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Wednesday, 10 August 2022

How are real estate + infrastructure players coping with high inflation?

Six months since the start of Russia’s invasion of Ukraine, how are real estate + infrastructure players handling a high-inflation environment? Few industries have evaded the far-reaching consequences of Russia’s ongoing war in Ukraine. Construction and infrastructure players, which rely heavily on building materials that have seen dramatic price increases, import restrictions, shortages, and expensive financing in recent months, is no exception.

It’s already been a rough ride: The real estate construction industry was already facing a crunch earlier this year as it reeled from the effects of the devaluation of the EGP and as inflation began to rise, as we noted in a previous edition of Hardhat. Today, we look at just how much the industry is being impacted, the factors at play behind the scenes, and what industry insiders see as the path forward.

The biggest issue is skyrocketing costs: For real estate developers, the cost of embarking on a new project has risen by an estimated 40% since the start of the year due to weak exchange rates, high financing costs, higher construction materials prices, and more labor costs, industry insiders tell us. Higher construction costs have meant that housing prices have also shot up by some 15-20% for consumers. Annual urban inflation registered 13.2% in June, with housing and utilities prices rising 7.4% y-o-y, according to CAPMAS figures.

With soaring costs, companies are scrambling to get projects done fast and mitigate future burdens: Developers are putting their effort into getting projects constructed in as little time as possible to avoid potential price increases in the future and to cut their losses, industry insiders tell us. Still, developers don’t want to see fixed deadlines on the projects.

And new projects are in the pipeline despite the current challenges: Some real estate developers have jumped on the chance to offset some of their losses through increasing the number of units being constructed by some 15-30%, Fathallah Fawzy, head of the Egyptian Businessmen Association’s Construction and Building Committee, tells us said.

But some developers have buckled under the pressure of mounting challenges to conducting business: Some 10-20% of real estate developers have halted their construction projects as a result of the intensifying fiscal and logistical pressures on their industry, Mohamed El Bustani, head of the Real Estate Developers Association in New Cairo and the new administrative capital, tells us. Many have even sold off their projects before beginning construction, El Bustani added.

There’s been government support… Since the start of the war and the subsequent trade disruptions and price increases that have fallen on the industry, local companies have been capitalizing on government initiatives to weather the impact on their businesses. These policies include a six-month extension on delivery deadlines for developers working on projects in new cities, providing them with a grace period to address delays in their construction schedules due to the pandemic and global supply chain issues.

…But private sector players are hoping for more: Private sector players are in a bit of a bind with significant headwinds facing them, El Bustani tells us. These companies hope to get some government-backed protection on sales and purchase contracts that would see buyers bear 10% of the rising costs of construction, El Bustani argues.

National projects have been ongoing despite the challenges: Government-funded projects built under the Hayah Karima (Decent Life) initiative continued relatively uninterrupted over the past six months, despite the rising cost of getting them built, which has gone up from EGP 260 bn to EGP 300 bn, Walaa Gad told us. Gad is director of the Local Development Ministry’s central department for the Decent Life initiative. There has been cost pressure on everything from infrastructure works to sewage lines, and weigh stations. Many of these projects require importing key components like pumps and electromechanical equipment for them to work, which only became more expensive to do since the start of the war, Gad said.

But some target dates have been pushed back: The first phase of the Hayah Karima initiative, which would see the construction of some 1.3k sewage stations and 173 treatment plants, was initially slated to be completed by July but import delays have since pushed back the project’s estimated completion date to December, Gad said.

Public works projects in Upper Egypt have been trudging along as well: Infrastructure projects in Upper Egypt like the Daraw Axis in Aswan and the the Alternative Axis for Aswan Reservoir have not been halted since the war broke out, Osama Hussein, Arab Contractors’ media officer told us, but there is still some degree of disruption caused by delays in the arrival of imported equipment and materials.

Contractors on national projects are covered: The Egyptian Construction and Building Contractors Federation is waiting on amendments to the 2017 Contractors Compensation Act, which are expected to be approved later this year that will help shield contractors against global economic shocks that harm the industry. The government has previously stepped in to support contractors through various crises over the past several years and it looks prepared to do so once more, said Mohamed Sami Saad, head of the Contractors Union. Offering grace periods for companies to restructure their business and pay back their dues, in addition to the Finance Ministry expediting their payments of arrears to contractors are all part of the patchwork of policies that helped protect the sector and the mns of workers employed by it, Saad said.

Overall, the sector is still solvent: The local real estate industry is still hanging on despite the numerous global challenges threatening the sector, Fawzy says. Despite the higher than usual prices, the real estate market is healthy and will overcome this crisis like it did covid-19 and the currency float in 2016, El Bustani and Fawzy both say.

But these challenges seem likely to stick around for a little while longer: Despite a modest decline in building materials prices in recent weeks, prices are still higher than they were before the war in Ukraine started. Add to that, stubbornly high global inflation and supply chain disruptions that have made some materials more difficult to get a hold of and prices could rise once more.

Could lower prices ever become a reality? With the fluctuation in the prices of all construction inputs and the scarcity of many of them, “a fair price for real estate has become a distant dream for real estate developers,” El Bustani tells us. “We held several meetings and almost set an appropriate price that protects companies and consumers and ensures fair competition, but the crisis made it almost impossible to predict prices,” he added.

Your top infrastructure stories for the week:

  • Spanish train manufacturer Talgo will supply us with seven more sleeper trains, under an agreement with the Egyptian National Railway (ENR).
  • The state-owned Holding Company for Silos and Storage plans to build ten wheat silos in Upper Egypt with a total capacity of 600k tons, at a cost of EGP 3 bn.

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