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THERE’S NO PLACE LIKE HOME
In a global economy, any major player’s booms or busts are bound to be felt in some form or another worldwide. So when America hits an economic rough patch, everyone braces for the repercussions. The recent credit crunch in the US, and the accompanying housing and mortgage finance panic, has sparked the rumor that the problem could be contagious, and Egypt’s real estate bubble might likewise be about to burst. But while our economy is facing plenty of challenges, a real estate and credit bust is probably not one of them, for two important reasons.
The first is that Egypt’s mortgage market is only worth the equivalent of less than half a percent of our GDP, as compared with a whopping 65 percent of America’s and 45 percent of Europe’s. The second is that local demand for housing and real estate development still vastly exceeds the supply. Meeting that demand has resulted in 15-percent year-on-year growth for the construction sector. Despite the rising cost of building materials, the sector shows no signs of slowing down, and is, on the contrary, helping drive the economy.
A recent report from Morgan Stanley underlines Egypt’s strengths as the largest property market in the MENA region, dependent on local rather than foreign demand. Buying power may vary dramatically in Egypt, but economic growth has helped boost the ranks of the middle class. According to Morgan Stanley, Egypt’s “addressable market” (i.e. potential property buyers), the top-earning 35 percent of the population, amounts to some 26 million individuals, a market segment expected to reach 29 million by 2012. For now, the percentage of Egyptians who live in their own homes remains low, just 32 percent, compared to Jordan’s 75 percent and Tunisia’s 67 percent. One of the main causes, the lack of mortgage finance, is being addressed and the economic forecast is positive.
With property values on the rise, buying a house requires long-term loans and the ability to use the property as collateral. Mortgage Finance Law 148/2001 is finally bearing fruit, with seven specialized companies and 16 banks now providing mortgage finance.
Streamlined registration for property owners and lower registration fees have improved people’s access to mortgage loans, and the amount lent last year of LE 2 billion is expected to double in 2009. This kind of financing is still new to Egypt and public awareness campaigns will help spread the word, but, given the choice, most families would rather buy than rent, and many more will have access to that option.
Meanwhile, housing shortfalls remain substantial. Research published by HC Securities based on government estimates stated that of the 680,000 housing units required in 2007, only 250,000 would make it to market. But it is worth noting that 94 percent of the completed units targeted low- to middle-income buyers, where demand is greatest. While high-end housing has been the focus for many developers, the trend is shifting to meet the needs of a large market segment for whom affordability is key. Business models that include financing arrangements for buyers will help boost this market, further fueling construction growth and the economy at large.
Egypt needn’t worry about a credit crunch or mortgage collapse, but America’s crisis should serve as a warning. One of the reasons Egypt lacks mortgage finance is that it takes long-term funding to back it up, usually from insurance and pension funds. These are both very weak players in our capital market, so other kinds of bonding must replace them. Revamping Egypt’s insurance and pension sectors will ensure the long-term funding resources to support mortgage finance on a national scale.
For the mortgage market to grow, aside from securitization, loans need to be carefully packaged. Financing arrangements in Egypt have to be straightforward and adapted to the buyer’s means, so that people will be encouraged to purchase homes that improve their lifestyle without fear of bankruptcy. Likewise, the demand for affordable housing must be met, with both the private and public sector supporting the supply process. Given the market dynamics, providing low- to middle-income housing with appropriate finance arrangements is a good investment. Above all, hard-working Egyptians deserve the security of owning a decent home, and providing that opportunity remains one of the primary goals of economic reform.
OMAR A. MOHANNA
President, AmCham Egypt
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