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the real estate scare
with the asian crisis fresh in mind, some observers are warning
that the building boom could have serious consequences. but don’t
bail out just yet.
by lawrence simaro fraser
and leila atraqchi
in a country of 63 million people and only 50,000 square kilometers
of inhabitable land, there has al-ways been one rock-solid investment
– real estate. inflation may surge and stock markets may crash,
but egyptians have always been able to find refuge in the market
for land, in which demand, on a long-term basis, seems fated to
always exceed supply.
but everything has its limits, and a growing number of populist
commentators are arguing that egyptians’ investment in real
estate has left the boundaries of rationality far behind. spurred
on by collapsing stock prices and the wide availability of desert
land on easy terms, investors have poured money into real estate
– £e 25 billion into the new cities alone (see sidebar)
– raising fears in some quarters of a price bubble whose pricking
could lead to an asian-style crash.
“watch out!” warned ibrahim nafie, editor in chief of
al ahram newspaper in a recent editorial. “what has happened
and has ruined the indonesian economy was not only so-called corruption,
but also the short-term loans and expectations of land reclamations
and the building of luxurious houses.”
what nafie is referring to is the speculative building boom in asia
triggered by rising property values in those overheated economies
and fuel-ed by the wide, even aggressive, availability of credit
from none-too-vigilant lenders. dollar-pegged currencies encouraged
international lenders to pour foreign currency into domestic banks,
which re-lent the funds to dom-estic real estate developers or non-bank
intermediaries, whose collateral was property. things were fine
as long as the property market was booming. but when the property
bubble popped and drew attention to the weakness of the loan portfolios
of many banks, money started to flow out of the country. the flight
of capital raised the pressure on the currency itself, ultimately
forcing devaluations, begin-ning in thailand. devaluations raised
the cost of the debt service of for-eign loans, putting further
pressure on the banks at a time when speculators were defaulting
on their loans. the crisis mounted, and now the world is facing
the prospect of a global depression.
this, of course, is a heavily simplified scenario. other factors
– namely high current account deficits, heavy short-term foreign
currency borrowing and declining exports – played an equally
important role in the collapse. but property bubbles are unquestionably
unhealthy, so nafie’s warning bears examining.
government and private sector in-terest in real estate investment
has been steadily increasing since the early 1990s, culminating
in the recent frenzy of middle-class and luxury residential development
in and around the new cities. and the government has continued to
encourage such de-velopment. in a statement on state television
on july 21, prime minister kamal el-ganzouri announced government
plans to build 16 new cities, thus increasing the percentage of
egypt’s inhabited land to 27 percent over the next 20 years.
ibrahim faw-zy, chairman of the general authority for investment,
has been making statements in the local press urging banks to increase
their financial contributions to real estate projects in order to
increase their credibility and attract new foreign and local investors
to the market. the government has also been selling new-city land
at minimal prices, of which investors initially need only pay 25
percent. as a result, private investors have rushed to build in
areas around cairo, alexandria and the north coast.
nnsome have questioned the value of these investments. “this
is false development,” said mil-ad hanna, a former professor
of structural engineering at ain shams univer-sity. “building
a house is good in-vestment, but it is good only if it ser-ves people.
for in-stance, if you construct a villa in the north coast, you
may use it only for a specific period during the year, summer vacations
mostly. this type of investment does not have a return, neither
social nor economic, and the profits are only ac-crued to the owner.”
according to local press reports, those profits were initially enormous.
when the price of real estate in general began to rise in 1996,
the luxury market skyrocketed. reports said some developers were
realizing profit margins as wide as 300 percent. but in july 1998,
oversaturation set in and prices crashed. again, according to local
press reports, some developers were slashing their prices for luxury
properties by as much as 60 percent. others reportedly pulled out
entirely. there have also been reports that mohamed abdel aziz,
chairman of the federation of egyptian banks and head of the national
bank of egypt, has warned banks against granting loans for the construction
of luxury housing, calling instead for greater diversification and
the pooling of resources in lower and middle-class housing schemes.
“the highly exaggerated prices of both land and apartments
in the past years have created a situation of what i call an excessive
surplus in supply that has no relationship to the forces of demand
in the market,” said mus-tafa abdel latif, an economist at
the egyptian center for economic studies.
could the bubble be bursting? could asia happen here? hanna said
it could. according to hanna, the state banks have made large loans
to shaky companies. if these companies begin to default, he said,
the central bank will be forced to intervene to bail out some of
these banks, which would eventually lead to the economic convulsions
that hit indonesia.
but don’t panic just yet. the consensus among economists and
financial analysts interviewed for this story is that egypt is insulated
from an asian-type collapse, because the level of financial flows
from foreign sources is quite small. egyptian banks simply don’t
share their asian counterparts’ exposure to foreign borrowing.
according to the host of egyptian officials making the case at the
euro-money conference for investment in egypt, the nation’s
total foreign debt is $28 billion, only 6 percent of which is short
term. just $2 billion of that total belongs to the private sector.
the government has taken precautions to keep the situation from
deteriorating. for instance, a recent decree allows people to take
out loans in a foreign currency only if they have a steady revenue
stream in the same currency. and both the government and the central
bank are keen to preserve the position of the pound.
“egypt has very healthy reserves and the fact that their currency
is not traded means that they’re reasonably insulated,”
said adrian swinscoe, another economist at eces.
there’s also the question of whether egypt even has a property
bubble to begin with. asia’s dramatic rise in property prices
was fueled by years of extremely high economic growth, something
egypt has yet to witness. “i don’t think there is a bubble
here in the first place,” said omar abdallah, a sector analyst
at efg-hermes. “real estate investment is on the low side compared
to international standards.”
according to hisham amin, head of the public information office
at the ministry of housing, utilities and new communities, investment
in real estate amounts to just 3.8 percent of overall investment
in egypt. “this is a safe percentage which doesn’t pose
any risk for banks,” he said.
with population growing and livable land not (putting tushka aside
for the moment), there will always be a need for new property. as
a consequence, swinscoe said, the risk of a sudden deflation in
prices that causes the market to collapse is highly un-likely. “i
don’t know whether it has gone beyond its market value, but
people are still willing to pay for it,” he said. “land
here is still a premium and is relatively liquid. the only way is
up for the price of land.”
finally, egypt doesn’t have much of a current account deficit.
in fact, the only symptoms it really has in common with the troubled
asian econ-omies, observers said, is its effective peg of the pound
to the u.s. dollar, declining foreign-currency earnings and a measure
of cronyism. each of these presents risks, but in the absence of
heavy in-flows of short-term foreign capital, all are sustainable.
but if the crisis scenario isn’t much of an issue, there is
still the question of the real-estate market’s current slump.
according to fawzy, the slump can be weathered and a market crash
averted if investors simply seek reasonable profit margins, rather
than the 200 percent bonanza they had previously coveted.
comforting, but there is other work to be done if true demand for
housing is to be reflected accurately by the market. for the moment,
bank loans to buy homes are not typically available to the public.
some development companies have managed to arrange finance packages
for their clients, and a mortgage law is said to be in the works,
but as yet consumers have very limited access to credit.
according to abdallah, expanded access to consumer credit loans
is critical to the development of sustainable demand in the real
estate market. if banks aren’t willing to take all the risk,
some of it could be shared with the capital market. “we would
like to see some kind of security or mortgage-backed securities,”
he said.
even without these inducements, real estate remains egypt’s
investment of choice. land remains a hedge against investments in
business and stocks for individual and institutional investors alike.
as more investors begin to compare the stock market’s returns
against the risk involved, they will likely look for alternative
assets, said swinscoe. oddly enough, tremors in commerce and equities
triggered by the asian crisis, which came about in part by real
estate speculation, could make property a more attractive in-vestment
in egypt. analysts interviewed for this article said that real estate
investment is seen as a safe bet, especially in times of uncertainty,
when people tend to retreat from paper-based equities to solid assets.
anyway, developers seem happy with their prospects. “with the
track record of real estate development, it was just logical to
look into that sector,” said alaa el ghadban, general manager
of investments at mena for touristic & estate investment.
so does the government, which continues to reel out the sales pitch.
“egypt has a thriving real estate market,” fawzi said
in a speech in alex-andria. “it’s a cure for economic
stagnation.”
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