CAIRO: With an increasing number of development projects – both in residential and retail sectors – skeptical views claim the current real estate boom is only a bubble and fear that it may soon burst.
“The real estate market is booming like it has never boomed before, and a lot of people are questioning whether or not this boom is just another bubble, said Maher Maksoud, managing director of Sodic. “Our view is that there are very strong fundamentals for why the sector is booming today.
Such strong fundamentals, clarified Maher, are due to the significant ongoing change in the economy’s profile as a whole, which in turn led to the enhancement of the real estate sector, among others.
“The large growth of the private sector [coupled with] growth in employment [translate] into greater distribution of income, creating a new class of purchasing power.
In the past, he clarified, the real estate sector targeted only around 2-3 percent of the population. Nowadays, with an increase in income distribution, the sector is beginning to attract a new segment of the society that was previously overlooked: the upper and middle class.
“People in Egypt tend to think things are a bubble if they suddenly increase over a short period of time, Maher stated. “At the end of the day, in order to evaluate whether or not this is a bubble, it’s not enough to only look at price increase. You [also] have to look at supply versus demand. Is supply outstripping demand? That is the question. He believes that prices in the real estate sector have increased because they are adjusting. “The fact is that demand is outstripping supply and not vice versa. Most of the projects being developed nowadays, whether residential or commercial, are booked in advance.
Maher backs his argument by referring to economic reforms that are taking place across the board and consequently pour into the real estate sector. “A growing financial sector with strong financial institutions that own a lot of liquidity allows for further development of the real estate market. [Privatization] and growth in the banking sector, in particular, created a new segment of private sector employees holding stronger purchasing power that [in turn] causes an increase in demand for residential real estate.
Moreover, the country nowadays, he said, is witnessing growth in retail and office spaces. “Private sector companies are now growing very quickly and international companies are coming into the market, therefore, triggering large demand for buying as well as leasing office space.
The same applies for the retail sector. “Few years ago, retail in Egypt was extremely limited. International brand names were not available in Egypt . because of low distribution of income as well as obstacles to importation of products and higher tariff rates.
However, on account of economic reforms, stronger purchasing power, and minimization of impediments to trade and investment, investors are muscling into the market and companies are expanding their operations.
“Look at the retail sector these days: International brand names are opening up multiple outlets, creating a new segment of demand for real estate, Maher said. “That is one way to gauge real demand on the sector.
“So, we don’t see this as a bubble. We see it as an adjustment in the economy.
Maher illustrated that the real estate sector, including its credit, is responding to this boom in a very positive way.
“In response, a new trend [named] urbanization has appeared whereby demand for real estate is being satisfied in areas that were not historically the main part of Cairo, he explained. “People nowadays want to buy a new house, be part of a new life, have better schools, hospitals, and malls. And there is no place in the old city, so new neighborhoods were created as a result of this phenomenon.
Indeed, real estate projects are currently developing in areas that were previously uninhabited such as New Cairo, Qattameya, and Sixth of October.
The second response Maher highlighted was that customers were becoming savvier. “Real estate companies have to become more sophisticated to appeal to customers, he added explaining that they have to offer better products, sales and marketing strategies, and most importantly better financing and pricing schemes.
He predicted that prices on the market may decline in synchronization of purchasing power. “But again that does not define as a bursting bubble because in any period of adjustment there is a quick transition of prices.
“Mortgage finance is an extremely important part of the equation, too. It is very difficult to buy a house in cash, he emphasized adding that mortgage finance further increases demand for real estate development projects as well as opens up the sector to multiple segments of the society rather than the upscale clientele.
“Mortgage finance is profitable on all levels. It is profitable for developers as well as banks, [and] is critical for buyers.
He indicated a need to increase size of the mortgage finance market. “The ambition is for mortgage finance to reach 10 percent of the real estate sector.
In fact, the government is bullish on the mortgage finance sector. So far, four financial institutions specializing in mortgage finance facilities have been established, while two more are under construction. Another mortgage re-finance company was recently established to mainly finance banks and other institutions that offer mortgage packages. Moreover, around 18 banks across the country are geared to offer mortgage packages to different clients.
“Mortgage finance did not exist three years ago. Now, [transactions] amount to LE 5-7 billion. And as more cozy products are offered into the market, transactions will exceed LE 10 billion, Maher said.
