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Supply-Demand Imbalance Triggers Crisis in theEgyptian Realty Market

Demand is outpacing supply in the Egyptian realty market, which is considered one of the major economic sectors in the country. This is occurring at a time when the private sector is more incentivised than before to launch real estate projects that bridge the gap between supply and demand. Furthermore, the government is increasing efforts to launch projects that meet the needs of the low-income segments of society. Despite the financial crises besetting the Egyptian economy, big foreign and local investments have recently been drawn to the economy, solidifying the real estate sector’s attractiveness.

However, Al Mazaya Holding’s Weekly Report predicted that increasing property prices would trigger a crisis in the realty market, now considered the only investment platform where cash flows can be directed. This is in anticipation of the probable devaluation of the Egyptian pound, which will have its own bearing on bank deposits and financial markets credits, ultimately leading to price bubbles that are difficult to control in the short run.

The report summarised the crisis the Egyptian realty market is going through due to the lack of balance between demand and supply. This is a result of the rapid population growth, the low-income demographic’s inability to pay for housing, and the discrepancy in property prices from one area to another, in addition to the decreasing purchasing power.

The report noted that property prices represent a real challenge, with real estate development companies finding growing difficulties in selling housing units at the current high prices. The report also urged all parties concerned to collaborate before the situation worsens and escalates into a significant crisis that would certainly impinge on the Egyptian economy, leading ultimately to a situation where the banks would not hold sufficient funds to fund real estate companies.

Furthermore, the report added that real estate companies and investors are required to launch more projects addressing the low-income demographic that accounts for the largest share of the Egyptian population. Real estate companies were also advised to stay clear of luxury projects in order to avoid a potential collapse in prices and demand for real estate units and enhance economic growth rates in order to preempt any more crises.

The report mentioned that the building and construction sector posted fair growth rates reaching up to 12% during the first 9 months of 2016, which makes government estimations of scoring a growth rate of 4.5% a valid possibility. The current and expected growth rates continued to rise during August, reaching up to 16.4% on an annual basis.

The non-availability of hard currency in the banks that fund foreign trade will cause investors and traders in the Egyptian real estate sector to sustain heavy losses, pushing them to get their financial needs at much higher prices from the black market – a situation that will lead to increasingly high inflation rates. The report attributed the current financial crisis to an imbalanced management of foreign credit and the lack of a proper mechanism to generate sustained flows of foreign currency.

The current crisis is considerably attributed as well to the deteriorating conditions in the tourism sector, which is one of the largest hard currency earners in the country. The ailing economic conditions have not been mitigated by the floating exchange rate regime, which has proved to be an insufficient solution to survive the current crisis, despite previous predictions that exchange rate flexibility would draw foreign investments and re-channel expats’ remittances back to the local economy.

The report added that it has now become necessary to launch a package of economic reforms in parallel with the floating exchange rate mechanism. These reforms, according to the report, should include guarantees to provide foreign currency for purposes of importation for a minimum of six months. The report highlighted the grave impact the current economic developments would have on the realty market, which has for 10 years been witnessing increasing prices and high demand due to the continued devaluation of the local currency by the Egyptian Central Bank.

The report highlighted the effect of increasing inflation rates on the current property prices, with available data attributing the all-time high 20% increase in prices over the past year to the 70% hike in land prices in Grater Cairo. Theaverage price per square meter for houses and villas reached around LE 18,000, with property prices varying according to location, space and level of finishing and decoration.

The report predicted that the crisis will continue and the average Egyptian citizen’s purchasing power will be curbed if no sufficient measures are taken. A continued rise in real estate prices will probably make the recession manifest itself due to the locals’ unwillingness to buy at overstated prices. Mortgages would go for longer payment periods to ensure lower monthly instalments.

The report concluded that it has become more necessary now than ever before to survive the crisis by launching medium and small-scale housing units. Furthermore, the government can also enhance its efficiency to overcome challenges in a market that already boasts multiple investment opportunities for Egyptian businessmen, due to the restrictions imposed on foreign currency and external money transfer transactions.