{"id":615213,"date":"2024-02-14T00:00:00","date_gmt":"2024-02-14T00:00:00","guid":{"rendered":"https:\/\/enterpriseam.com\/egypt\/hardhats\/developers-are-eyeing-risk-contracts-to-cope-with-unpredictable-construction-cost-increases\/"},"modified":"2024-02-14T00:00:00","modified_gmt":"2024-02-14T00:00:00","slug":"developers-are-eyeing-risk-contracts-to-cope-with-unpredictable-construction-cost-increases","status":"publish","type":"hardhat","link":"https:\/\/enterpriseam.com\/egypt\/hardhats\/developers-are-eyeing-risk-contracts-to-cope-with-unpredictable-construction-cost-increases\/","title":{"rendered":"Developers are eyeing risk contracts to cope with unpredictable construction cost increases"},"content":{"rendered":"

Over the past two years, Egypt's real estate sector has faced challenging conditions due<\/strong> to significant cost increases<\/strong>, as a particularly volatile exchange rate has created losses for some developers \u2014 especially those selling on credit. Despite these challenges, the sector continues to grow and developers are thinking of new and creative ways to cope with unpredictable economic conditions.<\/p>\n

Tackling the property pricing puzzle:<\/strong> Developers have committed to existing contracts despite the soaring costs of construction materials, Tarek Shoukry, the chairman of the Federation of Egyptian Industries\u2019 (FEI) real estate division told Enterprise. Developers have had to seek solutions for already inked low per-meter pricing and installment agreements with clients that became problematic as costs doubled, placing significant additional financial burdens on developers, Shoukry added.<\/p>\n

Enter, risk contracts: <\/strong>Developers are considering risk contracts as a method that would allow unit buyers to have additional financial obligations beyond the initial purchase agreement prior to unit delivery. These contracts entail shared obligations between the company and clients in the event of unprecedented spikes in construction material costs, which have made pricing residential units increasingly difficult, according to developers who spoke with Enterprise.<\/p>\n

Risk contracts offer a solid solution to the uncertainty companies face when pricing<\/strong> residential units<\/strong>, industry sources told Enterprise. These contracts allow developers to pass on additional costs to clients if the average construction cost exceeds a threshold of 20-25% during the project's execution, executive directorof the FEI\u2019s real estate division Osama Saad El Din told us. The contracts also take into account average cement and steel prices during construction and the developer is obliged to cover cost increases up to 20% \u2014 but beyond this, the buyer and developer will share any additional cost rises.<\/p>\n

There\u2019s incentives to get customers onboard:<\/strong> To encourage clients to take risk contracts, developers are offering units at prices lower than those of fixed-rate contracts, effectively making the unit potentially cheaper and treating the client as more of a partner in the project than customer in the project, industry insiders told us.<\/p>\n

The rise in construction costs \u2014 and property prices \u2014 shows little sign of easing:<\/strong> New Cairo Developers Association chair Mohamed El Bostany told us that we could see further rises in real estate costs, potentially up to 50%, on the back of cost increases across all construction stages. Orascom Construction Executive Director of Concessions Khaled El Degwy mirrored El Bostany\u2019s forecast in comments to Enterprise, penciling in construction costs surges and higher property prices in the future. <\/p>\n

There is an unprecedented rise in rebar prices in the local market<\/strong>, El Degwy told us. Ezz Steel's factory price reached some EGP 55.3k per ton and about EGP 57.3k per ton for end consumers, marking a EGP 7k increase from the last hike a week ago. While Suez Steel's prices stood at EGP 55.2k per ton, with end consumer prices reaching an unprecedented EGP 62k per ton in certain areas, El Degwy added. <\/p>\n

Red Sea disruptions, energy price hikes, and tax increases are to blame:<\/strong> Conflict in the Red Sea has increased shipping costs, disturbed global supply chains, and led to raw material supply shortages, which in turn has pushed up the production cost of rebar, according to El Degwy. On top of this, a rise in gas and electricity prices coupled with increased financing costs and tax hikes have pushed production costs further still.<\/p>\n

Steel factories are operating at 28.5% of their capacity:<\/strong> Egypt\u2019s total steel production capacity stands at 14 mn tons a year, but the actual output amounts to only 4 mn tons due to import difficulties, FEI sources told us. The country\u2019s total production of rebar dipped 5% y-o-y to 7.4 mn tons between January and November 2023. Scrapping the ban on rebar imports could bring some balance to the market, FEI real estate division member Daker Abdullah told Enterprise.<\/p>\n

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