EGYPT: IS THERE A REAL ESTATE BUBBLE IN PRIME RESIDENTIAL MARKET?
A real estate bubble in the making or sector expansion? Everyone is wondering in response to the fast appreciation in Egypt’s prime residential property market in the past couple of years. Here, we have listed down 8 reasons why a bubble is not on the horizon:
1. Property price hikes is based on real economic factors and not speculation :
In 2016, the Egyptian pound has lost more than 50% of its value upon currency devaluation. Headline Inflation rates hiked to an annual average of 30% in 2017, 14.4% in 2018 & 10.7% up to October 2019. As a result, the increase in property prices is not speculative in nature but because of pure macroeconomic conditions and surge in cost of input materials and labor. Some materials have increased by more than 100% from 2016 to 2018. Not to mention the increase in land prices. Developers were forced to increase prices to maintain their margins.
2. Real demand based on population dynamics:
Real demand continues to play a pivotal role in the Egyptian real estate sector. As per the Central Agency for Public Mobilization and Statistics (CAPMAS), 240K marriages takes place in Cairo and Giza every year and same number of units is required.
As per Arab African International Securities (AAIS) report as cited in Invest Gate January 2019 issue stated that demand required by upper middle and high-end classes is estimated by 34K units per annum. This corresponds to 14% of total Cairo & Giza marriages.
From the supply side, as per JLL 2018 a year in review report, 18K residential units within Greater Cairo gated communities are added annually to the market in 2018 and 2019. It is evident that annual demand is almost double the supply from pure demographics angle.
There are other demand factors which are not counted like investment, reallocation and upgrading. There are no available figures to quantify these factors; however, its contribution to the demand cannot be ignored or underestimated. As per Aqarmap Real Estate Trends 2019 report, a survey found that 33% of buyers purchasing objectives is for investment and over 17% for reallocation.
Finally, let’s assume under a sensitized scenario that demand by upper middle and high-end classes stand at a conservative figure of 7% of total Cairo and Giza marriages instead of 14% (all other factors neutral), then demand from a demographics marriage factor is just adequate to meet the supply.
3. Robust financial results of listed real estate companies.
Combined revenues of the top five listed market players namely SODIC, Palm Hills, Emaar Masr, Talaat Mustafa Group and Madinet Nasr Housing Development have shown continuous growth from 2014 to 2018. During the period, combined contracted sales recorded EGP181bn increasing by 164% with an average annual growth rate of 27%. The sustainable growth rates reflect developers’ successful business models and real demand despite the challenging economic conditions during the past years.
In H2 2019, the top five listed companies have recorded mixed results as the first half of the year is generally characterized by slower sales that picks momentum in the second half particularly during summer season. Combined revenues for H1 2019 is at the same level as H1 2018 and expected to close the year higher than the all-time high of 2018 or at least at same level.
4. Healthy financing Portfolio of listed developers:
Developers have resumed the banks role to finance buyers in higher socio-economic segments. The legal ownership of the unit is only transferred to the buyer after all the installments are recovered. As such, any failure by the buyer to pay the full price of the property does not mean a distressed sale listed on the market but would mean that the unit returns to the developer’s inventory at book value.
Listed companies appear to have healthy collections with low delinquency providing strong visibility to their cash flows and sustainable liquidity in the real estate market over the medium term. Examining SODIC with EGP11.6bn of checks under collections, it has recorded a delinquency rate as low as 4% in 2018.
5. Cheaper secondary sales does not mean there is a bubble:
There is a reason behind why secondary sales on cash terms is cheaper than primary sales. It is the significant embedded interest component the developer charge on your primary off plan unit that increases with the longer a payment term is. Developers are not offering flexible 7-10 payment plan free but comes at a cost. Just try to offer a developer a 50% down payment instead of 10% and you will be surprised with a hefty discount. An influx of new real estate projects is by default putting pressure on secondary market sales as property buyers prefer to go for an off plan unit with a flexible payment plan.
6. Real estate as an alternative asset investment is appealing as interest rates are expected to soften.
Post currency devaluation, Central Bank of Egypt (CBE) hiked interest rates several times in total of 700 basis points as a monetary tool to combat inflation. The average overnight EGP interbank deposit rate skyrocketed to 18.75% while 3 months treasury bills recorded an average of 18%. An exceptionally high returns that has driven huge funds to the banking sector to take benefit of such attractive rates.
Starting 2018, CBE started to cut interest rates. The average overnight EGP deposit rate was cut several times in total of 650 basis points till November 2019 with more expected cuts in the future to reach inflation targets. As per the CBE monetary policy recent report, the inflation outlook remain consistent with the targeted disinflation path of 9% (±3%) inflation target for 2020 Q4.
As interest rates offered by the banking sector is on a downward curve, real estate will be even more appealing as an alternative attractive investment from both capital gain perspective and yield.
7. Insignificant mortgage market in Egypt with no consequential effect on prices:
High mortgage levels could bite hard in an economic downturn. This what happened in the US back in 2008 as jobs losses forced mass defaults on mortgage payments. With banks sitting on lots of foreclosures, real estate prices collapsed.
In Egypt, it is a different story. The real estate mortgage sector is miniscule and it requires several years to pick up from a very low base due to various legal constraints. Sector size for both Egyptian banks and specialized real estate mortgage companies in 2018 recorded an insignificant figure of EGP35bn (USD2bn).
The mortgage sector is mainly driven by the Central Bank of Egypt special programs catered for middle, lower and social housing income brackets that has surging population demand. This EGP 35bn is roughly translated into 150K apartment in lower income brackets. An insignificant figure in a different socio economic cluster. To put things in the right perspective, the mortgage market in the United States and the United Kingdom in 2019 stood at USD 12.3trillion & USD 1.7trillion respectively compared to USD2bn Egyptian real estate mortgage market.
8. Good Projects are quickly sold out
Have you ever wondered why good projects for reputable developers are sold out quickly. It is real demand for a good product.
To conclude, the Egyptian real estate sector is not immune to global economic downturns, local economic volatility and socio-political instability but it has been remarkably resilient to several years of political and economic turmoil. A downturn has not been witnessed in the sector but rather short periods of stagnation. Investors tend to wait for better times to sell their assets. The sector has been an investment safe haven to hedge against inflation. The market is witnessing tremendous investment from the Private sector, which reflects that the real estate sector is buoyant and promising in a market that has strong demand for housing.