One of the main hurdles to the development of Egypt's mortgage finance industry has been the erratic property registration practices in Egypt, insiders say. In 2001, the Egyptian government launched Law 148 outlining regulations of the mortgage industry. It was not until three years later that the first mortgage finance companies began operations. Today, after nine years, the mortgage business continues to be underdeveloped and far from able to satisfy homebuyers' demand for funds. “The culture of registration is still not widespread because we have lived like this for the past 50 years,” Hala Bassiouni, managing director of the Egyptian Housing Finance Company, said. Her company rejects 50 percent of the applications it receives, she said, mostly due to problems with the property documents. Often the land for development is not registered, there is no clear ownership on the property, or the construction does not reflect the building license. According to her, preliminary contracts allow real estate developers to build on land that is not registered, which further exacerbates the problem. “Property documentations are lacking the most [in the application process] because of the trend of not registering property,” concurred Ahmed Haggag, board consultant for Sakan Finance. His company has also denied more than 50 percent of its applicants. Since 2004, registration fees have come down after several reductions, from 12 percent to 3 percent of the property price, to a flat fee of maximum LE 2,000. Registration time was decreased from 1.5 years to between three-six months and it is gradually improving. Despite this, registration is not moving fast enough to accommodate the market and accordingly, it is negatively affecting the mortgage business, Haggag said. High interest rates have also burdened the mortgage finance industry. After several stimulus packages launched by the Egyptian government, the inflation rate has remained high at almost 13 percent. “With the current inflation rates, the Central Bank has increased interest rates. This impacts interest rates generally speaking. Mortgage companies are sourcing their funds from either banks or from going into the capital markets and issuing bonds. “Since they are all very nascent companies, they are not able to issue bonds, so they are going to source their funding from banks. [The bank interest rates] are already high, so we are talking about 11-12 percent [borrowing interest]; with the extra stress you are talking about an average of 14 percent,” Bassiouni explained. High cost of funds in Egypt also affects real estate developers which often finance new projects with a mix of company capital and borrowed funds from banks. “This is, I believe, one of the major reasons behind mortgage not taking off the way everyone expected it to. [The real estate companies] are recipients of funds from banks. If banks have high lending rates, so will the companies. It's a vicious circle… the prices of properties still, relatively speaking, do not match the income of the people,” Bassiouni said. Haggag also recognizes the discrepancy between average incomes and property prices as a challenge to the mortgage business. In his view, Egypt's middle class is unable to find properties fitting its budget. “What concerns me is really the clientele with the LE 6,000 and LE 7,000 and LE 10,000. Would they find property that suits or matches their requirements? I don't think there are properties that match this type of demand in the market,” he said. Families in the lower-income segment do not even qualify for a mortgage because, according to law, the monthly mortgage payment cannot exceed 25 percent of monthly income. The government, however, is planning to increase this percentage to 33. Additionally, there is a state program for mortgage subsidies for families with income of less than LE 2,500. The novelty of mortgage products also deters Egyptians from considering them seriously. “We are still a cash-based society. People are still a bit hesitant to go for mortgages probably because it's a cultural [sensitivity] to be indebted on the roof that you are living under,” Bassiouni said. In her estimations, not more than 10 percent of home buyers take out mortgages, incomparable, in her opinion, to the population size and the real estate stock of Egypt. “People don't look at it as an investment; they look at the property as the place they live in until they die. People become very hesitant about getting this long-term investment,” Haggag said. He confides that some clients get approved, but then change their mind and end up not accepting their mortgage. Another barrier to mortgage finance's popularity is the prohibition of receiving or paying an interest in Islamic law. Before the global financial crisis, Amlak Finance, a UAE-based mortgage company, was to offer Islamic mortgage products in Egypt, but after posting significant losses in 2009, the company has ceased operations. Started by a subprime mortgage failure, the global financial meltdown also affected the Egyptian mortgage market, but only on the surface, as two Gulf-based mortgage companies with licenses did not start operations. The stable growth of the Egyptian Housing Finance Company and Sakan's dynamic entry at the end of 2009 demonstrate that the worst has passed. Now the hope is that the mortgage finance industry will advance and will help solve the housing shortage in Egypt. “The culture of this economy or this society is investing in real estate because it's the safest of all saving or investment tools. If [you take] time deposits, because of the inflation, you are not gaining; if you go to the stock market, it is very risky; and if you go to foreign currency, it is more or less stable. “There is still an unfulfilled demand [for real estate] and this unfulfilled demand is increasing, not decreasing,” she said. “I'm very optimistic. It's hard, but it's affecting the lives of people. And once it's done properly, it will affect a vast majority of people,” predicted Haggag.
