Is Egypt’s real estate sector headed for a bubble? The specter of a so-called real estate bubble is once again haunting the Egyptian market, with some analysts predicting its emergence as early as Q4 2024. However, industry players are quick to dismiss these concerns, asserting that the fundamental conditions for a bubble are not present in the Egyptian market. In today’s HardHat, we delve into the ongoing debate, exploring the factors at play and the sector’s outlook.

But what exactly is a real estate bubble? A real estate bubble occurs when property prices in an area or city become excessively inflated compared to their actual value, often driven by speculation and other factors. The problem with bubbles though, is that they tend to burst, which in this case could trigger a sharp decline in property prices as the market tries to reevaluate prices — often through overcorrection.

Fears that a property bubble is about to emerge are fueled by economic headwinds: Some economic analysts have pointed to the rising USD exchange rate as a potential trigger for a real estate bubble. Economist Hany Tawfik repeatedly suggests that the weakening purchasing power of citizens could lead to a significant slowdown in the sector, suggesting a property bubble could develop by Q4 this year or early 2025.

Although others think that we may already have a property bubble: Some suggest that there is already a real estate bubble forming in the market, according to several industry players. Economist Medhat Nafei in his latest article on Shorouk News thinks there is currently a property bubble, which he attributed to soaring real estate prices during the past ten years to unprecedented levels. Nafei said the increase was not determined primarily by rising wages, but instead the depreciation of the EGP against the greenback. A volatile and depreciating national currency pushed citizens and investors alike to pile into property purchases to hedge against currency fluctuations and ride the property investment boom.

INDUSTRY INSIDERS SEEM CONFIDENT A BUBBLE IS NOT IN THE CARDS-

Most industry insiders we spoke to think the possibility of a bubble emerging is out of the question: Real estate experts and developers we spoke to rejected the notion of an impending bubble, citing several key factors, including

Genuine and growing demand: Mohamed El Bustani, the deputy head of the real estate division at the Federation of Egyptian Chambers of Commerce, told Enterprise that demand in Egypt is real and increasing. He pointed to the significant opening of the Egyptian real estate market to foreign markets and the presence of both local and global demand for real estate investment in Egypt.

Robust property sales and revenues: Tatweer Misr CEO Ahmed Shalaby highlighted the substantial efforts made by real estate companies to boost the sector’s contribution to economic growth. Major companies have reported significant revenues, reflecting strong domestic and foreign demand.

Shift from speculation to real demand: El Bustani told us that current property purchases are driven by genuine demand rather than speculation, as the market saw solid demand on real estate assets at times last year when there was widespread uncertainty across other sectors. This demand has recently subsided, and developers refrained from rolling out other property projects or putting up new units for sale until balance returns to the market and to allow themselves to accurately calculate the costs to lay out stable pricing policies, according to Bustani, who says sales during the quarter are up.

Soaring costs drove property prices up: The high price tags on real estate units are not arbitrary, but rather pushed up by the rising exchange rate of foreign currencies against the EGP, inflation, and inflated costs across various sections, Ahmed Adbullah, member of the Federation of Egyptian Chambers of Commerce’s real estate investment division, told Enterprise.

Early resales are a healthy sign: El Bustani argues that purchasing property assets from those who are reselling early to make gains is “a healthy sign.” It helps put more capital into the system, achieves returns for owners, and indicates that real estate is a good asset to own.

Newly married couples are helping fuel real estate demand — and in turn prices: Fathallah Fawzi, chair of the Real Estate Development Committee at the Egyptian Businessmen’s Association, told Enterprise that the fundamentals for a bubble are not present in Egypt. Fawzi highlighted that, according to official data, there are one mn new marriages annually in Egypt, requiring at least 500k units, which is reflected in growing demand.

Continuous population growth is also a factor: Abdullah added that the continuous increase in population reflects growth in demand on property units, with real estate companies significantly expanding across various diverse projects to meet different types of demand.

Limited contribution from luxury housing: Fawzi noted that luxury and upper-middle housing provided by private sector developers represents only about 10% of the annual demand volume, with no more than 35k units annually.

The difference in prices between the primary and secondary market is not evidence of a bubble, but of a weakening of demand: Prices in the primary market are currently 30-50% higher than the secondary market is due to “a year and a half of economic reform measures that impacted” purchasing power and hit demand, Arab African International Securities Co-Head of Research Mahmoud Gad said in a note. As the CBE begins to cut rates, increased liquidity in the secondary market should help bring down prices to a similar level.

Limited role of mortgage financing: Both Abdullah and El Bustani pointed out that only about 5% of property purchases in Egypt are financed through mortgages, which they see as one of the key conditions for a bubble that is not prevalent in the country.

By the numbers: Mortgage financing volumes granted to beneficiaries so far have reached EGP 74 bn through 22 banks and 8 companies, with cash support of EGP 9.7 bn, according to Mai Abdel Hamid, head of the government’s Mortgage Finance Fund. Meanwhile, 20 local developers have achieved record sales exceeding EGP 700 bn last year — a 111% y-o-y jump compared to the previous year’s EGP 332 bn, according to the annual report by The Board Consulting on the Egyptian real estate sector.

ICYMI- Tarek Shoukry, the head of the Federation of Egyptian Industries’ real estate division, told us previously that the Central Bank of Egypt is looking to revitalize mortgage financing, which would lead to increased demand, provided that the property unit itself serves as the collateral for mortgage financing, guaranteeing the developers’ rights should clients fail to meet their payments.

Real estate is a growth driver: El Bustani sees the real estate sector as a leading driver of economic growth in Egypt, supported by a surge in investments from local, Arab, and foreign players. He emphasized that real estate remains the preferred investment for Egyptians despite rising prices.

Prices expected to calm down: House Housing Committee Secretary Amin Massoud told us that he expects prices to stabilize as the pound’s exchange rates settle and developers aim to maintain market appeal.

Your top infrastructure stories for the week:

  • A berth for handling grains in Qena: The River Transport Authority is planning to build an EGP 350 mn berth for grain and crop trading at Dandara River Port in Qena. The project is pending the cabinet’s approval. (Al Borsa)
  • Some USD 3.2 bn worth of PPP infrastructure projects on offer by the end of year: The government plans to invite bids for over USD 3.2 bn worth of projects before the end of the year, Director of the Finance Ministry’s public-private partnership (PPP) unit Atter Hannoura said at the PPP MENA Forum in Dubai.
  • Another one of our real estate developers is heading to Saudi Arabia: Real estate developer Tatweer Misr is partnering up with Saudi’s Naif Alrajhi Investment to launch its first projects in Saudi Arabia. The projects are expected to debut at the end of the year or the beginning of the next.
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