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A SUSTAINABLE DEVELOPMENT?
BY JAMES EXELBY
British sun-lovers with money to invest are snapping up second homes in warmer climates around the world. In recent years, they have set their sights on Sharm Al Sheikh. Residential tourism presents an enormous opportunity, but a few potential stumbling blocks remain.
Last month, Minister of Tourism Mohamed Zoheir Garana told a meeting of the
British Egyptian Business Association (BEBA) that developing residential tourism
was now a priority for Egypt. He was addressing the right audience.
An estimated 400,000 Britons now own over $100 billion worth of property overseas,
according to Savills, a London-based real estate agency. France and Spain still
head the league tables, but since 2005 Egypt, and in particular Sharm Al Sheikh,
has begun to see the arrival in force of British residential tourists, looking
for investment, rental income or simply somewhere to escape the dreary English
weather.
“Two years ago, it was predominantly Italians, both for tourism and property,”
says Lee Ward, sales and marketing director of Pioneer Property, a British-owned
real estate agent in Sharm Al Sheikh. Now, British buyers account for 85 to
90 percent of property sales, he says. The Germans and Dutch “are coming
but not buying;” the Russians are beginning to make their presence felt
either at the very top of the property market or the very bottom, he continues.
While Gulf buyers have been expressing interest, they are so far uncommitted,
says another agent.
Although there are no reliable statistics for total sales to foreigners in the
Sharm Al Sheikh area, a rough estimate based on individual figures from four
leading agencies suggests that foreigners have bought up to 3,000 units over
the last three years, worth up to $250 million. Whereas the original developments
tended to be in the Hadaba area of the city, between Old Sharm and Naema Bay,
much of the new off-plan property is being sold out in Nabq, north of the international
airport.
The reasons for the British influx are not hard to fathom: climate and affordability.
Egypt’s Red Sea Riviera boasts year-round sunshine and Egyptian property
seems, at least to British buyers, cheap.
A strong British pound and a decade of economic growth coupled with house price
rises in the UK have created the kind of mass affluence that has brought second
home ownership within the reach of millions. But with the average price of a
home in the UK now standing at over £200,000, foreign markets are looking
increasingly appealing. And with vacation properties in the western European
destinations increasing in step with UK prices, buyers have been forced to look
further afield.
Bulgaria and Turkey have both attracted large numbers of bargain-hunters. Dubai
with its long-term strategic marketing campaign – involving national carrier
Emirates, iconic architecture and world-class events – has tried to position
itself in the premium pricing category. Egypt, on the other hand, boasts a warmer
climate than southern and eastern Europe yet without Dubai’s debilitating
summer humidity.
The average buyer is also looking for more than just ideal weather. Most are
investing in foreign property for capital gains or for a steady rental income.
Others simply want a retirement home where the cost of living and bills –
such heating and electricity – are much lower than home.
Patrick Kennedy, marketing manager of SSQ Investment & Real Estate, puts
the average sale for a two-bedroom apartment in Sharm at around £40,000
to £50,000, compared with £60,000 to £70,000 before the Egyptian
pound’s sharp devaluation in 2003. “The Brits started arriving in
2003 and now they’re easily the largest single nationality,” he
says. However, he reckons that Italians still make up about 10 percent of buyers
and in certain developments, such as EuroSharm in Naema Bay, it’s closer
to 100 percent.
Khaled Shaker, operations manager of Sharm Al Sheikh Real Estate, confirms the
British predominance. “In one resort, we sold 180 out of 360 units to
British buyers,” with most buyers from the north of England and Scotland,
he says. He sees most new owners living in their property for one month a year
and renting it for the other eleven. Capital gains are also an important incentive,
and he says the Egyptian government has been somewhat naïve in its treatment
of the issue, missing a revenue opportunity. Others might call it “tax-friendly.”
In terms of their age profile, Shaker says that the majority of UK buyers –
some 60 percent – are between 35 and 65 years of age, with 30 percent
under 35 and 10 percent over 65.
Often, Ward says, the buyers of the cheaper units are young couples who feel
they cannot afford to buy in the UK, but desperately want to get a foot on the
property ladder somewhere.
Pioneer Property – which quotes nearly all of its selling prices in sterling
– is currently offering a 50-square-meter freehold studio in the Roman
Theater residential complex for a cheeky £19,999. Ward estimates that
40 percent of the company’s sales are studios for less than £25,000.
“Cheaper than a car” goes the agent’s mantra.
Tour operators flex muscle
The big tour operators are a major yet often unseen influence on the property
market. “They own this town,” claims one Sharm real estate agent,
who asked not to be named. UK market leaders such as Thomson, Thomas Cook and
First Choice practically dictate hotel prices and their own aircraft make up
the majority of the more than 20 weekly flights from the UK.
Airfare and flight frequency are important considerations when buying abroad.
In recent years, the Egyptian government has been underwriting one-third of
the cost of charter flights, helping to keep prices low, according to one real
estate agent. One-way flights are sometimes advertised for as little as £20
although return tickets usually cost between £120 and £180 including
taxes.
The Red Sea Riviera has proved popular with the big companies for other reasons.
Unlike simple bucket-and-spade destinations such as Spain’s Costa del
Sol, Egypt’s resorts offer profitable excursion tours. According to one
travel rep, around half of tourists on package deals opt for at least one excursion,
either to the Pyramids, the Valley of the Kings or “Moses’ Mountain.”
The happier the operators are with the resort, the keener they are to promote
Sharm in their brochures. Pioneer, for instance, works with the tour operators,
distributing 30,000 copies of its promotional map at the airport to new arrivals.
It also prints 5,000 copies of its monthly magazine.
According to the Ministry of Tourism, Sinai now accounts for 32 percent of Egypt’s
8.5 million foreign arrivals. One British tour rep suggested that as many as
one in 20 of British arrivals were looking to buy property. And the market is
not just relying on returnees. Pioneer’s Ward says that whereas six months
ago three quarters of people looking to buy were returning visitors, now around
half were first-timers.
For many, the idea of buying in Sinai has been effectively planted long before
they touch down in Egypt. Firstly, there is the widely broadcast “Egypt:
Gift of the Sun” TV commercial on British television. While some international
publications have called the resort “overdeveloped” and “somewhat
soulless,” others are full of praise. Condé Nast Traveller magazine
featured Sinai as its cover story in January, describing the resort as “heaven
for winter-sun seekers.” British prime minister Tony Blair’s highly
publicized fondness for Sharm has given it an incalculable boost. His family
holiday a few months after the 2005 bombings was a badly needed vote of confidence
at a time of market collapse.
The property sections of British newspapers devote increasing space to foreign
properties for sale. Influential TV shows such as Channel 4’s “A
Place in the Sun” attract several million viewers a week and generate
spin-off magazines and exhibitions. The latest, the 2007 “A Place in the
Sun” exhibition, held in London in late March, attracted around 20,000
visitors over three days. Egyptian exhibitors had a strong presence, and the
country ranked in the top ten of “hot countries,” in close company
with more established markets such as Spain, Dubai and Cyprus.
And recently, most of the news has been good. Prices have been rising by 25
to 30 percent in the last 12 months. Rents at the moment are good: studios can
be let for around LE 1,500 a month, two-bedroom apartments for as much as LE
7,000. Sharm Al Sheikh International Airport is now capable of handling 7 million
passengers a year following an expansion completed in April 2006.
The government has also done its bit, ensuring that developments complete infrastructure
before selling units. Success has followed. Egypt Experience, a British-Egyptian
company, sold 36 units in Sharm in the last two years, says company director
Jennette Bradbury. They are now selling in Hurghada. After “extensive
marketing in the leading magazines for overseas property, we have generated
over a thousand leads [for Egyptian property] so far in 2007.”
The growing British population is changing Sharm’s dynamics. Britain recently
established an honorary consul in the resort to serve the growing number of
British visitors and residents. According to Mark Rakestraw, the British consul
in Cairo, there are now on average 10,000 British vacationers in Sharm in any
given week – many of them visiting their properties there. He puts the
number of British families residing in Sinai and registered with the embassy
at 250.
Amenities are lacking, but improving. The Sharm British School, opened in 2005,
has 56 pupils between the ages of two and seven. Healthcare, however, is a major
concern. For people retiring to Sharm, the International Hospital will probably
not meet UK standards of nursing.
Shaky foundations
Security is the wild card. The July 2005 bombings in Sharm Al Sheikh caused
six months of devastation to the tourism industry. Property sales ceased altogether
say Pioneer’s Ward and the property market was “saved,” mostly
thanks to the fact that many buyers were committed to installments. “No
one backed out of a unit to which they had committed,” he says.
The question of political risk is not merely one of terrorism, however. Presidential
succession, the growth of the Muslim Brotherhood and the suppression of opposition
are rarely mentioned in Sinai-related stories, but all are important to British
home-buyers weighing up a future investment. Yet knowledge of the political
situation in Egypt among many British buyers who frequent the various Egyptian
property chat rooms is often negligible.
Another hurdle to growth is the lack of mortgage availability in Egypt. Three
years since parliament passed the mortgage law, the amount of money being lent
is still pitifully small and lending to non-Egyptians non-existent. “They
say it’s going to happen in six months, but I don’t see it happening,”
says SSQ’s Kennedy, expressing the concern of many. That means British
investors must either pay cash upfront or in installments, or raise capital
on the security of their UK property. Realtors suggest potential buyers get
in touch with a UK-based mortgage company, which can arrange a £40,000
loan for an Egyptian property on the security of their British property for
as little as £150 a month.
The Egyptian government is publicly committed to developing a mortgage market
and companies such as Taamir Mortgage are now offering loans to non-Egyptians
so long as they can supply a certificate proving at least 10 years of property
ownership. With local interest rates at 13 percent – nearly double those
in the UK – however, most British buyers would surely prefer to borrow
in sterling rather than bet on another devaluation of the Egyptian pound.
But the biggest headache, by far, for foreign buyers, sellers and agents in
Sharm Al Sheikh is the status of the law. “Everything is very, very gray,”
says Pioneer’s Ward.
Before 2005, developers were selling to non-Egyptians on a freehold basis, that
is ownership of the land and building in perpetuity. In that year, however,
Prime Minister Ahmed Nazif issued Prime Ministerial Decree 548/2005 “Concerning
Non-Egyptians’ Ownership and Usufruct of Residential Units in Certain
Areas.”
Article 2 of the decree relates specifically to Sharm. “It is permissible
to grant an usufruct [lease] to non-Egyptians with regard to residential units
for a period of 99 years maximum in Sharm Al Sheikh city by virtue of a decree
of the competent body after obtaining the approval of concerned entities.”
" No one backed out of a unit to which they committed"
According to realtors that Business Monthly spoke to, the 99-year lease –
unique to Sharm – was added due to the concern that Israelis were buying
up Sinai. One Egyptian real estate agent who did not wish to be named, pointed
out: “A lot of the buyers had Jewish-looking names.”
The first problem with the concept of a lease, explains Abbas El Bahrawy, a
Sharm-based property lawyer, is that it means different things in Egyptian and
British law. In the UK, a long lease passes to the deceased’s heirs. Under
local law, a lease reverts to the freeholder (the developer) on the death of
the leaseholder. To avoid this, says El Bahrawy, a buyer’s lawyer should
insist on a clause stating that in the event of the leaseholder’s death,
the developer will assign the lease to the heirs of the deceased. At present,
however, a majority of new leases do not contain the relevant clause.
Another problem is title registration. The government made registration considerably
cheaper in 2006, capping it at LE 2,000, though lawyer fees can add considerable
cost. Many buyers, even when the situation is explained to them, do not wish
to pay the additional cost of registration fees, particularly on the lower cost
properties, says El Bahrawy. He points out that registration still takes time
– anywhere up to 15 months. More critically, registration is not available
to leaseholders.
Buyers of leaseholds should at least notarize their contracts with the authorities
in South Sinai’s capital, Al Tor. Notarization, unlike registration, is
not proof of lease ownership, but it is an important element of protection in
establishing priority of interest in the event of disputed ownership.
The vague wording of the decree, combined with the fact that parliament has
still not got around to approving it, has left the parties concerned in a considerable
state of confusion. No one is really sure whether non-Egyptians can still buy
property on a freehold basis. Certainly, resorts such as Delta Sharm in the
Hadaba area of the city continue to sell and resell on this basis. “Technically,
a decree does not cancel a [previously existing] law, it merely gives another
option,” says El Bahrawy. Other observers add that a further unwelcome
consequence of the legal confusion is some officials have been demanding unwarranted
fees.
Legal certainty is important in a market where transparency of ownership is
a real problem. Who controls the developer is of vital concern to any buyer.
Perhaps as much as two thirds of total sales – and in the case of one
agent 85 percent – are off-plan. In other words, buyers are paying upfront
and with no security in case of the developer’s insolvency.
The Sharm rumor mill has been buzzing with the imminent collapse of one resort
development as creditors move in for the kill. Off-plan buyers in such a situation
will almost certainly find themselves well down the list of creditors. And that’s
not good for anyone. If the worst happens, Egypt can expect to be in the firing
line from the various British consumer programs and magazines.
Unregulated market
One of Sharm’s selling points has been the impressive capital growth in
the last 18 months, but some insiders suggest that developers are manipulating
prices. Recent price hikes at some resorts are not the result of increased demand,
but rather an attempt to provide good publicity and maintain impressive capital
growth, say cynics. Since no one in Sharm is quite sure exactly how many units
are currently being built – perhaps as many as 35 resorts with 500 units
each – the long-term investor, particularly in the buy-to-let sector,
will need strong nerves.
Another concern for buyers is the lack of regulation on licensing procedures
for realtors. SSQ’s Kennedy says as of April 2007 there were 212 agents
operating in Sharm, compared with around 70 only 12 months earlier.
Nader Al Sharkawy, owner of Magic Well Real Estate & Investments, makes
a comparison: “Recently, when there was a serious problem with the diving
industry here, the situation was threatening the reputation of the resort. PADI
[Professional Association of Diving Instructors] and SSI [Scuba Schools International]
together forced the government to appoint the Ministry of Tourism as regulator.
We need to do the same.”
And yet, he says, even the leading agents are unwilling to cooperate on the
issue. He blames the failure of his industry colleagues to act sensibly on a
short-term boom-bust cycle mentality.
The concept of an independent chartered surveyor to report to the prospective
buyer on the state of the property does not exist in Egypt. Intermediaries play
for both sides. Real estate agents receive commission from both seller and buyer
(in Britain they receive a percentage from only the seller). Lawyers often act
for the agent, developer and buyer.
So far, none of the gremlins lurking in the shadows have made it into the light
of day. But a single horror story broadcast to millions of British primetime
viewers could ruin Egypt’s reputation as a safe bet. With all its natural
advantages, and the already considerable revenues that residential tourism has
brought, observers say it is now time that the government devote itself a little
more assiduously to the long-term ordering of the market.
Tourism minister Garana said in April that his ministry and the Ministry of
Justice were studying the problem of 99-year leases. If Egypt is to achieve
his target of 10,000 residential tourism unit sales a year, he might like to
look into the other issues while he’s at it.
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