Predicting the inflation and then burst of property bubble has never been easy, if it was bubbles wouldn’t exist at all as markets would adjust accordingly. Speculation however is always rife when a market is performing well and in the case of Egypt there are currently voices for and against an imminent crash. So how can you spot the upcoming Egypt property bubble?
What causes property bubbles?
Bubbles are often caused by owners holding lots of debt. Property is listed at the highest possible price which has a detrimental effect on the ability of a purchaser to buy. Eventually the market reaches saturation point and owners are forced to considerably lower asking prices, thereby causing a ‘crash’.
A second but equally important element in the creation of property bubbles is demand, a market can absorb higher prices if people are buying properties. In Greater Cairo we are seeing population growth of approximately 400,000 inhabitants a year, equating to an annual need of 100,000 new units. Currently the efforts of both the public and private sectors are struggling to meet existing demand. This is positive for Cairo and goes against what we know of the creation of Egypt property bubbles.
The effect of inflation on property
The actions of property owners alone cannot be held responsible for the creation of a bubble. Whilst we look at prices and demand as important factors, we must also look at economic influences. For Egypt, these factors have been currency devaluation, inflation, fuel price increases, and more. Just as an owner may keep a price high, so can a buyer lose the ability to pay due to economic variables.
Fortunately in Egypt we are seeing developers adapt to economic pressures by creating smaller units, utilising smarter designs, and extending payment terms for buyers – another element to the market that suggests a crash is not imminent. Whilst this is generally positive, as lower repayment amounts help local buyers sign contracts (despite the total price increasing), it hasn’t stemmed interest from overseas investors who are able to buy relatively cheaply thanks to currency rates. It could be said that it is currently easier for Egyptian expats living abroad to buy in Egypt than it is for local buyers. This may be a reason we are seeing stagnation.
Real estate or interest rates?
Would-be purchasers have been presented with a choice; do they invest in property or take advantage of relatively high yields on Certificates of Deposits (CDs)?
Recently Egyptian banks have adjusted interest rates to attract liquidity. This has made banks popular with investors and as cash moves into CDs it moves out of the property market. In Egypt’s case this has had a negative effect on the secondary market with prime locations seeing the bulk of activity. Fortunately this is not a long term problem as CDs mature in 2018 and we expect some of that cash to return to the property market.
The most important factor in the creation and then pop of Egypt property bubble is speculation. If investors are educated as to how a real estate market performs they are less likely to make bad choices. At JLL we don’t believe Egypt is witnessing the creation of a property bubble but are glad attention is being paid to the risk that one may appear.
JLL Egypt: We were the first international real estate services firm to open in Cairo, a strong signal to the wider marketplace and a statement of intent to our clients that we will be everywhere they need us to be. In both mature and emerging markets, our experienced advisors work extensively with public and private developers, city authorities, investors and land owners to help them optimise the returns from their new and existing real estate developments. We understand every step of the development process and protect your interests by helping you make fully informed and confident decisions. Contact our JLL Egypt team for more information.
Author: Ayman Sami
As Head of JLL’s Egypt office Ayman oversees the delivery of all services including development consulting, property management, real estate research, retail and office leasing, capital markets and valuation services, to ensure that the highest level of local and international expertise is being used.
Prior to joining JLL, Ayman has worked on projects in Egypt in the areas of real estate development, land and asset valuations, as well as market research and analysis for major establishments. He holds a Bachelor of Science Degree in Marketing Management from The American College of Greece – Athens, Greece.