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Real estate prices and production costs at a disjoint as state reaps benefits - Daily News Egypt

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Real estate prices and production costs at a disjoint as state reaps benefits

NUCA’s generated EGP 61bn last year for the state because of how it allocated lands


Prices for construction material shave declined notably during the past few years. Despite this drop, the price of real estate properties shows no sign of slowing its ascent.

Head of cement companies at the Federation of Egyptian Industries (FDI) Medhat Stephanos said the cost of cement represents 8% of the construction cost and 3% of the unit price.

The price of steel decreased by an average of EGP 600 during the past two months, to EGP 4,600 per tonne, EGP 1,000 lower than its price during the same period last year.

This is substantially lower than its price in 2008, where the price for one tonne of steel reached EGP 8,000. The average price for a square metre of real estate property in 2008 was EGP 1,500.

The global economic crisis took its toll on constructions material, causing the price of a tonne of steel to drop to EGP 3,600. This drop was not reflected in the property prices since they increased to an average of EGP 2,500 per square metre.

“The average price of a square metre for a residential unit in government projects is EGP 4,000 while the average price of a square metre of a residential unit in a private company project would cost EGP 5,000,” executive director of the Chamber of Metallurgical Industries Mohamed Hanafy said.

The average price for a 63-70 sqms housing unit can range between EGP 150,000 and EGP 160,000. The appreciation and depreciation in steel prices have had an insubstantial effect on real estate properties, Hanafy said.

“Steel composes 7-8% of the total cost of construction,” Hanafy said and that an increase in steel prices is less significant to the increase of real estate value compared to “other factors”.

Main drivers for real estate property

The price of land accounts for the main profit margin for real estate developers, Stephanos explained and that only 30% of the profits are tied to actual costs. He said the other main driver is the supply and demand of land. The limited supply of land resulted in increased demand and pushed prices up.

Political economy scholar at the Carnegie Middle East Centre Amr Adly agreed and that the main factor influenced property prices is the price of land. The way in which land is offered has created artificial land scarcity.

Adly said land pricing became a problem in the 1980s during the presidency of Anwar Al-Sadat who passed law no. 143 in 1981.

The law placed desert lands, which fall out of the building cordons and agricultural lands, under the control of the Ministry of Housing and the various Egyptian authorises such as the New Urban Communities Authority (NUCA), Egyptian Agricultural Authority (EAA), Tourism Development Authority (TDA), and the Industrial Development Authority (IDA).

After receiving approval from the ministries of Defence, Petroleum, and Antiquities, Egyptian authorities have the right to plan how these lands will be used and the way in which it will offer these lands to developers.

 

Instead of offering those lands at subsidised prices, these authorities were caught in a conflict of interest between generating revenues and solving the housing crises, Adly said. Authorities opted to generate revenues for the state, highlighting that NUCA’s generated EGP 61bn last year for the state because of how it allocated lands.

 

Adly said that even if authorities sold the land at a subsided price, there will still be land shortage because governorates cannot control the supply in their own areas.

 

What the future holds for properties

The upwards trend of the real estate prices does not seem to be disappearing any time soon. Adly mentioned that Egyptians purchase property as an investment measure to safeguard their savings.

“Egyptians prefer purchasing property, even if they will not use it, than putting their money in a bank or investing it in the capital market,” Adly said.

Any change in the price of properties will not be correlated to price of construction material since real estate values mainly reflect a long term trend rather than a short term change, Adly said.

The researcher said that land supply and demographic need will control prices and as long as the first is low while the second is increasing, the prices will surge.

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