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May 26, 2024
PI Global Investments
Real Estate

Foreign currency crunch has led to pricing uncertainty among real estate developers – Orascom Development

Despite massive sales last year, Egypt’s real estate developers greet 2024 with concern, due to the cost of business amid the country’s turbulent economic situation and the grinding foreign currency crunch, according to Tamer Dewidar, CEO of Orascom Development Egypt ’s O West, Makadi Heights and Byoum. 

“One of the concerns in 2024 remains uncertainty,” Dewidar told Zawya. “It is challenging to anticipate all the changes in Egypt, whether two weeks or a month from now. The uncertainty of the currency and its impact on construction material prices makes it difficult for us to anticipate the cost of construction.” 

For months, investors and businessmen have been holding their breath in anticipation of a devaluation of the Egyptian pound, a move deemed essential to revive a $3-billion loan agreement with the IMF to attract foreign currency flows and undermine a flourishing black market. The exchange rate on the parallel market has surpassed 61/$, while regulators insist on maintaining an official rate of 30.9. The recent meetings between IMF representatives, Egyptian regulators and US treasury officials in Washington have revived hopes that a devaluation may be around the corner.

On Thursday, Moody’s downgraded Egypt’s credit outlook rating from “stable” to “negative”citing weak debt affordability and weakening local currency.

 Contingency plans

“To adapt, of course, we regularly review our costing and pricing, given the fluctuation of the dollar.” Dewidar said. 

During the first nine months of 2023, the average selling price per square meter in O West rose by nearly 50 percent compared to the same period last year, reaching more than EGP 55,000, according to the latest figures issued by Orascom Development Egypt, which is listed on the Egyptian Exchange (EGX).  The average selling price in Makadi Heights  grew by nearly 27 percent in the first nine months of 2023 versus the same period in 2022, reaching nearly EGP47 thousand per square meter.

“Prices of all construction components have doubled over the last six or seven months. To hedge, some developers in Egypt are shortening payment plans, which have reached six years and more in Egypt, to collect cash faster.” Dewider said.

O West and Makadi Heights are two of the flagship projects of Orascom Development Egypt, a subsidiary of Switzerland-based Orascom Development Holding. Launched in 2019, O West is a gated residential town stretching over an area of nearly 1000 acres in the city of 6th of October. Makadi Heights is a resort town overlooking the Red Sea. Both projects target buyers with deep pockets.  

Selling less and gaining more

To hedge against an anticipated devaluation of the pound, Dewidar said the firm sells the lowest number of units they are confident of building and delivering on time while maintaining profit margins. 

He explained that the company also intends to shorten installment plans, which currently stand at six years in Makadi Heights and seven years in O West. 

“Shortening installment plans will give us better NPVs and reduce the risk, because this way we can collect cash faster and hence build faster,” he said. “Sales volume may be affected, but increasing sales without enough profit margins has a negative impact on companies; therefore, smart companies are keen to avoid it.”

Most real estate developers sell their products off-plan, where buyers pay installments before delivery of units. The construction process is financed by these installments rather than bank loans or share capital. In this scheme, the unit price is set in advance, and installment plans can reach up to ten years. 

“We are hearing that some market players in Egypt have sold projects at a low price, not taking into consideration the current inflation, and this might create a challenge and worry some buyers,” said Dewidar. 

Real estate as a safe haven

Egypt’s real estate is considered one of the most stable sectors and is widely perceived as the safest investment vehicle. The residential real estate market size is estimated at nearly $20 billion in 2024 and is expected to reach more than $33 billion by 2029, growing at a CAGR of 10.96% during the forecast period, according to Mordor Intelligence.

In the first nine months (9M) of 2023, the total real estate sales of O West increased by nearly 82% compared to the same period in 2022, reaching EGP 6.3 billion. The number of contracted units increased by nearly 47% in 2023 compared to 9M-2022. As for Makadi Heights, the total net real estate sales increased by 200% in 9M 2023 versus 9M 2022, reaching a total of EGP 1.8 billion. 

“The demand in the Egyptian real estate market is still so high because people want to hedge against inflation. There is a big jump in sales in the market in general,” Dewidar said. 

(Reporting by Noha El Hennawy; editing by Seban Scaria)

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