Wednesday, 11 May 2022

What are Egypt’s real estate developers doing to reduce the fallout from inflation and the devaluation?

What are Egypt’s real estate developers doing to mitigate the fallout from inflation and the devaluation? Egypt’s real estate sector is being substantially impacted by soaring raw material price increases from the war in Ukraine, along with the recent interest rate hike and EGP devaluation, several leading players told us recently. Today, we look at what the industry is doing to mitigate the short-term impact of cost increases, how consumers could be affected, and whether we should expect delays in project deliverability.

Real estate companies have been holding talks with the government to explore ways of tempering the short-term fallout from price hikes, say sources. “A lot of meetings were held with government officials,” Redcon Construction Chairman Tarek ElGamal tells Enterprise. The government has since been seriously considering giving time extensions on projects and perhaps temporarily removing the interest on land payments, he adds.

They’re also holding talks with each other: Many conversations are taking place between developers — especially those in joint development partnerships, MNHD CEO Abdallah Sallam tells us. “Everyone’s talking about the effects of the current economic challenges on consumer prices, and how big of a hike they’re willing to take, as well as construction costs and how to protect margins. Everyone’s testing the market.”

Some steps, including repricing, are already underway: Renegotiating the cost of raw material procurement with suppliers and repricing company inventory can offset recent cost increases, ORA Developers CEO Haitham Mohamed tells Enterprise. ORA has sold 20% of its total inventory, meaning it can amend the prices it sells the remaining 80% for, he adds. O West applied a 10% pricing increase on its units at the beginning of April, and will likely apply more price increases throughout the year, CEO Tarek Kamel tells Enterprise. MNHD is in strategic talks with construction companies or contractors — both on controlling the cost of construction and innovating with the terms of payment — says Sallam.

While some players aim to cut costs and diversify their product mix strategically: Limiting the hit to profit margins isn’t just about repricing, notes Sallam. “We also need to look at cash flow management and financing, and be more efficient with our hiring and corporate expenses,” he adds. “Sometimes, in moments of crisis, it’s actually the time to spend a bit more in particular areas — which is exactly what we’re doing.” MNHD is accelerating a strategic plan that involves reviewing its product mix, potentially introducing new, higher-margin products, and making use of value engineering to cut costs effectively, Sallam says.

How will all this affect consumers? A possible average price increase in the real estate market of 30% in 2022: “Initially, before the war and the change in the FX rate, we expected a price increase of 10-15% in the market this year,” says Kamel. “But now I think it will be around 30%,” he adds.

Despite these challenges, developers are committed to their deadlines: “We hope this situation doesn’t affect our schedule for deliveries — as quick delivery will help mitigate cost risks,” says Sallam. MNHD is about to award a new construction phase to a contractor, and everyone’s still committed, he adds. O West is also fully committed to its contractual delivery dates, and should start delivering by the end of 1Q 2023, says Kamel. ORA, meanwhile, is even hoping to deliver ahead of schedule, says Mohamed. “With the impact from inflation and the devaluation, once we sell, we engage contractors and fix the prices. If you work faster, you can minimize the hits of inflation and devaluation by delivering as soon as possible,” he adds.

It’s difficult to predict when the current market volatility might stabilize, sources note. The recent price spike was very sudden, notes ElGamal. “It’s not like the one that started in 2005 when the market was overheated, which took three years to peak. This one happened in days, and it’s not easy to predict how long it will last,” he adds. Sallam expects more clarity in the coming quarter: “Things will be clearer, whether this is a global crisis, or whether our market will stay resilient, adapt to the new measures and keep its momentum.”

But overall, there’s still optimism about the future of the real estate sector: “Egyptians always find safe haven in real estate, and trust the sector as a place to grow their investments,” says Sallam. “Looking at the macroeconomics of the industry, I don't see it slowing down anytime soon. Supply falls very short of the real demand in this country. And when it comes to the housing industry, we're talking about a crucial product,” he adds.

Could the issuance of proposed government regulations dampen that enthusiasm? Proposed new government regulations that could potentially prohibit developers from selling units in a development until they’ve completed 30% of the project — which have not been implemented — could face pushback from the industry, notes a legal expert speaking on condition of anonymity. Though the aim of the regulation would be to protect buyers and the market from bubbles and large-scale fraud, it would also punish financially solvent developers that operate legally and ethically, the expert adds.

Real estate players we spoke to agree the sector would benefit from some form of regulation: “I think government intervention when it comes to the real estate market is well needed at this point in time,” notes Kamel. “In the last few years, the market attracted many entities that aren’t necessarily up to the right operational standard,” he adds. It’s the role of the government to put regulations in place to protect both developers and customers, and the intention behind these proposed regulations is good, says Sallam.

But some would prefer less dramatic measures: These particular regulations could constitute one more challenge for a market already facing its fair share of challenges, Sallam notes. “I’m confident the government will cooperate with developers to introduce practical measures that regulate the market without stifling it,” he adds.

Your top infrastructure stories for the week:

  • Abu Dhabi Ports to build and run Safaga terminal, cruise ship infrastructure: ADP has signed a contract to develop, operate and manage a multi-purpose terminal in Safaga Port as part of a joint venture with the Red Sea Ports Authority and the Transport Ministry’s commercial arm.
  • BRT, Metro Line 3 extension coming soon: The next phase of the Cairo Metro Line 3 will open to the public in July and the Cairo Ring Road bus rapid transit (BRT) system will be up and running by the end of the year.
  • Eni to work on carbon capture pilot: The Oil Ministry and Eni are implementing a pilot carbon capture project at the Italian energy firm’s Meleiha concessions in the Western Desert.
  • Borg El Arab power plant upgrade: Egypt Kuwait Holding subsidiary Kahraba has awarded Finnish company Wartsila a contract to deliver equipment that will add 20 MW of capacity to the 40 MW Borg El Arab power plant.

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