Why buying real estate to safeguard savings is hurting Egypt's economy

Faced with soaring inflation and a plunging currency, savers are using property as a haven, but experts warn the trend drains liquid funds from other investments.

AFP

An aerial photograph of a part of Cairo showing the historic Amr ibn al-Aas Mosque in the city of Fustat (right), the Coptic Cairo area and the Nile Island, and Giza appears. April 28, 2023

Why buying real estate to safeguard savings is hurting Egypt's economy

Marcelle Nasr

last update on 03 Sep 2023

As their national economy fluctuates, many Egyptians have turned to real estate as one of the safest and least risky ways to safeguard their savings.

Like gold, real estate is seen as a good alternative to cash savings in banks and is a good way of protecting against inflation and the Egyptian pound’s devaluation against the dollar.

Even during economic crises, real estate prices tend to remain stable, if not high, making the sector safe as well as capable of providing returns.

However, experts are warning of potentially serious knock-on effects from this trend for the rest of the economy, as the value captured by the flow of money into the sector is not put to work in more liquid investments elsewhere.

The decline in the Egyptian pound and the rising inflation rate have negatively affected the construction industry.

Reuters — The iconic tower skyscraper in the Central Business District being built in the New Administrative Capital, East of Cairo

Core inflation hit 40.3% in May— up from 38.6% in April — driving up the cost of building materials. The cost of a ton of iron rose from 17,000 pounds ($551) to 40,000 pounds. And land prices — a key input cost for developers — have also soared, partly due to wider global inflation.

This means that the profitability of real estate developers has fluctuated, despite the fact that people are rushing to buy homes to protect their savings.

The devaluation of the pound has made Egyptian real estate attractive to foreign buyers, especially those paying in foreign currencies. Properties are selling like hotcakes and real estate agencies recorded high profits in the first quarter of 2023.

Taking a pounding

But amid a shortage of foreign currency in Egypt, construction contractors are feeling the pinch from a weakened pound.

Real estate companies rushed to hedge against soaring inflation and a weakening currency by linking the price of their residential units to the pound’s exchange rate against the dollar.

The decline in the Egyptian pound and the rising inflation rate have negatively affected the construction industry. Core inflation hit 40.3% in May— up from 38.6% in April — driving up the cost of building materials.

As real estate companies target the wealthy class which comprises approximately 10% of Egypt's 105 million citizens, the middle class has been priced out of affordable housing options.

Additionally, construction companies that are locked into long-term delivery dates for projects are especially vulnerable as the pound continues to fall. Revenues are further eaten up by soaring inflation.

Government support

As a result, several developers froze sales and construction plans last month, asking for government assistance to the sector, which accounts for 20% of Egypt's GDP, or nearly 1.6 trillion pounds (about $52bn).

On its part, the government approved an incentives package that included a discounted 10% interest rate on loans for two years— lower than the central bank's official 19% rate. The timeline to complete approved projects has also been extended by 20%.

The government also lifted restrictions that prevented foreigners from buying more than two properties in Egypt. The sale of property to foreign investors is often referred to as "exporting Egyptian real estate" and can help attract much-needed foreign currency to the country.

The government approved an incentives package that included a discounted 10% interest rate on loans for two years— lower than the central bank's official 19% rate.

Knock-on effects

But while that is welcome, some experts believe that investing in real estate as an alternative to banks can hurt the wider economy because it slows the cycle of capital, tying it up in long-term and illiquid haven investments.

When used as a haven to protect capital, the money real estate attracts is not put to use elsewhere, and other forms of investment decline, while funds sunk in real estate tend to stay there for the long term.

This can slow the cycle of the economy down.

Hassan Al-Sadi, professor of finance at Cairo University, told Al Majalla: "When real estate is stuck behind closed walls, it is not a good investment. Real estate should be purchased to invest one's money, not save it."

"There's a big difference between the two: saving in the real estate sector in Egypt doesn't generate income, but rather capital gains in the case of resales in the future. In this way, real estate saving turns into real estate consumption, thus disrupting the economic cycle of capital between two and 10 years."

Fundamental strength

As economists grapple with the potential ramifications of the real estate boom, the sector's vitals look strong, which means it will continue to rake in both domestic and foreign revenue.

Fitch Solutions, the financial services arm of the credit rating agency, was upbeat in its Egypt Real Estate Report issued in January.

The report predicted that commercial real estate rents would fall sharply in 2023 in dollar terms while rising in the local currency.

In the near term, the commercial real estate market's growth will slow as a result of macroeconomic uncertainty, but increased foreign investment in Egypt and state investment in infrastructure will lead to higher demand for commercial real estate in the long run.

On its part, Property Finder — a real estate platform operating in the Middle East and North Africa — said that around 522 projects — both residential and mixed-use — are currently underway in Egypt, with a value of about $309.9bn. This represents about 50% of the total number of projects for various uses and accounts for about 83% of total investments in the sector.

As economists grapple with the potential ramifications of the real estate boom, the sector's vitals look strong, which means it will continue to rake in both domestic and foreign revenue.

These projects were distributed across 21 governorates in Egypt. The average price for apartments in the first quarter of this year increased by 30% compared to the first quarter of 2022, while the average price for villas jumped by 25%.

Meanwhile, average rents for apartments and villas increased by about 24%, compared to the same period last year. Property Finder attributed this upward trend to the impact of the Egyptian pound's devaluation and high inflation on construction costs in the real estate sector.

Building growth

The property sector continues to be a strong driver of long-term economic growth, creating more jobs in the fields of construction, energy, and infrastructure.

AFP — An aerial photograph of a part of Cairo showing the historic Amr ibn al-Aas Mosque in the city of Fustat (right), the Coptic Cairo area and the Nile Island, and Giza appears. April 28, 2023

Now is an ideal time to invest as property values are steadily rising.

Speaking to Al Majalla, the executive director of the Real Estate Development Chamber, Osama Saadeddin, said: "The need for real estate continues and won't stop. Demand is skyrocketing due to the increasing rate of marriages in Egypt and construction companies will not be able to keep up with this rising demand."

"Real estate is one of the safest channels of liquidity; those with extra money lying around are investing it in real estate instead of letting it lose value sitting in banks."

He also said that people are also parking their money in gold and foreign currencies, for the same reason.

As for foreigners buying properties in Egypt, Saadeddin singled out Iraqis as some of the most active investors. He said that the earthquake in Turkey has dissuaded Iraqis from buying property there, instead looking to Egypt as an alternative.

Nonetheless, wider economic uncertainty continues to cast a shadow on the property sector. Many of the large development projects supervised by the state have been scaled back. Some have been suspended temporarily due to a lack of liquidity.

These large projects are the driving force of the entire Egyptian real estate market, and the pressures they are facing affect the entire sector. The performance and revenues of developers of all sizes, and the earnings of workers in the sector, who number more than 5 million, are also affected.

There are also legitimate concerns that the quality of fast-built projects could be compromised.

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