July 5, 2019

On April 1, the prominent Egyptian businessman Naguib Sawiris said that the demand for real estate in Egypt is nearly ten times the supply.

Such a statement seems strange at first glance, as most experts expect a real estate crisis due to the current recession which began at the end of the last quarter of 2018. Sawiris has tried to feed the market with positive indicators.

No one knows exactly why Sawiris contradicts the views of most experts in the real estate sector.

Many of them assert that the real estate market is currently in its pre- bubble phase, as reflected in the decline in sales, and the fear felt by real estate developers.

Sawiris’ denial of the existence of such a real estate crisis and a lack of supply seems very strange.

The Egyptian real estate market has grown steadily since 2013 with the help of state expansion and companies affiliated to the military establishment in this sector.

This expansion reached its peak in the New Administrative Capital, the most funded project. Expected investments associated with it is about $45 billion, the equivalent to more than 15 per cent of the current GDP in Egypt.

Simultaneously, speculation has increased among economic experts and real estate developers about the odds the bubble will explode in the Egyptian real estate market.

This entails a real estate price rise, which came close to the 32 per cent inflation rate that occurred after the November 2016 decision to float the Egyptian pound.

Those concerns reinforce fears related to the explosion odds of the bubble itself.

When the real estate actors, or the market in general, speak about a current or a future price bubble, this leads, in the long run, to traders refraining from buying.

This crazy collective behaviour may lead to a great crisis in the real estate sector, as the psychological factor is an important element for the existence of such a bubble. 

It played an effective role in the major real estate crisis in 2008.

What is the real estate bubble?

This happens when investors feel that real estate is a safe bet for their savings, so they buy in bulk for a speculative purpose, and later resell.

Consequently, this fully applies to the case of Egypt, as there are about 14 million closed residential units in the Egyptian market while developers continue to build new units.

As a result, the prices increase, then there is what is called a self-feeding process which pushes the price bubble to a high inflation rate.

After that, prices eventually reach levels exceeding the purchasing power of most of the population.

This scenario is happening today in Egypt, as there is a lot of supply and little demand due to high prices.

Most real estate developers tend to build luxury houses, which fulfil the ambition of the middle class to put their money in a fixed asset.

Consequently, real estate stops playing its basic role as an analgesic and becomes a value store when everyone is convinced that real estate is the best store for the value of money.

The prices of the real estate sector increase annually in rates, which exceed interest rates that reached high levels between 16-20 per cent after liberating the currency.

Assuming that these numbers are not correct, i.e. bank interest rates exceed the increase in the prices of certain properties, the belief of every one in such cases is enough to make them buy more residential units and store them for resale.

There are more factors which determine the increasing real estate demand in Egypt including cultural factors.

The traditional request made by wives to their husbands, notably in cities, to provide independent marital homes stimulates demand. 

However, they often resort to the unofficial market, which is based on very small real estate companies or individuals, and depend on dividing lands – often agricultural – building and selling them.

This pattern is clearer in Giza and its residential neighborhoods, which absorbed almost all of the rural migration in the 1970s.

According to David Sims, the author of famous books monitoring the urban changes in Cairo, the informal market absorbed about 79 per cent of the population increase in Egypt between 1996 and 2006, while the new cities just absorbed about 15 per cent.

Therefore, there is a big informal market in Egypt where there is no clear and accurate real estate inflation rate.

Similarly, real estate developers within the formal market, in both public and private sectors, don’t provide us with clear statistics about inflation in property prices.

All we have is estimates, and this makes the process of prediction more difficult.

By mentioning estimates, it is worth saying that JLL, one of the biggest property companies in the world, estimated the price rise in the Egyptian real estate market in 2016 at a level of 30 per cent, and 25 per cent in 2017.

In 2018, AqarMap Index estimated the price rise in the Egyptian real estate market at a level of 16 per cent.

Thus, it is likely that future prices take the decreasing trend, or at least that future increase won’t match the same levels of the post floating period.

This makes it more likely we will witness a looming crisis at the moment when prices stop increasing.

Such cases can justify the larger facilities in payments and benefits provided by property developers due to decreasing property sales in the market because of the increasing prices.

State as a crisis accelerator

The state’s injection of large public investments in the infrastructure sectors is helping to boost the real estate sector.

Overall, the real estate sector is growing at a rate equal to or more than twice the real growth rate in Egypt.

Since 2013, the construction sector has grown by more than 7 per cent, while the average economic growth rate has not exceeded 3-4 per cent.

Last year, for example, the growth rate of the construction sector was 10 per cent, and the real estate sector, which includes real estate and business services, has grown at acceptable rates ranging from 3-5 per cent since 2013.

As a result, the sustained growth of the two sectors, construction and real estate activities, helped to increase the relative weight of both, related to the GDP.

For instance, in the last year, the relative weight of the two sectors together was about 16 per cent of GDP.

This, in turn, made many real estate developers and industry experts believe it had become the engine of growth, a true perception as the high rates of growth achieved by both sectors lead to GDP growth.

However, beneath these numbers are many hidden facts. With the continuity of the economic crisis, the real estate sector benefits from the facilities provided by the state, and from investments injected in property and construction sectors, especially the major projects of the new cities, led by the New Administrative Capital.

These state-driven investments help boost the status of the real estate sector by increasing its share of GDP and contributing to economic growth.

Over the last year alone, the growth rate of the construction sector was about 10 per cent, according to official figures issued by the Central Bank, while the growth rate in general was only at a level of 5.2 per cent.

In case of merging both construction and property activities sectors, the outcome will be 16.4 per cent as a relative weight of GDP.

This means that the real estate sector in Egypt is nearly equal to the relative weight of the whole industrial sector. 

Such imbalance in the relative weight of the major sectors of the economy reflects the core structural problem of the Egyptian economy.

This might manifest when the volume increase of service activities exceeds the increase of productive activities.

The imbalance affects the unemployment rate, poverty and other key indicators of the economy.

The latest growth in GDP after the economic reform procedures reflects a fragile growth motivated by fragile sectors such as real estate which could be exposed to a crisis at any time.

This will have an immediate destructive effect on the Egyptian economy in case of the occurrence of such a bubble due to the large relative weight of this sector in the economy.

How can the crisis occur?

There are many signs of an imminent real estate bubble in the Egyptian market, most notably the decline in demand for real estate in the second half of 2018 by 25 per cent, and the decline in price increases to less than half its level in 2016, according to the AqarMAP Index.

If this continues over the medium term, within two or three years this decline may lead to increased supply, which in turn will make the owners resort to a “second sale market” to put their properties for sale, which leads to a sudden drop in prices, and thus a crisis in the real estate sector.

Some analysts may argue that the Egyptian real estate market is strong because most of the funding is not directly tied to the banking sector, and thus, there are no real estate mortgages or other financial derivatives, and no excessive lending unlike what happened in the USA in 2008.

However, this does not prevent the crisis which affects the banking sector as many real estate developers rely on borrowing from banks.

Moreover, the explosion of the housing bubble will result in a loss in the value of fixed and invested real estate household savings.

Consequently, this may affect their other liquid savings, pushing a big withdrawal from the banking sector.

This will certainly affect the liquidity available in the banking sector itself.

Furthermore, one of the important indicators related to such a feeling of a crisis is represented in the frequent talk about growing demand.

However, there is a funding crisis due to the uncommon mortgage system, which pushed Talaat Moustafa Group to announce the establishment of a financing firm in cooperation with Hermes Holding Group.

Mortgage financing can actually be a solution of the current crisis, but at the same time, it maximises the potential for a future bubble if many borrowers cannot repay the mortgage loans. This echoes an American-style bubble.

The occurrence of a bubble may be delayed, or not happen at all, and consequently the price increase may continue after previous minor dips, especially given that the inflation rate is still high, and this pushes many to try to adopt these economic circumstances by investing in the real estate sector.

All this depends mainly on the expectations of market players about the future of the sector. Thus, the statements of major developers such as Talaat Mustafa and Naguib Sawiris are of great importance as they aim to assure everyone that the existing defect does not exist, and that things will improve with buying rather than selling.

The bubble may not exist when people refrain from buying their own properties for speculative purposes, and this will consequently lead not to lower prices but to full market stagnation, and affect the construction sector, which employs approximately 3.4 million Egyptians, according to figures from the Central Agency for Mobilisation and Statistics.

This sector contributes to about 52 per cent of the new job opportunities in 2017, and this will deepen the current unemployment crisis.

Whether the coming real estate crisis will be in the shape of a housing bubble paralysing the movement of selling and buying, or the sector is subject to gradual stagnation, it is sure enough that we will be facing a deep economic crisis. This is because the real estate sector over time has become the largest operator of employment, especially seasonal employment.

This foreshadows a future unemployment crisis, which will hit the Egyptian economy, with the failure of other major sectors (industry and agriculture) to generate jobs.