch up with the devaluation. This was too much for the buyers, resulting in a major decrease in transactions and an illiquid market (Osman, 2017).
A problem of affordability for low incomes (50% of Cairo lives informally)
- Still a huge housing gap
- demand is still growing