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Rising cost of construction materials props property prices - Daily News Egypt

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Rising cost of construction materials props property prices

CAIRO: Among the many obstacles to housing in Egypt, the rising cost of building materials has been the most controversial. While skyrocketing steel prices and industry players have been headline news all year, the cost of other building materials have gone up as well. Construction material costs leapt almost 80-100 percent over the last two …

CAIRO: Among the many obstacles to housing in Egypt, the rising cost of building materials has been the most controversial. While skyrocketing steel prices and industry players have been headline news all year, the cost of other building materials have gone up as well.

Construction material costs leapt almost 80-100 percent over the last two years, and Daily News Egypt looks at the reasons behind these recent hikes.

One of the major pillars of the construction, steel started off 2007 on a 20 percent upward curve. It settled on LE 3,300 per ton until roughly mid-year and later skyrocketed ahead of a global construction boom.

“Prices of steel were stable for a while early 2007. However, amid a construction boom in the Middle East as well as in emerging markets particularly Russia and China, costs of input material rose globally, said Tarek Shahin, construction analyst at Beltone Financial.

The commodity continued its sky-high leaps throughout the current year on preemptive demand from developers, he added. From September 2007 until April this year, steel costs soared around 70 percent.

Shahin explained that costs of industry inputs such as iron ore, raw billet, and scrap have globally risen by up to 87 percent, which in turn pushed up steel prices. Experts estimate that local steel producers import up to 80 percent of their raw material from international markets.

“Steel prices currently sell at an average of LE 6,200 per ton, which shows an almost 100 percent increase over last year’s prices, Shahin said.

Cement is a different story altogether, Shahin added. Cement prices are not affected by costs of global input material as is the case of steel. “That is why, year-on-year price increase is not very sharp.

The energy-intensive industry is affected by natural gas prices. “In 2006, the industry used subsidized gas at roughly $1 per million British thermal unit (mBtu).. That is why; the government pressured cement producers to lower market prices, and a silent war continued between both parties, he said.

Later this year, the government upped energy prices for heavy intensive industries from $1.85 per (mBtu) to around $2.90 per (mBtu) to cover costs of public-sector pay hikes introduced last May.

“This is a sharp increase in gas prices that [will directly] reflect on cement prices, Shahin added.

At the start of the year 2007, cement sold at around LE 300 per ton. It later reached LE 370-400 per ton to finally sell at the current LE 500 per ton.

As the essential building block, one would think bricks would be making news as well. “Prices of bricks surged this year with the hike in mazot prices, said Shahin.

The government abruptly introduced last January a 100 percent hike in the price of mazot (fuel oil) from LE 500 to LE 1,000 per ton, as part of its energy reform program. The hike directly affected commodities that heavily rely on fuel oil for production.

Brick kilns producers were among the first to feel the effect, as mazot constitutes 45 percent of operating costs. Prices of bricks – that were already going up early in the year to LE 515 per ton – further soared to LE 1,020, following the mazot price upsurges.

Steel tycoons have argued that the price of their product does not affect the total cost of a development as much as the price of cables, which has also risen sharply this past year.

The price of cables is directly correlated to prices of copper and aluminum, Shahin said. “They both recorded steep increases in 2006 – a very big shift similar to what occurred with steel prices in 2004 – mainly due to an increase in demand from Asian markets.

In 2007, he said, prices jumped to LE 7,000 per ton and currently settled at slightly over LE 8,000 per ton.

Putting these prices into context, it would seem that the boom in real estate prices are justified, but have the hikes in raw material costs triggered the ongoing upsurges in property prices? According to Shahin, these hikes were a part of the reason.

“Of course property prices were affected by this hike.but it [extent of the effect] differs from one project to another, he said.

For example, villas do not consume large quantities of steel versus apartment complexes, he explained. Plus, developers who bought land in an auction paid more money than those who bought state-owned land. “Those who bought in an auction will naturally sell at higher prices to offset some of their costs.

According to EFG-Hermes records, price of raw land in New Cairo and Sixth of October has risen more than 200 percent over the past two years due to reasons including interest from Gulf developers, strong demand for residential units, and a shift to an auction system for selling raw land.

In May 2007, the Egyptian government carried out two auctions of raw land. In the first, three plots in New Cairo with a total area of 16.5 million square meters were sold for a total LE 13.4 billion. In the second, three plots with an area of 2.9 million square meters in both New Cairo and Sixth of October were sold for a total of LE 4.3 billion.

That is how; he says, “property price increases over the last two years were not based on cost of raw material on the most part..One of the main engines behind property price upsurges is strong demand [that intensified in 2006/7] and not a rise in raw material costs contrary to what many people think, Shahin said.

“There is real demand, resulting from an increase in demographics and speculative buyers that invest in property.

He explained that both input material and raw land costs contribute 30 percent increase in property prices, which compares with a 50 percent increase in the Emirates.

“In Egypt, property prices soared 80-100 percent over the last two years.and current figures indicate they will continue to escalate but at a slower pace, Shahin added.

“Now the question is, can these developers pass on costs to consumers.or are they in danger of going bust? It remains to be seen but all company executives are very confident and [bullish] on the market in Egypt, Shahin said. “Towards the end of the year, more data will be available to confirm these views. But so far, we’re not pessimistic and believe the elements are there for the market to serve.

He believes the main driver for real estate market growth is the more affluent upper-middle segment of society. “This market segment possesses a level of wealth that allows it to transcend inflationary pressures, he clarified. “There is strong indication that level of demand in Egypt increasingly [stems from] young professionals that are willing to pay.

So far, he added, we haven’t seen any indication that people’s wealth is diminishing even with the current inflation rates (at a record high of 20.2 percent in June). The same people who could afford to buy last year will afford to buy this year because of mortgage finance schemes, which are still not impressive but are keeping things going, Shahin said.

“The market has not reached the ‘out of business’ stage yet. If developers need to increase prices, the wheels of the real estate market will continue going even if the market is narrowing.

Topics: FJP

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