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No bubble in sight
Published in Al-Ahram Weekly on 06 - 05 - 2010

Egypt's real estate market may have come out of the global crisis unscathed, but to avoid any future meltdown it has to do things differently, writes Niveen Wahish
Around this time a year ago Egypt's real estate market was in limbo. Buyers were holding back in the expectation that prices would drop while developers stood their ground keeping prices constant. That hesitation is a thing of the past, according to Mohamed Allam, managing director of Hassan Allam Properties, a leading property developer and a subsidiary of Hassan Allam Holding.
"The situation today is totally different from a year ago," Allam said. "The market is vibrant." In fact, Allam believes that last year's freeze was unjustified. "We did not have a problem in the first place," he said, explaining that real demand for property spurred by Egypt's growing population makes Egypt's real estate market very different from surrounding markets. Indeed, as long as demand exists there are no fears of real estate becoming the next bubble.
Tarek Aboualy, head of Jones Lang LaSalle Misr, the financial and professional services firm specialising in real estate, says local demand has been the main driver of the real estate market in Egypt, causing it to be much less impacted by the global financial crisis. He said that a recent investor sentiment survey carried out by Jones Lang LaSalle Misr revealed that more than 80 per cent of respondents believe that the local real estate market will recover within 12 months. He estimates Egypt's current real estate market growth rate at 10 per cent and expects it to reach 13.5 per cent by the end of 2010.
At such levels of growth prices have certainly not dropped. They have maintained their same levels, if not increased slightly on pre-crisis levels. If one good thing were to come out of the crisis, Allam said, it was that it pushed real estate speculators out of the market: those who had been buying into any project, holding onto it for a short while, and selling it afterwards at a premium. That was one of the reasons prices went so high, Allam explained. Today, only the long- term investor is in for the ride.
That long-term investor, however, still must be well financed. Surveying prices at Next Move, the real estate exhibition that ended earlier this week, Al-Ahram Weekly found that the lowest prices ranged around LE3,000 per metre of unfinished property. Next Move offered products in the new suburbs of Cairo like Zayed, Katameya, New Cairo, 6 October governorate as well as holiday homes in the Northern Coast, Sharm El-Sheikh, Marsa Allam and Hurghada. Allam acknowledges that LE3,000 per metre is not cheap, but he said in these new locations prices have been benchmarked and will not drop. He attributes high prices to the auction system adopted by the Ministry of Housing in selling land. In addition, according to Aboualy, the relocation of major international organisations operating in Egypt, and government plans to move several governmental departments as well as university branches to new areas, led to an increase in land prices, residential and commercial buildings sales and rental prices.
Allam believes hope for cheaper prices could be in new developments along areas such as the Cairo-Alexandria Desert Road or the Cairo- Suez Desert Road where land prices are still cheap, thus lowering costs for developers. He points out that many are today willing to move out of the city in search of cheaper prices, knowing that in five to 10 years those prices will leap. But this according to Aboualy has put tremendous pressure on roads and infrastructure. "As with all megacities worldwide, there are considerable planning constraints," he said.
The move out of the city has not cut the price on inner city property, however. According to Allam, many after having moved out of the city are moving back in because of problems they face with road networks or basic services such as hospitals. "This is causing inner city prices to spike again."
Nonetheless, Youssef Khalil, vice-president of Coldwell Banker, a leading real estate services company, points out that though prices are high when compared to prices in the recent past, they remain lower than world and regional prices. He attributes the high prices to the price of land, coupled with inflation and strong demand.
Prices are not only a question of location, but also the willingness of developers to offer smaller-sized cheaper units. Mohamed Allam explains that so far developers have been focussing on providing units for the upper class and upper middle class income brackets. This is changing due to saturation in this segment of the market, he said. While developers will still build for that segment, they will increasingly provide cheaper units, not by compromising on quality but by offering smaller sized units, to address the wider middle class segment.
Khalil compares the real estate market to a pyramid. "The greatest need is at the base of the pyramid where affordable housing is in demand by the majority," he said. While that is not where developers are heading at the moment, he said, they are increasingly beginning to tap the middle segment where there is also plenty of demand. Allam estimated demand to be around 100,000 units annually in that segment.
Aboualy, too, acknowledges that there is recognition of the necessity to build "real homes for real people", or in other words affordable homes that meet the needs of the broader Egyptian society. "In Egypt, mid-range or affordable homes are central to the ongoing growth of the broader community," he said.
Aboualy said that Egyptian real estate developers have already adjusted their business models by offering apartments and smaller units, rather than houses and villas. He estimates that the low-end market has a huge shortage and that the government should look into offering more incentives to attract developers to this sector.
Allam agreed that the low- income housing segment is not attractive enough to developers. To start with, he said, the areas allocated for such housing are difficult to sell because of remoteness and lack of services. Also, profit margins in such projects are not attractive unless other construction methods different from traditional concrete and steel are employed.
Meanwhile, though mortgage finance can help all segments of society acquire the homes it remain underutilised. Allam says that while his company has agreements with several mortgage companies to provide financing to anyone wishing to purchase property from them, hardly anyone has taken advantage of it. Many are deterred by high interest rates.
As Khalil put it, people are scared away when they realise that by the end of the instalment period they will be paying twice the original price of the unit. To overcome this obstacle, Allam said interest rates on mortgages should be lower than market rates. But that does not appear possible at the moment: "The market cycle is not mature enough for that yet."
Aboualy agrees that mortgage finance still plays a limited role in the Egyptian real estate market. He said that despite the fact that a conservative mortgage market has saved Egypt from the worst excesses that led to the global economic downturn, mortgage companies still struggle with high mortgage rates as well as the registration law and other regulations.
In the meantime, Khalil points out that developers are being innovative and are offering in-house instalments of up to seven years to encourage buyers. However, he warned that though they may announce that they are not charging interest, he believes their costs are by default woven into the original housing price.

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