The face of the local housing and real estate sector is changing. Sherine Abdel-Razek takes a second look Hardly a day passes by without a full-page newspaper advertisement for housing units, upscale compounds and summer resorts, a phenomenon which highlights the fact that the supply side of the real estate market is flourishing. This comes despite a spiral increase in the cost of building materials, jumping by 75-100 per cent in the past year, and this is reflected in flat prices for the end consumer. The index of building licences, showing the number of licences granted for constructing new units, has soared by 42 per cent through last year. "Egyptians have always done this whenever inflation rates increase," explained Minister of Investment Mahmoud Mohieddin. "They rush to buy and [build] new homes because they believe the real estate sector is an investment hedge against increasing prices." Mohieddin was addressing participants at the Euromoney conference on Egypt's housing and real estate finance. The local real estate sector reported a real growth rate of seven per cent, contributing to GDP by 8.6 per cent, and employs 11 per cent of the country's work force. Despite the common belief that the real estate swallows the larger portion of investments, Mohieddin assured that only 5-6 per cent of overall investments go there. If supply is strong, what about demand? "The fast growing population requires that the sector receive a stronger push to meet the target of building 5.3 million housing units by 2017," stated Mohieddin. The conference promised the low-income bracket affordable homes, especially after the private sector joined state-owned housing entities in building economy houses. Minister of Housing Ahmed El-Maghrabi revealed that in the past the government was building 30- 35,000 such units per year, but now this supply will triple with private companies adding around 100,000 units to the market. Moreover, a new European company is currently considering investing in this segment. The private sector was offered many incentives, such as low land prices, to tap this relatively less profitable sector. Coming a few months after the peak of the US and international credit crunch caused by the default of real estate loans known as the sub-prime crisis, the Euromoney conference shed light on developments in real estate finance in Egypt and the effectiveness of the regulations governing the sector. Recently, the mortgage finance sector has seen important developments with the number of mortgage finance companies increasing to eight, five of which are foreign, in addition to 16 banks with licences to undertake the activity. The overall value of loans extended to finance mortgages reached LE2.2 billion compared to LE1 billion a year ago, and registration fees for housing units were lowered from three per cent of the unit's value to only one per cent, with a maximum of LE2,000. A newly created Guarantee and Subsidy Fund (GSF) grants subsidies to low-income individuals wishing to buy housing units, by lowering the mortgage to an affordable level. The fund's current contribution is 15 per cent of the value of the unit, with a maximum of LE10,000. This form of subsidy reduces the monthly instalments to a level not exceeding a quarter of the monthly income of the home buyer, in addition to forming a fund to finance the mortgage and using securitisation activity to finance loans. But the picture is not all rosy. The limited sources available to banks to finance mortgages top the list of impediments to the growth of the sector. "Why don't banks use part of the interest-free reserves they deposit at the Central Bank of Egypt, currently estimated at LE70-75 billion, to revive the market," wondered Fouad Sultan, former minister of tourism. Sultan, an advocate of liberal economy, also suggested replicating the experience of the South East Asian tigers in using privatisation receipts to fund housing units, road paving and sewage projects. Mohieddin reacted to the suggestions by pointing out that his ministry currently channels the receipts of asset sales, especially those of a controversial nature, to projects in the real estate sector. "For instance, the receipts of the Sidi Abdel-Rahman land plot sale were used to pave the Upper Egypt roads network." The high cost of acquiring loans is another problem which conference speakers addressed. Osama Saleh, head of the Egyptian Mortgage Finance Authority (EMFA), said that efforts to lower the cost through reducing registration fees and plans to lower the sum paid by buyers before obtaining the loan from the current 15 per cent, are offset by high interest rates of no less than 8-9 per cent in the short- to medium-term. A question which was repeated during the conference is whether Egypt can withstand such setbacks as the sub-prime crime; the responses were mixed. Ahmed Sabri, a real estate appraiser at KPMG, warned that expansion in the market might result in a local sub-prime crisis. "If it happened in the US, where inflation rates are much less than the local 16 per cent, and mortgage rates are less than the local double digit and where overall high risk mortgages count for 16 per cent of the overall mortgage portfolio, then it can happen here," argued Sabri. In fact, in Egypt, the majority of loans over the past two years were granted to people with income below LE5,000 per month. However, most speakers calmed such fears by explaining that the sector now mainly focuses on transactions in the primary market (acquiring loans from banks) and deals in the secondary market (such as securitisation deals or refinancing mortgages) where the sub-prime problem is still very limited. Saleh disclosed that so far three securitisation deals have taken place in Egypt. The presence of the new credit bureau, a company formed to gather data on the creditworthiness of companies and individuals, is core in helping reduce the risk of defaults. The way the market is regulated gives the authority the right to take back the unit if the buyer defaulted. "We had five repossession cases last year," noted Saleh.
