After the Egyptian government liberalised the pound and the increase in construction materials and fuel prices, real estate developers had to ask banks for loans and facilitations to finance their projects, especially after decreasing down payments and extending installment periods.
Some developers say that the loans they receive are not to due to lack of liquidity, as there is a real demand and sales cover the increase in construction cost, however, the loans are for accelerating the development of projects. In addition, they are to purchase more land and expand in different areas.
Ashraf Dowidar, CEO of ARDIC for Real Estate Development and Investments, said that the company will sign a EGP 500m loan with a consortium of three banks to finance the company’s Zizinia El Mostakbal project.
Dowidar added that the National Bank of Egypt (NBE) and two other banks will finance Zizinia El Mostakbal, therefore, the NBE could provide another loan for the company’s new project in Upper Egypt if it requested the loan.
He noted that if the sales of the Upper Egypt project go well, the company will not use the loan from the NBE, reaffirming that the main purpose of the loan is to accelerate the development of the company’s new projects.
For his part, Darwish Hassanein, CEO of Saudi Egyptian Construction Company (SECON), said that his company signed a long-term joint financing contract with Banque Misr and the NBE at the beginning of 2016 to complete a previous loan, agreed in 2013, worth EGP 600m.
Hassanein added that the loan is fully allocated for its project SECON Nile Towers at Maadi’s Corniche, and in 2013, the company received a loan worth EGP 92.8m, which it paid recently and the remaining amount was obtained in 2016. The loan is granted at the balance between the two banks, to be paid over five years with a grace period of one year.
He pointed out that the company resorted to obtaining the loan because of the hotel and the company’s desire for speed of completion, despite the possession of sufficient financial solvency, especially following the recent increase in the company’s capital in 2015 worth $ 243m was paid equally between the governments of Saudi Arabia and Egypt. Saudi Arabia’s share in cash is 50% at $121.5m.
“Most of the real estate investment companies and real estate developers turn to banks because their capital is not enough on one hand, and most companies sell their units on longer terms with fewer down payments on the other hand,” said Omar El–Shenety, founder and managing director of Multiples Group. “This may lead to funding gap that appeared in the sector before the flotation and it is not the cause of this gap,” he said.
El-Shenety explained that the reason for the financing gap is the increase in supply by some companies targeting a specific segment at the same time and this is very clear with regard to second home projects in Ain Sokhna or the North Coast, the supply for which is more than demand, which in turn led to a funding gap.
He added that the gap is the key reason for obtaining funding, whether in the form of cheque factoring, financing of projects by banks, leasing of assets, and other forms of financing to solve the financing gap.
He pointed out that the most important reasons that led to some companies to resort to loans are significant increases in land prices recently, as well as that the government was providing larger plots of land on terms of payment acceptable, including repayment terms of up to five years. But currently, the government does not offer large plots of land except the New Administrative Capital. In addition, the conditions for payments of land have become very difficult and therefore forced developers to pay the value of land in a hurry, as well as extend installment periods, leading to a financing gap for those companies.
He explained that the companies that resort to loans does not mean that they have a loss or lack of liquidity, but have a funding gap, and the main reason is the increase in land prices, increases in installment periods, and decreases in down payments.
He denied that the inability of companies to pay loans caused the sale of units at lesser values to repay them, and pointed out that the inability to pay will not cause a real estate bubble, but a bubble would arise when supply is higher than demand, which is clearly visible in the case of luxury units.
He added that the spread of the idea of decreasing down payments and extending installment periods will put a lot of pressure on developers and will have negative effects on them after a certain period.
A funding gap in a given project of a single company is different from a funding gap in all its projects, but what is happening now is that all projects have high rates of financing gaps and this is the challenge,” said El-Shenety.
Mohamed Salama, marketing manager at Amlak Finance Egypt, agreed with El-Shenety that funding gaps among real estate companies have become very large even after many companies and developers have undertaken three mechanisms to motivate their customers to buy.
This includes discounts on cash payments of up to 32%. In addition, many companies offfer fewer units in each project because of the successive increases in the prices of building materials to avoid prices that could increase at any moment, along with other indirect costs also increasing, such as salaries of workers and electricity prices, and thus companies could not fix the prices of units and resort to offering less units.
Salama noted that the financing gap did not decrease with all the facilitations provided by the companies, but it increased because of the decline in sales of companies in the Sixth of October and the Fifth Settlement areas by 30-40% in the first quarter of 2017 compared to a year prior.
Therefore, companies have taken a different approach which have a significant effect on the mortgage market through selling part of their real estate portfolios to finance companies or banks, through cheque factoring, under which the company sells the value of cheques owed by its customers who have already received units and still pay their installments to the bank, and in return, obtains the liquidity required to meet other obligations of land installments or contractor payments.
For this reason, Salama clarified that real estate developers are not stuck, because they do not owe banks, but the clients are the ones obliged to pay the cheques to banks.
Nehad Adel, president of Business to Business for Investment and Real Estate Marketing, agreed with Salama that the stumbling of companies and real estate developers is out of the question because the financing gap has been compensated for in the form of raising companies’ unit prices, despite the extension of payment periods.
Therefore, Adel does not believe there will be a financing gap that developers or companies will have to compensate for through loans.
He added that the process of buying land and overcoming high prices is made through a partnership mechanism to overcome the high rise in land prices, and also, developers will not be forced to borrow from banks.
He ruled out developers having to resort to banks, especially after the interest rate rise of about 20%.
Developers have a lot of other alternatives to compensate for the gaps that occurred for many companies, including the construction of sold units only. Developers can extend other phases or sell new units of their projects at much higher prices than the units sold previously to cover cost differences and minimise loss.
Ashraf Diaa, managing director of ERA West Associates, said that some real estate companies preferred to enter into partnerships with banks to complete some projects to avoid a high interest rate on loans, while many developers did not resort to banks to finance their projects because they do not suffer from a liquidity crisis.
He pointed out that most of these companies focus on the implementation of a project or two only without financing through loans, relying heavily on achieved sales, especially as most of these companies market their projects and units, most of which have not been completed, and therefore raise prices slightly above market price to cover construction costs.
However, he noted that there are some companies that stumbled after the increase in building materials and land prices, and so resorted to borrowing from banks.
“Developers who take loans from banks do so to buy larger plots of land and speed up the project implementation process, not because of a financial gap,” Diaa said. “Extending installment periods and decreasing down payments do not have a negative impact on the liquidity of the companies but have a benefit for both developer and client”.
Developers thus maintain their clients while raising the interest rate on unit prices. Hence, they gain when selling a portion of their units to cover the cost of other units still under development. The extension of payment periods is also a win-win, as developers would sell more units, therefore they do not have to resort to banks to finance liquidity deficits, according to Diaa.
For her part, director of the real estate finance sector at the Arab Investment Bank, Fatima Al-Zan, said that the Central Bank of Egypt (CBE) provided liquidity of EGP 20bn to banks and real estate companies in the last quarter of 2016 through the beginning of 2017. This is in line with the general trend of the country, especially that the initiative has received a large acceptance by companies to include a larger segment of customers under the initiative, which is much better than resorting to mortgage financing at a high interest rate of over 20%.
On the high interest rate on loans and their impact on the business of real estate companies, she said the interest rate margin is within acceptable limits, which is lower for other means of financing.
She praised the CBE’s initiative, noting that it seeks to solve the problems of real estate companies, especially lack of liquidity after the flotation, so companies do not lose their customers due to the higher prices of building materials and fuel.