A new lease on life
The imminent activation of the mortgage market may breathe life back into the real estate market and the economy at large. Niveen Wahish reports
There was a time when owning an apartment or house was considered a surefire investment for the future. Egyptians would buy real estate knowing that their value would steadily rise upwards, outpacing inflation. This was the case10 years ago, but now it is no longer so. Since the mid-1990s, not only have apartment owners wishing to sell not been getting their asking price, but even developers have been unable to unload new buildings. For the last decade, the real estate market has been in a painful recession, and today an estimated two million units stand uninhabited. The stagnation in the real estate market in turn has taken the already-struggling economy down with it. The contracting business is known to be an engine of growth for the economy as a whole, both providing substantial employment and generating activity in roughly 100 complementary businesses.
But the downturn may be finally be reaching its end. In the last few months, according to Youssef Khalil, real estate broker with Coldwell Banker, there has been an increase in activity in the market. "The prices are at their lowest point now," he said explaining that the recession which has prevailed for the past few years is inducing people to sell merely to recover their capital, with little hope of making any profit.
"If you have the cash, now is the time to buy," he said. He expects prices to increase as the cost of building new units has skyrocketed since the depreciation in the value of the pound last January.
Moreover, the imminent activation of the mortgage law, which was ratified by parliament two years ago, may push prices to rise. With the creation of mortgage financing, a surge in demand is expected to help the real estate market recover to a healthy equilibrium.
Although the law has been around for two years, the creation of a number of bodies was necessary before it could be fully implemented. Foremost among those is the General Authority for Real Estate Finance, which will be at the core of the law's implementation. Its role is to supervise the application of the law and grant licences to the various concerned bodies and individuals. Aly Shaker, head of the authority spoke to Al-Ahram Weekly , saying that the first real estate finance company, Al-Tameer for Real Estate Financing, with an authorised capital of LE500 million, is expected to go into operation by mid- September. Affiliated to the Housing and Urbanisation Bank, the operation of the new company will inaugurate the new law. A second company, the Real Estate Financing and Development Company, with an authorised capital of LE400 million, is also being formed by the four public banks, while two more companies are reportedly in the works.
If things proceed as planned, there will be at least four companies in business by the end of 2003, while the newly-created market will be able to easily accommodate more companies. As Shaker said, this will help occupy the two million empty units, valued at LE200 billion, in addition to 250,000 units needed annually to accommodate the growing population.
The main benefit of the law is that it will support the purchasing power of the public, giving an option to the potential buyers without the liquidity for an outright purchase. The other side of the coin is that this will naturally help sellers in the market who have long been waiting for demand to grow.
"This law revolves around the buyer. What he wants is what will be financed," said Shaker. He expects the activation of the law will mostly create demand for middle-income housing. Financing will also be available for home renovation and new house construction.
The real estate finance companies will be providing individuals with long-term financing extending over an average period of 20 years, covering up to 90 per cent of a unit's value. In the absence of the law, individuals who can not procure the cash either take out a short-term loan from a bank against a list of collaterals or pay high installments over a short period of time to developers.
While this is the ideal scenario, it may be difficult to achieve this from the beginning. One expert who preferred to remain anonymous said that at first these companies may not be willing to cover 90 per cent of the value of a unit for a long-term loan, because their reserves would quickly be drained.
To avoid companies running out of funding, the expert said, mortgage bonds should be developed and traded on the stock exchange, otherwise companies will soon lend out all their funds and have their hands tied down. Adding in his opinion, Shaker explained "These bonds will be a safe haven for long- term investments of insurance companies and other institutions who have long-term funds they want to invest." The housing bond is an ideal choice as well for insurance companies and other financial institutions who want long-term investments.
The bonds market is still underdeveloped, with little public awareness of its import. While they usually represent 70 per cent of the stock market's dealings, currently they comprise only 30 per cent.
Interest rates are another issue which may prevent the law from achieving the desired benefits. High interest rates would of course raise the monthly instalment due from the buyer, reducing the usefulness of the law to middle and lower- income buyers.
Real estate finance companies will not be the only new entrants onto the market. Another company is being established to facilitate the registration of units. According to Shaker, it is a joint venture between the Survey Authority, the New Urban Communities Authority and the Housing and Urbanisation Bank. "This is important to facilitate the process for giving out loans," added the anonymous source.
Registration fees are critical to the success of the law, as they are needed. Around 80 per cent of units in Egypt are not registered because of the high fees charged for registration. To encourage compliance with the law, the Ministry of Finance lowered registration fees from 12 per cent of the unit's value to six per cent and more recently to 4.5 per cent. At a recent conference, the minister of finance had said that registration fees may drop further to one or 1.5 per cent to encourage people to register.
The authority will also oversee the work of the Real Estate Financing and Subsidy Fund which will be established to provide housing to low-income individuals with an annual income not exceeding LE9,000 if single and LE12,000 if married. A presidential decree establishing the fund was issued last year, but currently studies are still underway regarding development of the fund's resources. The activation of the law will contribute to building up financing for the fund. According to the executive charter of the law, all mortgage contracts signed will give up to two per cent the unit's total value to the fund. The government will provide the fund with free land and infrastructure at low cost where it can build and make its own affordable units available to those who need financial assistance.
The authority is also busily preparing the market to properly incorporate the law. Mortgage appraisers, agents and brokers are being required to register with the authority, and must undergo a certified training course.
