Real estate developers demand more incentives to resuscitate the sector: Enterprise met with several real estate developers during a conference held earlier this month, where they voiced their demands from the Central Bank of Egypt and the Housing Ministry to throw the sector a lifeline amid persistent headwinds. Industry players we spoke with cited issues that are stifling the sector, such as the high prices of raw materials and construction materials, high borrowing costs, and the EGP devaluation. These compounding issues have made it difficult for developers to complete projects that are under implementation and put pressure on smaller players in the market.

REFRESHER- Real estate developers received a package of incentives this year: The government rolled out a handful of incentives for the real estate sector earlier this year, including deferring the repayment of the outstanding installments on state-owned land and reducing the interest rate, according to Assistant Housing Minister for the Affairs of the New Urban Communities Authority (NUCA) Waleed Abbas. The first package of incentives was in February, when cabinet agreed to provide real estate developers with a 20% deadline extension on their projects and to consider projects completed when they are 85% finished. NUCA also decided to bring the interest rate to 1% above the CBE lending rate, down from 2%. NUCA widened these support measures in June, when it decided to push back project deadlines another 20% and consider projects finished when they are 80% completed. Additionally, the authority eased rules on the maximum building density of projects and the split between buildings, utilities, and services.

Industry players want to service their projects offsite, with all the developers we spoke to saying they want to be allowed to tack on administrative and commercial units to projects they’ve already agreed to develop as residential developments. However, this request has been met with significant resistance, our sources told us. Industry players expressed that it is unfair that developers buy land for up to EGP 50k per meter if the project is set to be administrative or commercial, while real estate developers building housing projects with a commercial component can buy land for low as EGP 5k per meter, according to Abbas. This demand comes after the Housing Ministry approved the proposal to change the range of administrative and commercial spaces to 5-15% of the total project instead of 8-12%. If implemented, this proposed change would maximize the investment return and enable developers to offset losses incurred during the construction of the project.

A lot of under-construction units and not enough funding: Lenders have stopped financing under-construction units after some housing developers and clients failed to repay loans amid financial distress. This has prompted the CBE to call off double financing for the same unit, Al Oula Managing Director and Vice Chairman Ayman Abdel Hameed told Enterprise. The Financial Regulatory Authority (FRA) has limited financing from real estate funds to under-construction units to 25% of the lending fund’s net assets, “which is a small amount considering that most companies operate with an average capital of up to EGP 50 mn,” Abdel Hamid noted.

The solution? Using under-construction units as the main collateral for lending, head of the Federation of Egyptian Industries’ real estate division Tarek Shoukry suggests, on the condition that the developer acquires the funded unit with its real value rather than its market value. This would be a net positive for both sides — investment banks don’t want to own units and developers can buy the units for less than the market price, according to Shoukry. This would also ensure that clients would refrain from getting loans for units that surpass their purchasing power. This recommendation was also supported by the deputy housing minister, who believes that this proposal’s enforceability is subject to how smooth the process of passing the units to the investment bank is and the developer’s willingness to repay the remaining installments. Shoukry also called upon the Housing Ministry to support developers’ requests for the CBE to allow banks to resume financing under-construction projects.

High prices remain a hurdle for developers: Pricing is one of the biggest challenges facing developers currently, which means the real estate market needs to be studied thoroughly to determine a correct pricing strategy that aligns with the increasing prices of land, which accounts for the bulk of project costs and the rising prices of building materials, according to Madinet Masr CEO Abdallah Sallam. Owning a huge portfolio of land is considered a way to overcome the current crisis, Sallam told us. Real estate developers must study each project on its own when determining the costs and how much to increase the prices in order to balance out the implementation costs and the expected sale rates, he added. Nonetheless, companies should take heed when using the inflows from a project to accelerate the completion of another project, Sallam added. Developers now revise the selling prices of units weekly and monthly according to demand and to achieve the selling target because companies are required to make the biggest sale possible to hedge themselves from the devaluation of the EGP and the surging prices of construction materials, according to Ahmed Shalaby, CEO of Tatweer Misr. “As long as the market has room for increasing prices, developers don’t have a choice but to raise prices as well,” he added.

Selling prices have already increased: The average prices of residential units have risen 38% y-o-y since the beginning of 2023 until July on the back of spiraling building material prices and the shortage of raw material in the supply market, Country Head of real estate advisory outfit JLL Ayman Sami told us. Some developers have halted sales on some of their projects until the uncertainties facing the sector clear out, he said. Developers are expected to deliver around 35k residential units by the end of this year, Sami said.

How are developers coping? The difficult economic conditions that Egypt has been facing since the covid-19 pandemic, followed by the Russia-Ukraine war and its repercussions, have given real estate players experience in coping with difficult conditions, Tatweer’s Shalaby said. For example, developers have devised ways to hedge against the implications of EGP devaluation, by accelerating the implementation of projects and stocking up on more than a year’s worth of raw and building materials to cover the needs of ongoing projects, Shalaby explained. Another strategy that Tatweer Misr uses, similar to other developers, is to hold on to 10-15% of its units as a reserve rather than selling them up front. Withholding inventory gives them the option of selling at a higher price later — such as after delivery of a project. New projects also gives the company the opportunity to potentially offset any losses, Shalaby explained.

Suggestions to bring down construction costs: Imported materials that are used in luxury housing projects should have their import customs reduced, engineering consultant Mohamed Abdel Ghany proposed, adding that timelines for repaying zero-interest land installments should be extended, especially in the new administrative capital, to prevent some projects from being disrupted. Developers should also appoint expert consultants and experienced contractors who have worked on similar projects to carry out projects with competitive designs, Abdel Ghany also suggests. Appointing an engineering consultant during design and construction phases saves around 15-25% of total construction costs and gives the project a competitive edge, said Criteria Design Group CEO Hesham Helal. Consulting firms try to bring forward solutions and establish a balance between costs and value to create real estate products with international standards that are able to compete and be exported globally, Helal added.

New land plots attracted a lot of demand: The new plots of land offered for sale by NUCA have attracted a lot of demand from investors. NUCA received offers from 85 investors who are bidding for 23 plots of land with over EGP 2 bn investments. This would give real estate investors room for offsetting losses and cost variances, as they would have vacant land to build on over a timeframe that suits them.

Your top infrastructure stories for the week:

• Companies in talks to develop Eastern Desert industrial zone: A handful of private-sector companies are in talks with the government to help set up a USD 2 bn industrial zone in the Eastern Desert’s Golden Triangle.
• Arab, Chinese companies could invest USD 600 mn in Egypt wind plants: Three unnamed firms hailing from the Arab world and China are looking to invest USD 600 mn to build wind farms in Egypt.
• Five investors interested in Gabal El Zeit: The government has received five offers from investors interested in acquiring the 580-MW Gabal El Zeit wind farm.
• Fertiglobe wants to store more chemicals at Egyptian ports: Fertiglobe has signed a non-binding MoU with Abu Dhabi Ports to explore opportunities for storing and shipping urea and ammonia at ports in Egypt.
• More golden licenses: The government has granted golden licenses to companies planning to establish new strategic warehouses and a recycling plant.