In Egypt’s heterogenous real estate sector: Where does a real estate bubble lurk?

The current market demand stands at 1 million units per annum, while 450,000 units are supplied per year

Economists and real estate developers are divided over the possibility of a real estate bubble occurring in the sector. The first camp has been warning of a fast-approaching sector bubble that may burst soon, while the other camp is claiming that it is responding to real demand, relying on the country’s rapid population growth and the high percentage of marriages.

According to the Oxford Business Group’s Egypt 2018 report, there are significant demand drivers for continued construction expenditures with an estimated 98 million inhabitants and an annual growth rate of 2.45 percent. Urban areas are constrained which will result in significant construction investments – the question is for whom are the developers building?

In a recent interview with Business Forward, founder of Dar Al Mimar Group (DMG) and chairman of Mountain View Amr Soliman said that he would rather describe the real estate sector in Egypt as a competitive market, not a bubble, given the massive demand and the corresponding massive supply.

Business Forward speaks to the founder of Egyptian Private Equity Association (EPEA) Hany Tawfik and the managing director of Multiples Group Omar El Shenety to get to the bottom of the so-called bubble’s existence and understand whether there is much ado about nothing or not.

What is a real estate bubble?
El Shenety explains that “a bubble in finance is any increase in the price of an asset as a result of speculation, not as a result of real demand. People do not want to to own or use it; they are just highly speculating on these assets.”

The answer to if Egypt is headed towards a real estate bubble or not depends on the definition of a bubble, according to Tawfik. “The financial crisis of 2008 – it all started in the United States (US) where there was strong real estate mortgage activity. Egypt got away with it at the time because it did not have a mortgage industry and was a cash-based society.”

Can Egypt witness a real estate bubble?
Tawfik says that a real estate bubble burst is inevitably coming. The total contribution of real estate to the GDP is 16.5 percent, and in comparison to other developed and developing countries, this is rather high.

“By no means should [the ratio] exceed 5 or 6 percent at most,” Tawfik says, explaining that when this ratio increases, it means that there is a lot of spending which could lead to a bubble.

“A collapse will happen; it is  inevitable,” Tawfik states, contrary to El Shenety who believes that the market definitely slows down in Egypt, but never totally collapses.

Real estate is not a single market and cannot be treated as a single entity, he emphasizes. It has five segments: luxury, upper middle, middle, lower middle and social housing. The signs of a real estate bubble already exists, but it is only noticeable in the first two segments, El-Shenety explains.   

Total contribution of real estate to the GDP is 16.5 percent

Is this bubble affecting the entire sector?  
El Shenety clarifies that some developers who focus on middle-class housing per se do not suffer from a bubble since they are responding to real demand. But in the first two segments that are exclusive to luxury and upper middle housing, Egypt certainly is already in the bubble. So it does exist, but not across the entire spectrum.

“If we merge all segments together and tackle the sector as a homogenous one, a distorted image will be formed,” El Shenety says, adding that in the lower housing markets, Egypt may witness a gap where supply is lower than demand.

However, Tawfik says that the bubble will not be exclusive to high-end markets. “Even in slums, the cost of building, raw material and the high price of the US dollar make it impossible to sell the square meter for less than LE3,000-4,000. Youth and fresh graduates cannot afford that.”

In response to the argument that real demand stems from the population’s growth and the increase in marriages, Tawfik says that people who really need units cannot afford to pay LE2-5 million. This argument may apply to societies where supply matches demand, but in Egypt, the purchase power is rather low.

The bubble does exist, but not across the entire spectrum

What has changed in the high-end market?
High-end units are usually sold but remain empty; hence, all the signs of a bubble in the segment exist, according to El Shenety who goes on to say that the number of sold units is higher than the number of owners, meaning that one owner buys more than one unit for investment purposes.

Additionally, Egypt used to have developers who sold their units through a 3-4-year installments system. Today, the installment system ranges between 8 and 10 years to create a movement in the market. “If the market is good and there is no bubble, why are you trying to create a movement?” El Shenety asks.

In a research paper submitted to the American University in Cairo’s (AUC) Public Policy Department by Rana Hamdy Laymouna entitled “The dynamics of the real estate sector in Egypt: Is there a risk of having a housing bubble?”, the analysis shows that real estate developers have been replacing the role of banks and selling units with easier credit facility terms, with no risk assessment of the buyers.

However, this does not mean that the country does not rely on a mortgage system. Tawfik explains that today, residential units are sold at a five-percent down-payment, while the rest is paid over 12-15 years. “This is mortgage that will lead to a collapse when default happens,” he says. A slow-down in the buying and selling process has already started, and the secondary market is almost non-existent, he concludes.

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