|
BUILDING DREAMS,
OR CHASING A MIRAGE?
The current housing boom has made dream homes more abundant, but less affordable. Since 2005, housing prices have skyrocketed in Cairo’s new communities, and more recently in the capital itself. Market insiders suspect a downturn could be imminent. Will this mean a mild price correction or a full-blown housing crisis?
BY GEOFFREY CRAIG
Splashy billboards around Cairo advertise new housing developments on the capital’s outskirts that embody a family-friendly suburban lifestyle. In one, a young couple gaze from their villa’s balcony onto a backyard pond, where their young boy is feeding a swan. In another, an artist’s rendering depicts luxurious villas spread over spacious green acreage in a stark contrast to the dust-colored congested city. The allure is obvious – so it’s no surprise that Cairenes have been lining up to purchase their dream homes. Demand is so high that many people are buying off plan, laying down wads of cash before the development is even built.
But luxury living doesn’t come cheap. A sales manager for one local developer estimates that the average going rate for a new villa in Sixth of October City, one of Cairo’s satellite cities, is LE 5,000 per square meter. That works out to LE 2 million for a standard 400-square-meter villa – double what it would have cost two years ago.
Analysts attribute the current housing boom, in part, to the economic growth resulting from the sweeping reforms implemented in late 2004 under the Nazif government. Real estate is traditionally one of the first sectors to absorb excess liquidity, as people believe property is a relatively low-risk investment compared to equities. “Buying power depends on income, and income is affected by what happens to the economy,” says Sameh Zidan, a market researcher at Coldwell Banker Egypt.
But it would be hard to ignore the impact of Gulf developers, which arrived in force beginning in 2006 and have purchased large tracts of real estate, driving prices up. For them, Egypt was a ripe market. The local housing sector had stagnated since 1997, resulting in a supply shortage. With a huge upwardly mobile population, Egypt presented a lucrative adventure for Gulf developers who believed their own market was growing too competitive. “The Gulf market was already saturated, so developers were looking for new places to invest,” says local developer Hesham Shoukri, CEO of the Roya Group.
Gulf developers have already staked claims in New Cairo, where Dubai’s Damac Properties is investing LE 30 billion to build the first phase of Hyde Park, a 6.3-million-square-meter mixed-use community. Nearby, Emaar, another Dubai developer, is sinking over LE 5.75 billion into a 3.8-million-square-meter residential community. Qatari Diar, meanwhile, has snapped up highly coveted downtown Nile-side real estate. The firm will invest about LE 5.5 billion to build commercial and residential skyscrapers on the Nile Corniche near Boulaq.
Better in the ’burbs
Cairo’s first generation of satellite cities, including Sixth of October City and 10th of Ramadan City, were originally envisioned by the government as a means of providing affordable housing to the working class and to reduce the capital’s population density. But by the mid-1990s, new projects began to sprout up in these communities aimed at a wealthier segment. Compounds such as Beverly Hills, Dreamland and Royal Hills were envisioned as American-style suburbs built around golf courses and recreation areas.
Developers today have updated the concept by designing fully integrated communities with luxurious villas, offices, sport facilities, schools and shopping. In short, they aim to create a city within a city. “Prices have changed because of the services attached,” Zidan explains. “Developers say, ‘We don’t want to only sell houses; we want to also sell these amenities.’”
Damac’s Hyde Park, for instance, is built around a one-million-square-meter landscaped park with seven kilometers of jogging trails, a country club and spa, water canals and bridges. Talaat Moustafa Group’s Madinaty, meanwhile, is a self-contained community in New Cairo expected to house 400,000 residents. And last December, Lebanese developer Solidere announced that it had forged a partnership with Egypt’s Sodic to develop two mixed-use “city centers” in Sixth of October City and New Cairo worth a combined $4 billion.
Life is looking better in the suburbs, says Shoukri, whose firm is developing a 2-million-square-meter multi-use project in New Cairo to be completed by the end of 2013. “In 2000, our problem was to convince people to go outside Cairo. So we offered a villa with a garden that was double the size of a place in Heliopolis, but for the same price. Now, we aren’t trying to convince people to come to New Cairo. Everyone wants to go.” He says the sale has gotten easier as more facilities have moved outside Cairo, including prestigious private schools, hypermarkets and restaurants.
Other developers are reporting similar success. Hatem Issa, general manager of Iqarat Misr, says the company sold all 129 villas of its Rayhana compound in Sixth of October City off plan – this despite the fact that the first finished villa is at least a year away.
The Cairo-based developer is now selling units for the second phase, projected to be completed in 2010. Rayhana, like most large housing projects, was designed to be built in stages. In the first phase, housing is offered at a low introductory price to boost sales early on, the aim being to generate cash that the developer can use to continue the project.
Price pushers
Low off-plan prices appeal to homebuyers eager to purchase a home before prices rise. But they also attract investors – individuals or small companies that purchase property without any intention of using it as a home. “Investors are more likely to buy in the initial phase when the prices are low,” says Nihad Soussa, director of business development at Sodic Property Services, a joint venture between Sodic and Coldwell Banker. “The whole point of them investing is that they buy, and sell it later for a higher price even before the project is developed. It’s not uncommon for them to sell six months or a year later.”
Investors comprise a large portion of the total market, as much as 70 percent according to her estimates. These speculators are often accused of driving up prices because they snap up property when it first goes onto the market.
But equally accountable, say analysts, is a new system for acquiring land from the government. In 2006, the Ministry of Housing & New Communities replaced the opaque allocation system, whereby plots were sold to developers of the ministry’s choosing, through an auction system that awarded development projects to the highest bidder. The new system is more transparent, but has led to bidding wars. Developers are willing to pay huge sums for a piece of the market, says Issa, who figures the rate for some parcels of land in Sixth of October City increased by at least six-fold after the auction system was introduced.
Does that mean property is overpriced? Not necessarily. “The increase in prices [under the auction system] was a correction for an undervalued price,” says Ahmed Sabbour, managing director of Al Ahly Real Estate Development Company. He argues that while prices have definitely risen, this increase is largely because the housing ministry had previously set prices artificially low.
The rising cost of construction materials, such as cement and steel, is also partly to blame. Cement prices have climbed 30 percent since 2006 to reach LE 400 per metric ton, while steel increased 20 percent to LE 3,900 per billet during the same period. Some developers claim these rising input costs have forced them to revise their unit sale price upwards, as a project’s building material costs are tallied at the time of sale, rather than upon construction.
But some analysts accuse developers of using the rising cost of building materials as a pretext to gouge homebuyers. They argue that developers, sensing a feverish market, have padded their costs by increasing profit margins. “The developer calculates his cost, puts his margin divided by the number of units, and this is his price,” explains Zidan. “Now that prices have risen, [the developer thinks to himself:] ‘I’ll consider that demand has risen... [so] I’ll put a higher margin, and now here’s the new cost.’”
The upshot of the real estate boom is that the skyrocketing prices in Cairo’s new communities have rebounded to the capital itself, where property values are soaring. Homeowners aware of prevailing rates outside Cairo have adjusted their prices accordingly, notes David Megalli, a sales manager at ERA Real Estate Egypt.
But Megalli feels that the two areas are not comparable, and the prices now being asked in Cairo are unsubstantiated. Property in Cairo should generally be valued less than upscale new communities, which promise spacious landscaped properties away from the din of the city.
That, however, hasn’t stopped homeowners from putting their property in Cairo on the market at disproportionately high rates, and waiting until a buyer comes along willing to meet their asking price. And when it happens, which it does on occasion, prices escalate even higher.
One problem, say realtors, is that people rely on word of mouth and wishful thinking when setting an asking price. Rarely do they call upon a professional appraiser to assess their property’s value. In any case, it is extremely difficult to assess the real value of a property as there is very little accurate pricing data to analyze. “It’s hard to call up someone and say how much did you sell your house for because they are evading taxes and they don’t want to register their houses because it will cost them too much,” says Soussa of Sodic. “And without the data it’s very hard to set prices.”
Realty check
It’s a well-known adage that what goes up must come down. But if there’s a bubble forming, nobody is willing to describe it as such. Megalli expects prices to hold steady through 2008 before cooling as the market enters the downward phase in the housing cycle. “You’re going from a seller’s market to a buyer’s market... Seventy percent of our calls are buyers. But that’s going down, and more sellers are calling now.”
The typical housing cycle is five years long, explains Coldwell Banker’s Zidan, who estimates that the current boom began in 2005 and is nearing its peak. “Real estate is overvalued right now,” he says, projecting that with more projects coming into the market in 2008, supply could outstrip demand and hasten a downturn.
Yet there are several factors that could extend the cycle’s duration, including the lucrative rental market. Global Property Guide, an online property research firm, ranks Egypt as having the highest residential rental return in the world. Landlords can expect a return of 11.35 percent on an investment before taxes, maintenance fees and other costs. In some areas, according to one local real estate expert, “rental prices are going up every two or three months.”
The sector also stands to gain if developers can tap into a bigger slice of the demographic pie. So far, much of the new development has targeted upper-class Egyptians, who account for no more than 5 percent of the population. Analysts see enormous potential to grow the market by broadening home ownership to include the burgeoning middle class. “The focus for the last 10 years was on luxurious developments. Now, let’s move to the middle class,” suggests Zidan. “This segment is well educated, has a good [professional] background and is the widest segment of Egyptian society.”
Ultimately, however, middle-class home ownership growth hinges on the nascent mortgage industry. “With mortgages, things are going to be more affordable,” Soussa affirms. “Not many people are taking advantage of mortgages right now, but I’m sure that will change.”
The first two mortgage companies in Egypt – Taamir Mortgage Finance Company and Egyptian Housing Finance Company – began offering mortgages in 2004. They have been joined by two others, Amlak Finance and Egyptian Mortgage Refinance Company. But the industry has struggled to get off the ground. Through March 2007, less than 1,500 mortgages had been taken nationwide, according to the Ministry of Investment.
Efforts to expand mortgages to the middle class include a LE 2,000 cap on property registration fees and the launch of a credit bureau, I-Score, which when fully operational will allow lenders to analyze risk better and thus offer lower interest rates. The current yield on mortgages is in the range of 13-14 percent, according to the Mortgage Finance Authority. Zidan argues that if rates can be brought down, the mortgage market could tap into a new pool of interested buyers. “Interest rates are too high for those who can borrow,” he says. “These aren’t people who want a second home, they want a first home. And that’s a lot to pay for them.”
The ongoing US subprime mortgage crisis has made economists nervous about the prospect of expanding the mortgage industry. But Egypt’s mortgage legislation places strict conditions on lending that minimize the risk of default. The maximum monthly installment is capped at 25 percent of an individual’s monthly income in the case of a low-income earner, defined as less than LE 1,000 per person, or LE 1,500 for a family. For everyone else, the installment is capped at 40 percent of monthly income.
The industry will also steer clear of high-risk subprime borrowers and target instead prospective first-time homebuyers with good credit histories. Unlike the investor, these people are looking for a property not to make a quick buck, but to live in for a long time. “Egypt is not a society that buys and sells quickly,” says Soussa. “In the United States, if you work in a different state, you’ll sell your house and go live there. People here are not mobile. They buy a house and they’ll stay there for a generation or two.”
And if there is a bubble forming in the market, this sense of longevity might be what prevents it from bursting. If property prices fall, Egyptians are likely to ride it out until they appreciate again. “People won’t sell a home for less than what they bought it for,” she adds.
Submit
your comment
Top
|
