The gross domestic product (GDP) growth rate of real estate activities in Egypt witnessed a sharp rise in 2016/2017, passing the 25%-mark, according to the Central Agency for Public Mobilization and Statistics (CAPMAS). Despite a slight drop in the following fiscal year, the real estate sector remains crucial as a contributor to GDP.
To delve deeper into the market dynamics, Business Forward speaks with managing director of DMG Group’s Real Estate Development and Management Wael Lotfy about the current market performance, how interest rates affect the sector and the export of real estate.
How is the market proving resilience amid low spending power and market pressures?
The current market demand stands at 1 million units per annum, while 450,000 units are supplied per year. This is healthy. Real estate construction costs tend to increase by around 15% annually; therefore, the fact that the market was able to absorb increasing costs over the past three years and attain profits confirms the market’s resilience.
Consumer spending power is affected by the lack of affordability. A buyer with a monthly income of LE 50,000 would have to provide 40% (equivalent to a minimum of LE 20,000) of their salary for a unit of 70 square meters. On the other hand, developers are pressured because – despite construction costs going up – raising unit prices would limit their market segment.
The solution for both consumers and developers is cultural shift. Developers need to produce cost- and construction-efficient households, rather than spacious high-end units. Meanwhile, Egyptians need to learn how to live efficiently in smaller units.
Is exporting real estate a tangible solution to today’s market challenges?
If you are good at manufacturing a certain product, you will have the urge to export it at later production phases – and Egypt is really good in manufacturing real estate. The market is appealing for Egyptian expats and foreigners who consider it a long-term investment. Europeans and GCC investors buy real estate in Egypt and rent it out for tourism purposes. Syrians, Libyans and Yemenis purchase real estate for residency purposes. However, exporting real estate does not improve the current supply or demand; it manifests sale opportunities in the A and B categories in the market.
How are the current interest rates imposed by the Central Bank of Egypt (CBE) affecting real estate?
For the past three years, the CBE interest rates have had a negative impact on real estate. People are more likely to put their money in banks to avoid investment risks and yield the benefit of 17%- 20% interest rates.
In terms of real estate, Egypt’s property rent rate increases by 4% annually, as opposed to an international rate of 7% of unit value. The total annual interest rate for renting out units stands at 13%, which is lower than interest rates offered by banks.
What challenges does the real estate market have to deal with in 2019?
The amount of brokers and real estate developers are increasing without a supervisory organization or fixed regulations. This will jeopardize the market. Hence, the Ministry of Housing is launching the Real Estate Developers Association to protect the ethics of the industry’s value chain through a fixed set of rules, regulating the relationship between government, consumer and developer.