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real estate wait by neil macdonald three years after the much trumpeted real estate law, egypt still lacks an effective system for mortgage financing implementation was never expected to be easy. but nearly three years have passed since the people’s assembly finally passed the long-debated real estate finance law (no. 148, june 2001), after years of discussion and extensive mediations between old-school arab socialists, free-market “new thinkers,” islamic scholars and us-trained investment advisers. law 148 – better known as “the mortgage law” – authorizes banks and other institutions to offer financing packages to help homebuyers take the plunge into property ownership. “mortgage finance, also known as housing or real estate finance, could be defined as providing cheap long-term funds or loans through financial institutions... to individuals... to buy, build or renovate a piece of real estate property,” al-ahram weekly explained six months ago, amid expectations that mortgages would be available by year-end. at the same time, the law is supposed to protect the mortgage lender against default by allowing for the eviction of homebuyers who fail to keep up with their mortgage payments. this point – though hard to reconcile with traditional local sensibilities – was the key to making mortgage loans possible in financial terms. all this was supposed to unleash a barrage of new home construction. instead of the glut of luxury villas seen in the past five years, the law’s proponents envisaged a surge of more modest, practical housing developments geared towards sectors of the population that had previously held no title to property. while law 148 technically went into effect in september 2001, the government announced a time frame of just over two years to put mortgages into practice. the stated deadline, in fact, was the end of 2003. yet today, more than a month into 2004, the real estate market is still in a slump, while accessible housing loans – the whole point of the law – remain elusive. investors still pin high hopes on the mortgage law as a way to kick-start the construction sector, thus fueling growth in the wider economy. but they are understandably anxious about when it will happen. going into overtime recently, government officials assured real estate companies that the law would be put into effect during the first quarter of 2004. that doesn’t leave much time to clarify property registration procedures, set up a credit-review agency, issue mortgage-based stock market instruments and create special insurance firms to back up housing lenders – all steps the realtors say are needed to ensure smooth, effective implementation of the law. mortgage-financing companies – the prime movers of egypt’s prospective mortgage market – have, at least, begun to take shape. after a painful year of courting investors, the state-run housing & development bank has lined up other shareholders to establish el taameer real estate financing co., the country’s first licensed mortgage broker, with paid-in capital of £e 500 million, the minimum allowed by law. hype about the mortgage law in recent years has drawn international realtors’ attention to egypt’s housing market, and its currently stifled potential. coldwell banker, the local franchise of the us-based international realty chain, is currently “going through the process of obtaining a real estate mortgage broker license,” company officials said. coldwell banker covers seven arab countries (mostly in the gulf) out of its cairo office, the center of a growing franchise operation that started out as homebuyers’ website betna.com. another major us realty brand may soon come into the egyptian market. mohamed baqdounes, century 21’s kuwait-based marketing manager, said his company was “looking seriously for a franchise partner in egypt.” news about the mortgage law’s passage was what originally piqued century 21’s appetite, baqdounes added. both century 21 and coldwell banker hope to be well positioned before mortgage lending takes effect and – presumably – drags the housing market to its feet. but neither company looks to egypt as a place for quick returns. “the egyptian real estate market is currently facing a recession,” coldwell banker’s chief financial analyst gasser sultan said. along with the general economic slowdown during the past five years, he noted “the huge inventory of medium to high-end properties, whereas the bulk of demand is in the low-end sector.” for the mortgage law to work, sultan said, the government must provide incentives to builders to increase the number of low-end properties available. “as a matter of fact, the government has started this process by offering land to developers for free, in addition to bearing 50 percent of the infrastructure costs,” he said. law 148 also obliges the government to ensure that mortgage loans will be accessible to lower-income citizens. more than a year ago, a fund was set up by presidential decree “to ensure that low wage earners pay no more than 25 percent of their salaries to repay loans of their homes,” ali shaker, head of the newly formed general mortgage authority, said. but doubts surround the amount of money actually available, especially following decisions by the central bank of egypt to hold back the first £e 1 billion set aside for the fund. aside from supporting low-income mortgages, the government ought to consider setting up a separate fund to subsidize the interest rates on mortgages for middle-income homebuyers, delta international bank head and former central bank chairman ali negm suggested in an interview with weekly business magazine al-ahram al-iktisadi in 2002. negm suggested that “procedures for obtaining a mortgage could follow the british model,” with estate agents referring potential buyers to a local bank or building society to arrange for suitable mortgage loans. shaker, however, said real estate financing companies, such as el taameer, would cater effectively to the middle-income bracket. shades of the eighties january 29, 2003, added to the hardships of prospective homebuyers in egypt. “the flotation of the dollar rate against the egyptian pound resulted in decreased purchasing power for egyptian citizens,” according to sultan. yet in the absence of a proletarian real estate revolution, the currency devaluation may actually have given a boost to the sagging real estate market. for citizens with assets to spare, real estate was long seen as a no-lose form of investment – until the early 1990s, when the government managed to rein in egypt’s chronic inflation by loosely pegging the currency to the us dollar. the revival of the stock market in the mid-1990s further dampened upper-class enthusiasm for apartments – even empty ones – as a means of storing wealth. but in the spring of 2003, just as local currency devaluation pushed up prices on the staple foods depended upon by the poor, it also bit into the savings of the relatively rich. apartments and villas – unlike shares on the bourse or egyptian-pound denominated bonds, for instance – appeared to hold their value in us dollar terms. actual price stability is hard to quantify in egypt’s poorly documented, illiquid market. ongoing complications from “old rent” contracts, along with prohibitions against renting in dollars (even to foreign nationals), are bound to make some would-be buyers hesitant about buying real estate. at the same time, the typically absentee owners of grand maisons particuliers in districts such as zamalek and heliopolis are notorious for overvaluing their property – in defiance of market logic, as real estate analysts see it. “egyptian property owners tend to overestimate the true value of property,” efg-hermes real estate analyst wessam mohie said. “this phenomenon persists because of the absence of specialized institutions responsible for property valuation.” currency devaluation hasn’t exactly tipped the scale, but it has affected the demand side of the equation. “we have already heard anecdotal evidence of a pick up in real estate volumes and prices in 2003, particularly during the second half of the year,” mohie added. “still, what we have seen are just signs of a slight pick up rather than a material recovery.” real estate is making these minor gains amid a general sense of insecurity. just as economic conditions last year showed an unnerving resemblance to the late 1980s, land and buildings started to look more attractive again. “we believe that inflation, resulting from the flotation of the dollar rate against the egyptian pound, rendered real estate the best investment alternative nowadays,” sultan said. while lack of purchasing power may have held back average homebuyers, last year’s market reportedly saw 1980s-style entrepreneurs and speculators going back into land. “the flotation of the dollar rate also made real estate very cheap from the perspective of foreign investors,” sultan added. the unseen hand of real estate speculators may also be causing renewed pressure on egypt’s modern architectural heritage. several years ago, heritage preservation advocates won general support from the ministry of housing, in the form of a decree that banned the demolition of villas built more than 40 years ago. in november, however, the state council overturned that decree, clearing the way for demolitions and new construction on properties not registered as “historic.” but money is going into modest single-family homes as well as crumbling villas and undeveloped tracts on the urban fringe. the recession, it seems, has not entirely killed off the middle class. “the currency situation is an advantage for egyptians working abroad,” said osama eskander, marketing manager for office rental firm regus. “right now,” he added, “residential is doing better than offices.” recent projects such as citystars and nile city have created an excess of high-end office spaces to match the late-1990s surplus of villas. “these developments are having difficulties so far,” eskander said, although high-quality offices will be needed if the economy picks up speed down the road. what needs must be according to realtors and real estate analysts, the only way to truly revive the market is to put the mortgage law into effect. “we believe the real estate finance law will be the major catalyst in bringing the market to a flourishing condition,” sultan said. “but certain criteria need to be met when putting the law into operation.” as in other sub-sets of the egyptian economy, registration procedures for real estate ownership tend to be a headache. low-tech, pen-and-paper recording methods, meanwhile, limit the practical value of the government’s vast repositories of data. there is no efficient system to find out who owns any given property; also lacking are insurance policies to protect titleholders. according to coldwell banker’s sultan, specialized financial instruments are needed to make mortgage lending a reality on a large scale. to generate liquidity for housing loans, would-be financers are hoping to issue mortgage-backed securities (mbss) “to be traded on the stock exchange, backed by the pool of real estate loans,” he said. in that regard, capital market authority chairman abdel hamid ibrahim announced on january 12 that the ministry of justice was about to complete its revision of an updated capital-market law, one of the last steps before the law can be presented to parliament. the draft law, he promised, covers the securitization process for long-term real estate loans – the essence of mbss. more fundamentally, the market lacks a central bureau to run credit checks on potential homebuyers. banks have only recently begun to integrate their credit-control systems for regular loans. the unified banking law, passed a year after the mortgage law, sketches the outlines of a centralized credit system. but, as with the mortgage law, the true time frame for implementing the banking legislation is unknown. the policy committee of the ruling national democratic party (ndp) has set deadlines for putting new legislation into practice, and is pushing the government harder than ever to meet them, party insiders say. but the same sources also say mortgages are still a very long way from becoming a reality. nearly three years after the people’s assembly passed it, the mortgage law “just doesn’t exist,” an ndp committee member admitted. essam eddin abbas, ceo of arab contractors investment co., took a different view, saying the details of mortgage mechanisms were less important than a healthy overall investment environment. “when funding is made available, all the necessary procedures will fall into place in practice,” he told al-ahram al-iktisadi. “lowering interest rates would be a solution,” he added. “in countries where property mortgages are the rule rather than the exception, the base lending rate is 4 to 5 percent.” abbas called egypt’s 12-13 percent base lending rates “the greatest obstacle facing investors.” in the us, he added, interest rates charged on property mortgages are 1.75 percent less than those on cash loans. he urged the central bank to bring interest rates for everyone – not just low-income, subsidized homebuyers – down to 6 percent. perhaps construction firms could be expected to dismiss the nitty-gritty of getting finished housing units into the hands of end users. but realtors also agree that the fortunes of the housing market will depend on the economy as a whole. “the government of egypt needs to implement balanced monetary and fiscal policies to decrease inflation and stimulate investment,” sultan said. triple penetration according to real estate analysts, the real estate finance law was originally modeled on us mortgage regulations. but few laws have gone through so many rounds of revision – under the eyes of such diverse stakeholders – before becoming the law of the land. committees at al-azhar, the official arbiter of islamic principles, reviewed the draft mortgage law and added their own input on at least two occasions. in the process, what was originally a western-style mortgage system may have been considerably diluted. instead of a simple contract between the homebuyer and the bank, egypt’s mortgage law sets out a “tripartite agreement” between buyer, seller and bank. consequently, if a homebuyer fails to keep up with mortgage payments, the seller becomes responsible for those payments, even years after the conclusion of the sale. “who’d do that?” a us-trained lawyer wondered. risk sharing with first-time homebuyers is hardly the incentive private sector real estate developers were hoping for. “it’s an installment-payment system,” not much different from arrangements already offered by real estate developers in sixth of october city, the lawyer said. but under the new system, “the buyer already holds the title, subject to mortgage.” another concern about law 148 comes back to the old eviction bugbear. coldwell banker’s wish list for government action includes “speeding up repossession and law-enforcement procedures.” as the law now stands, a foreclosed property must be auctioned off as a first step – that is, before any occupants can be thrown out. “this is a problem and would depress the price of the property,” the lawyer said. no one said it was going to be easy. but who ever thought implementing the mortgage law would be as difficult as all this?
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