Egypt’s Real Estate Market Undeterred by Economic Headwinds in 2017

by Admin on March 10, 2018

In the face of several economic and political troubles which beset Egypt following the uprising in 2011, real estate largely remained robust and still regarded by most Egyptians as a low risk investment during challenging times.

 

The property market was particularly affected in the latter quarter of 2016 and the beginning of 2017 due to the government implementing a tough economic reform programme. This was part of a $12 billion loan agreement with the IMF in order to address macroeconomic vulnerabilities and promote inclusive growth and job creation. The fiscal changes, which included subsidies cuts and a currency flotation, resulted in a significant increase in construction costs, a decrease in affordability and eventually a slowdown in the market. Nonetheless the second half of 2017 witnessed a strong comeback with many developers achieving healthy sales.

 

The overall outlook for demand in the market remains positive. Egypt is the most populated country in the Middle East and the third in Africa. With a population of almost 100 million, there is a strong and growing demand for housing. High fertility rates together with improved health outcomes and reduced mortality have resulted in a rapidly growing population. In the 30-year period from 1994 to 2014, there was a 46% growth in Egypt’s population. The current annual population growth rate is 2.5%. In addition, over half of the population are under 25 years of age. These factors create a strong and sustained demand for housing.

More Egyptians are now moving out of rural areas and opting for the city life. The number of city dwellers has been growing by around 1.8% each year which brings the proportion of Egyptians who live in urban areas to approximately 43.3% of the population. The capital city, Cairo, bears the brunt of this with over 20 million residents, while the country’s second largest city, Alexandria, is home to 4.8 million. National assessments for domestic housing requirements estimate that between 350,000 and 500,000 new homes are needed every year to meet the growing demand.

 

Although this high demand makes housing a very attractive sector, both private companies and the Egyptian government are yet to solve affordability problems. Despite the economy’s healthy growth rate from 2.9% to 4.3% between 2014 and 2016, and the increased GDP per capita from $12,000 to $12,600 in 2016, almost 28% of Egyptians are still classed as living in poverty. The main challenge is to intensify efforts to make housing more accessible for this part of the population, as well as earners on a middle income. Even with government funding measures and concerted efforts, the inability of prospective home buyers to gain credit, has had an adverse effect on demand.

 

The highest earners in Egypt account for 10% of the population and account for 25% of national expenditure. It is this segment which has been the prime focus of property developers. Real estate is viewed as a secure and reliable possession, which even through times of volatility and uncertainty, has managed to hold its value.

 

Prior to November 2016, when the Egyptian government decided to float the pound, prices in real estate had been growing by up to 35% per annum. This impressive appreciation in prices made acquiring real estate a more secure way of maintaining capital than cash.

 

The devaluation had a significant impact on prospective vendors and developers in real estate. In the budget of 2016/17, the government decided to lower fuel subsidies. This saw developers struggle to cope with higher inflationary pressures and increased construction costs. Potential investors and home buyers experienced a substantial decrease in purchase power.

 

These changes have had a major impact on both the demand and supply in the market. The majority of stakeholders, however, feel that this is a natural and temporary correction in the market that was bound to happen following the government reforms which ultimately aimed to boost domestic investment.  In Q1 2017, the pound’s value stabilised, with $1 equivalent to EGP 18 and foreign direct investment was on the rise.

The improved trend continued during the first 6 months of 2017. Real estate developers saw steady increases in sales over the first two quarters of 2017. This resulted from a sustained and strong local demand, driven primarily by population growth and the widespread conviction that real estate is a safe and low risk investment, especially during times of economic uncertainty.

 

 

In spite of the continuous improvement in market conditions towards the second half of 2017, several challenges remain to be addressed by real estate developers including client affordability as well as the fierce competition amongst developers due to the entry of a large number of new companies into the market. The devaluation of the currency and the cuts made to gas and oil subsidies, caused complications and increased construction costs. The developers in turn have then passed these onto the purchasers.

 

Developers have been forced to walk a tightrope to overcome these difficulties. They must be aware that demand may be restrained due to inflation and may have to come up with new ideas to attract potential buyers. Although developers are staying positive in this difficult operational environment, the road ahead is not without obstacles. Longer payment plans are being offered; instead of the traditional terms of a maximum of 7 years, 10-15-year plans are now available without any added interest. The development of smaller sized units has also been one of the solutions adopted by some developers to help mitigate the effect of price increases.

 

Egypt’s real estate sector, traditionally been viewed as a safe financial bet, is likely to maintain this reputation as the currency continues to stabilise and foreign investment increases. The formal real estate market remains focused on the top end of the income scale, where developers are feeling the effects of government reform efforts. Residential property prices have remained firm and are likely to go up as demand recovers.

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