Impact Of The Egyptian Pound Devaluation On The Real Estate Market In Egypt

The drop of the currency in Egypt that has happened in November 2016 has resulted to the Egyptian Pound to go into a major slowdown in developments when it comes to the real estate market. Walid Salah-Ahmed, who was a real estate developer himself, sounded the alarm in February 2017. He spoke and discussed about a “crash” within the development of real estate in Egypt. Let it be known that real estate development provides about 10 percent of Egypt’s annual GDP growth. Due to the significant value to the GDP growth, Egypt has been struggling economically because of the rise of costs and the lack of value of the currency that is endured.

As much as there will always be a demand within the property market, there has been a problem raised of the affordability on the supply line. Even the price of bricks to build any estate and other building materials have increased significantly from the prices provided before the devaluation. Another problem was that many of the new apartments and compounds were no longer considered affordable towards the middle class and lower class of Egypt. This would result in many empty apartments and unfinished building projects that no longer had the money to continue their real estate ventures.

Samih Sawiris, one of the biggest directors towards a real estate development company in Egypt has claimed that, “The real estate market in Egypt is approaching a bubble, because of the crazy profit margins and a large number of developers that are operating in the sector.” (Alghad, 2016)

With almost a year later, it is about time to make up the balance for the real estate market. What happened in the past year shall be balanced and looking forward to a brighter and better future for the country. But what will happen in the future for the economy to grow again and is the real estate market really heading into a bubble?

The Analysis of the real estate market have shown that the market has been booming significantly over the past year. Before the revolution occurred, growth rates of real estate values topped up to 15 percent within the annual growth. The financial crisis and the revolution led to a downturn in the Egyptian stock market. The stock market has been struggling until the exchange rate policy that has changed in November 2016. 

The real estate market didn’t remain untouched as many investors avoided to market for a short period of time. Between the years of 2013 and 2014, the investments in real estate have decreased by about 7 percent. However, with this decrease, the real estate market has expanded rapidly since then. With all the political turmoil and negative interest rate, investing within the real estate industry has turned out to be one of the safest options for many investors in the present time. In the first quarter of the year of 2015, the result of tremendous growth has shown that the property investments have increased with 30 percent in Egypt. In the same period of time, residential prices and land prices have also increased by 20 percent and 35 percent respectively. This is only an example of the strong continuation of the market since the great performance that has occurred in 2014. (Oxford Business Group, 2016)

RISE OF PRICES AND HIGH DEMAND

The great rise of real estate has been led by the tremendous rise of prices. For example, the developments that have occurred in the 6^th of October and New Cairo area have been doubled regarding the square meter price in two years (From 750 dollars to 1500 dollars). During the period of time between 2014 and 2016, the estimated demand for houses have decreased from 45 percent to 33 percent. (Oxford Business Group, 2016)

In general, the demand for properties that are for sale or for rent have increased by about 180 percent within the first quarter of 2017, compared to the same quarter in 2016. The supply of properties have increased to 55 percent in comparison to 2016. 

DEVALUATION OF THE POUND

It is only required less than one month to lose half of the value of the Egyptian pound compared to the American Dollar. Where 1 American Dollar could be exchanged for 8 Egyptian Pounds at the start of November 2017, the exchange rate was changed from 1:8 to 1:18 by the end of the same month. As part of the strategy to reform the economy within the country, the government of Egypt has then declared to stop the currency control and float the Egyptian pound in the process.

The currency control policy has resulted in a huge black market that priced dollars at almost twice of the official exchange rate. This uncertainty about the true value of the Egyptian pound has made it very unattractive for both investors to import or to invest in Egypt. The idea of floating the exchange rate is that the foreign investors now will come, helping to expand the economy of the country with all their investments in the process.

IMF Mission Chief for Egypt, Chris Jarvis, expects that “The flexible exchange rate regime will improve Egypt’s external competitiveness which would support tourism and attract many foreign investments.”

The Central Bank of Egypt has stated, “The floating of the currency will allow market demand and supply dynamics to work effectively.” (Alkhalisi, 2016)

THE FUTURE OF THE EGYPTIAN CURRENCY

Many experienced analysts suggest that the Egyptian currency will not be facing the past issues in the nearby future because of all the positive macroeconomic indicators such as inflation and account performance. There have been many significant improvements revolving the country compared to the pre-flotation phase. Put into perspective that the currency is still undervalued and the economy hasn’t reached its fullest potential regarding exports and tourism.

LOW INCOME RATES AS RESIDENTS LIVE IN A INFORMAL MANNER

With the income rate of many Egyptian residents has stayed constant or even depleted with the current devaluation of the currency from the differences between the past and the present, you will find that many Egyptian residents are barely making ends meet much more than before so the possibility of obtaining much luxurious life aspects can sometimes not be obtainable to the common household family. It has been stated that over 20 million Egyptians are currently living in very harsh housing conditions with no proper means to be able to improve their current situation.

THE FUTURE OF REAL ESTATE AFTER THE CURRENCY DEVALUATION

Over the past decade, the country’s population has increased over 2.5 percent, with the population being over 100 million citizens and more residing abroad, many people consider the future of the real estate market and how it will be influenced by the devaluation of the Egyptian Pound. With the housing gap to expand and increase despite the high demand on residential properties, it makes potential investors and developers’ struggle finding the right projects and lands. It has been pointed out by Khaled Abbas (The Assistant to the Housing Minster for Technical Affairs) that there is an annual of over 900 thousand marriages that happen and would require accommodation, which explains the raising demand for properties at all times during the year.

As it has been difficult for many citizens to be able to afford the many residential units that are available due to the value of the currency has been floating from one number to another which leads to most of the properties changing the price of the property because of the market value of certain places among the country. Since the devaluation has happened, it has been noticed that after a few years prior that the country has been improving and the prices have been stable and quite more affordable than past times. There are many advantages that you can gain from the fund including immediate delivery after being approved for financing from a fund you have applied while obtaining 90 percent of the value of the new unit within the loan process.

IN CONCLUSION 

After the devaluation of the pound, the real estate market have gotten a new relapse in return. It was unclear to many real estate developers what prices they should determine during that time with all the low increment of prices which resulted in fast sales and selling out many real estate developers in the process. After a while, most of the property owners have started to ask for double of the prices of their property before the currency devaluation as well as resulting in a major decrease in transactions and an illiquid market.