The not-so-real estate market
Antiquated laws and an economic crunch are keeping the real estate market in an unprecedented recession. Pierre Loza reports
After a decade of recession in the real estate market, many are questioning the economic soundness of past rent control legislation. Legislative attempts to revive the market come in the form of a much-awaited mortgage law, passed in 2001 and still under implementation.
While real estate was once considered among the most dynamic of Egypt's economic sectors, today around two million units stand uninhabited. This persistent market stagnation has forced real estate developers to cut prices and devise less demanding payment schemes, merely to recoup their original investment. A depreciating Egyptian pound that increased average prices did not help matters either.
Peter Reynolds, head of Zamalek's Conserve Real Estate, believes that a higher cost of living has constrained long-term savings, which typically flow into the real estate market. He also observed a tendency by property owners to evaluate their property in terms of US dollars, rather than Egyptian pounds. This mentality led to over- pricing as the exchange rate rose, and left many units vacant. However, due to a more recent relative stability in exchange rates, the over-pricing trend has faded.
The effects of a devalued pound have not been completely bleak though. Reynolds noted the increased demand by foreigners for Red Sea vacation homes, due to more attractive prices in hard currency terms. Compared to European vacation home prices, the Red Sea coast offers foreigners a much more affordable alternative. This positive implication does not alter the fact that the real estate crisis is a domestic problem, based on people's inability to afford housing.
In the hopes of pumping the market with some activity, Law No.148/ 2001 was issued to promulgate the functioning of a new real estate financing market and empower consumers with the financial flexibility to participate in the real estate market. Designed to provide cheap long-term funds for the buying, building and renovation of real estate at up to 90 per cent of the unit's value, many expect this law to breathe some air into a choking market.
With the establishment of the General Authority for Real Estate Finance (GAREF) headed by Ali Shaker, the institutional framework of this new market began to take shape. The GAREF functions as an institutional watchdog that supervises all aspects of the law's implementation, while also granting licences to all involved market bodies and individuals.
Expectations of four licensed mortgage companies in operation by the end of 2003 seem too optimistic in hindsight. Presently there is only one licensed mortgage company -- El Ta'meer for Real Estate Financing, an affiliate of the Housing and Urbanisation Bank with an authorised capital of LE500 million.
Set to operate by 20 February, El Ta'meer will get a head start on prospective competitors such as the recently established Egyptian Housing Finance Company (EHFC). EHFC is a joint venture with the Egyptian American Bank (EAB) holding 40 per cent of shares and an authorised capital of LE100 million. EAB will join the Bank of Alexandria, the Housing Development Finance Corporation, the International Financial Corporation and the German Investment and Development Company to launch Egypt's first private mortgage company.
El Ta'meer's chairman, Fathi El- Sebaie, told Al-Ahram Weekly that he understood the public's dire need for the start up of Egypt's first mortgage company, yet warned against a rushing of preparation measures. "We're preparing the company to begin operations, we're employing professionals, placing internal organisational guidelines and looking at government forms that dictate mortgage conditions. I can start now but I have to be ready for a storm of prospective mortgagers," he said.
The pace of progress has been attacked by critics. In a December interview with the Weekly Shaker predicted that operations would start by the beginning of 2004, but they have yet to commence. Shaker also spoke proudly of the nine appraisers, 52 brokers and 17 financial auditors all licensed and trained under programmes designed by the authority, in cooperation with Cairo University and other institutions.
This mortgage law sets a precedent in enabling financial institutions to repossess collateralised units in case of defaulting. However in the case of involuntary default, an insurance policy was introduced to insure against death, fire and other incapacitating circumstances. Insurance companies' involvement will not be confined solely to procedural measures. Their very nature, as long term financial institutions, puts them in the forefront of investors in this new system, whether as shareholders in mortgage companies or as investors in a mortgage-backed securities market that has yet to be established.
Securitisation, a new process for Egypt, is included in Egypt's new capital market law, but still requires the legislative base for its establishment. This process is helpful in ensuring a sustainable flow of funds to mortgage companies. Securitisation allows mortgage companies to sell loan or debt vehicles to securitisation companies, that sell them on the capital market in the form of mortgage-backed bonds. This provides an income source for mortgage companies and enables the continuous funding of mortgages. Negotiations took place between delegates from GAREF and Fannie Mae, a US securitisation company, to look at the possibility of Fannie Mae's entrance into an Egyptian bonds market.
A recent addition to the real estate finance system comes in the establishment and operation of Al-Ta'meer for Real Estate Registration and Information Systems. Because the real estate finance law only deals with registered units, this new company plays a vital role in simplifying registration procedures and getting units registered within a workable time frame. The Egyptian Public Survey Authority is a 40 per cent shareholder in this company, which should smoothen some bureaucratic difficulties. Led by the authority's chairman, Ismail El-Shahaat, this company will also be involved in the mapping, planning and categorisation of land areas. The company will also monitor price evaluations, to make sure prices are not nominally reduced to decrease registration fees.
To enable the law's penetration into lower-income brackets, the Real Estate Financing and Subsidy Fund was established under the supervision of GAREF. Although overall sources for the fund have not yet been determined, the law's executive charter stipulates that two per cent of the total value of any unit under mortgage contract must be allocated to the fund. Free land and low- cost infrastructure will also be provided to the fund, to facilitate the building of low-income housing for those in need.
Whether all of these measures can pull the market out of its current recession is still uncertain, due to the magnitude of Egypt's affordability gap. Samir Makary, professor of economics at the American University in Cairo (AUC), estimates that "Of about 260,000 housing units, needed annually to accommodate a growing population, only 100,000 are affordable." Makary attributes a large portion of this discrepancy to generations of rigid rent control laws.
He observed that "Of the 30 per cent vacant units in Cairo, six per cent were owned by tenants living in rent- controlled properties," Makary told the Weekly in an interview. This finding indicates that a significant percentage of tenants simply take advantage of the low rent, while retaining the income capacity to purchase housing. By not allowing the forces of supply and demand to interact freely, rent control in effect prevented the presence of a truly market-driven rent price.
According to a study conducted in 1995 by Stephen Malpezzi of the University of Wisconsin, the first implementation of rent control started as early as 1944. At this stage it applied only to housing built before 1944, to avoid discouraging housing production. The most drastic changes to the law took place from 1952-1965 at the start of the Egyptian revolution. In line with the revolution's populist spirit, previously set rents were reduced further and controls were extended to cover newer units.
The study entitled "Welfare Analysis of Rent Control with Side Payment: A Natural Experiment in Cairo, Egypt", also stated that rent controls were further extended in 1962 to include all new construction as well as existing stock. The only exemptions to the law were luxury and furnished units, which are limited in supply and usually rented out to foreigners. Rent control legislation also purported a clear bias towards tenants, to the disadvantage of landlords. A landlord would be able to legally evict a tenant under four specific cases. First, if the tenant converts the unit to non-residential use without the landlord's permission. Second, if the tenant sublets the unit without the landlord's consent. Third, a failure by the tenant to pay the rent 15 days after it is due, and lastly if the building collapses.
Also to the landlords disadvantage, there is a clause that permits the passage of tenure from the tenant to their heir. These restrictions among others turned the Egyptian market into more of an ownership-oriented system; one that is difficult to enter without a hefty lump sum that is usually beyond the means of most Egyptians, the University of Wisconsin study explained.
A more recent study, conducted in 2002 by Samir Makary of AUC says that the building boom of the 1980s also played a contributing role to the market's present stagnation. The study, entitled "The Real Estate Sector in Egypt", says that high returns on investment from upper-scale units during the 1980s stimulated an oversupply of high-end buildings, resulting in a lack of interest in the lower end part of the market by real estate developers. A reluctance of property owners to rent, due to rigid rent control laws and speculative tendencies, left 50,000 units vacant in Cairo alone. This effectively limited the access of middle to lower- income groups, to the real estate rental market.
Rent control laws failed to achieve their legislative purpose, due to the illegal practice of "Key Money". This is when tenants must pay an "up front lump sum payment" to purchase a rent- controlled unit, according to Makary's study. Rigidly under-priced rents have also led to a neglect of property maintenance, as well as decreased private investment. It also constrained property tax revenues based on under-priced rent values, which do not take into account external key money payments.
Experts say Law No.4 of 1996 helped reverse this trend to some extent by returning rent laws to old civil legislation. This law made two major changes to the Egyptian real estate market. Firstly, it ended the indefinite passage of tenure from the tenant to his or her heirs. Secondly, it stipulated that rent contracts be limited to a definite time period, without setting any constraint on price, other than the fact that it has to be previously agreed upon. Although the law met with some cynicism by landlords who didn't fully understand it, its implementation brought some life to an ailing rental market.
