Fresh reforms and increased economic pressures have put a new additional strain on contractors and clients working in Egypt, requiring the construction sector to change the way it prices and delivers projects.

At the forefront of these issues is a number of a new measures applied by the government, including the additional value-added tax (VAT) on construction projects, which has been increased to about 6 to 8 per cent depending on the size of the scheme. The government has also lifted subsidies on fuel, which has inflated operational costs for many industries. And of course the most damaging of all reforms has been the recent flotation of the Egyptian pound, which resulted in the value of the currency falling by approximately 50 per cent overnight.

The combination of all these issues has significantly increased the cost of construction. Contractors are being forced to continue working on projects priced during a completely different economic landscape.

The government has promised some sort of compensation for contractors working on public projects, a deal which is likely to replicate a similar arrangement in 2003, when Cairo last significantly devalued its currency. Local contractors welcome the government’s plan, but believe that it may still fall short.

For the private sector, large private developers are unlikely to renegotiate contracts with firms already working on Egypt’s many schemes. In addition to this, there is very little the government can do to protect contractors when it comes to private work.

But the cost of construction also affects developers, who may be forced to change their development and financial models moving forward. Egyptian real estate companies have often operated with a model that raises capital from off-plan sales. Much of the cash raised through pre-sales is used for construction. However, companies are now finding that the units sold two or three years ago were sold at prices that no longer make projects, or particular phases bankable.

Companies may be forced to change the type of properties being offered. For example, phases that were initially launched comprising villas and townhouses, could now have more apartments and smaller residential units.

Moving forward, developers will need to increase unit prices, which many have already done so. The problem is that almost all groups within Egyptian society have been hit hard by the economic headwinds, and disposable income, which would have previously covered mortgage payments, has significantly shrunk in recent months.

What happens next is difficult to predict. But developers could find themselves relying more on debt to press ahead with new phases of existing developments to avoid defaulting and not delivering. The other option could be a shift towards cheaper affordable housing projects, a segment which is in high demand across many of Egypt’s urban areas.

For contractors, the short term will prove difficult. Both private and public clients should expect higher prices from contractors as they try to alleviate the losses incurred in this transitional period.