SECTOR SNAPSHOT: Is the construction sector threatened by high prices?

Reem Nafie
4 Min Read

Complementing the boom in the real estate sector, the construction domain has also experienced a notable surge; however, the continuity of this upward trend remains in question by many analysts.

With the revival of Egypt’s real estate market in 2002, the demand for construction materials has accelerated. This is happening in spite of the skyrocketing costs of building materials, the decrease in subsidies for energy-intensive industries and and increase in wages for skilled labor.

According to a report issued by HC Securities, the cost of construction in Egypt dramatically increased by nearly 27 percent since January of this year, triggered by the increase in the cost of raw materials, specifically steel rebar and cement.

The cost of wholesale steel increased in April to LE 5,210 per ton while consumer prices closed at LE 5,630 per ton. This is the third increase in steel prices since the beginning of the year.

Steel price increases are currently under investigation by the Egyptian Competition Authority, but a decision has not been made yet. Steel companies have justified the price hikes in the sector, linking them to leaps in international markets and rises in prices of raw materials, which directly affect production costs.

Cement prices have also increased, resulting in 20 executives being charged with forming a cartel to increase prices and control production. Spurred by the steady ascent of cement prices, the Ministry of Trade and Industry announced it would ban cement exports, hoping to staunch further increases.

“Nevertheless, the construction sector in Egypt is growing remarkably, fuelled with heavy Gulf investments. Investments will continue to pour into the economy, fuelling growth across the board, HC Securities said in its report.

Analysts stress that the investments are due to a US economic slowdown and a possible similar scenario in Europe, especially since Egyptian growth rates are expected to remain strong in fiscal year 2007/2008.

While construction activities might not be affected by the increase in raw material prices now, the tables might turn soon. “I am expecting a recession in the construction and real estate domains by 2010 if the prices continue to increase at this rate, Mona Yassin, Egyptian Competition Authority Chairman told Daily News Egypt.

She argues that the proportionate increase of construction raw material prices and the price of real estate units will eventually affect the consumer’s purchasing power, decreasing the demand for both commodities.

While in the short term, real estate profits have not been affected, Hisham Talaat Moustafa, real estate tycoon recently said that the rising prices of construction material presents a predicament in Egypt. “Within the last year and a half only, apartment prices have soared by 80 percent, he said.

He explained that from 1996 to 2006, real estate prices increased an average of 15 percent per year. However, starting 2006 to last February, prices surged from LE 2,500 per square meter to LE 4,000.

As a result, the increase in price of raw materials has hindered the construction of real estate projects targeted at the low-income bracket.

Despite government promises that low-income housing is a top priority, contractors will remain hesitant to engage in such projects, knowing that the profits garnered won’t be as high as of luxury projects.

The construction sector is expected to face trouble amid expectations that sooner or later many people would not be able to afford the construction costs and real estate purchases if the prices continue to rise.

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