Wednesday,19 September, 2018
Current issue | Issue 1291, (14 - 20 April 2016)
Wednesday,19 September, 2018
Issue 1291, (14 - 20 April 2016)

Ahram Weekly

Safe haven?

The devaluation of the Egyptian pound makes investment in real estate attractive for some Egyptians, despite the danger of a bubble formation, reports Nesma Nowar

Safe haven?
Safe haven?
Al-Ahram Weekly

Investing in real estate has long been seen by Egyptians as a safe haven against inflation and the falling value of the Egyptian pound, especially during the turbulent economic times Egypt has been passing through since the 2011 Revolution.

There is a growing appetite to invest in real estate these days because of the deteriorating economic conditions and the fall in the Egyptian pound’s value, now standing at 8.87 against the US dollar on the official market.

“The rush to real estate has led to a rapid price escalation for certain flagship projects in Cairo that cater to the upper-middle segment of the market,” said Oxford Business Group (OBG) in its Egypt 2016 report.

OBG said that such rapid escalation, however, is not primarily being fuelled by end-users and that there is some evidence of a trend towards flipping properties in this segment of the market, although it is not clear how widespread the practice is.

The report suggests that the normal metrics to assess demand, which are based on income and savings, could be somewhat skewed in certain areas of the market, which could be an early warning sign of a bubble forming.

“Indeed, investment in the Cairene market, particularly in the eastern suburbs, is done with a strong focus on capital gains,” the report says.

A housing bubble is a temporary condition caused by speculation in the housing market that leads to a rapid increase in real estate prices. As with most economic bubbles, it eventually bursts, resulting in a quick decline in prices.

Ian Albert, Middle East director at Colliers International, a global leader in real estate advisory services, said that there are a number of considerations that reduce or mitigate the risk of overheating. He said that real estate remains an effective hedge on overall prices but investors should always consider their prime reason for buying, whether it is “owner occupation, a long-term investment (hedge), short-term speculation or an income-producing investment,” Albert told Al-Ahram Weekly via email.

He said that for income-producing assets, investors may see a squeeze on returns if prices begin to increase. Yield returns as a supplemental to the long-term inflationary hedge, however, supports the investment profile.

“We would always advise a client to steer away from short or speculative investment in real estate. This is not a suitable medium as real estate is an illiquid asset and as such falls into the medium- to long-term investment categories,” Albert said.

The OBG report said that Egypt has certain characteristics that should protect its property sector from a potential bubble. It said that the balance sheets of leading developers in the country look healthy, with little debt on their books, and that most customers in the market are cash buyers who have not used bank loans. The mortgage penetration rate in Egypt stood at just 0.84 per cent of GDP in 2013, according to the American Chamber of Commerce.

“These two facts alone should ensure that any sentiment shift and price drop is contained,” the report said.

Albert made a similar point, saying there are two fundamentals to the Egyptian property market that reduce the risk of a bubble: the shortage of finance available to developers and the shortage of finance available for purchasers through mortgages. “This in essence means that properties are constructed on a cash basis, limiting the pool size and therefore the demand of investors,” Albert said.

Hisham Al-Gemie, executive director of Trends, a local real estate company, agrees. He said that a sudden drop in real estate prices in Egypt is “unlikely because the real estate market in Egypt is supported by strong fundamental demand that will help protect it from any precipitous fall,” Al-Gemie told the Weekly.

Egypt’s real estate sector is one of the few that remained positive and robust despite political and economic uncertainty. It witnessed strong growth in 2014 and 2015.

The sector is also one of the few that has benefited from the current situation. A negative real interest rate, coupled with the devaluation of the Egyptian pound, has seen domestic investors push their cash into real estate as a safe investment.

Albert said the devaluation of the pound has prompted investors to continue to capitalise on real estate, primarily in the residential market, as a hedge against currency risks and inflation, saying that Cairo offers better value for money for international and regional investors.

He added that the currency devaluation has increased the purchasing power of foreign investors and Egyptians earning foreign income, which will likely increase demand for residential property.

However, Albert said that while the currency devaluation is expected to attract foreign investment into the country, overall living costs, including construction, are likely to see an increase and that developers pass on these costs in their price points.

In addition to the devaluation, the real estate market received another boost this year, through the fifth edition of the real estate exhibition Cityscape Egypt, held last week in Cairo. The four-day exhibition had over 90 exhibitors and received thousands of visitors.

At the exhibition’s inauguration, Khaled Abbas, assistant minister of housing for technical affairs, said that current investment in the Egyptian real estate market exceeds LE200 billion and that the real estate growth rate currently stands at 16 per cent.

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