Why Invest in Income Property?

Tuesday, 9th August 2016

By Fatma Khaled

Despite the instability of the Egyptian market over the past few years, it has become common knowledge that one market has withstood the repeated economic shocks and has managed to flourish against the overarching downwards current.

Real estate is perhaps the only industry that continues to see tremendous growth amid the complications of the economy, with many—both investors and individuals alike—relying on it as the safe haven for investing their cash.

Seeking to set themselves apart in a highly competitive sector, a number of companies have segued into a new branch of the real estate market, offering rental and management of properties as a service offered alongside their regular property market, promising that in conjunction with the regular appreciation of the property value, the buyer will also benefit from a regular flow of income generated from the property. Among the pioneers of income property in the Egyptian market are Porto Group, Brouj Egypt, and Italian Square.

Income property is defined as earning income through renting, leasing, or price appreciation of a property that can be residential or commercial, where residential properties are referred to as “non-owner occupied” that carry a mortgage of a higher interest rate than that of an “owner-occupied” mortgage.

The Egyptian market is currently filled with real estate developers and companies that offer the service of managing those income properties, a process often referred to as property management. This involves the management of personal property, tooling, systems, physical capital assets, and manpower required to maintain acquisition, control, accountability, maintenance, utilization and disposition.

Successful Examples

A vibrant example is Porto Group, a subsidiary of Amer Group, one of the most prominent developers in the Middle East and North Africa. Porto Group managed to develop projects in several destinations that combine residential, retail, office spaces and international restaurants.

Porto Group operates mainly on four vital interlinked lines of business that include not only real estate, but also malls, hotels, facilities’ management and sales, and vacation club services.

The company states that it provides facilities management and maintenance for all of its developments, offering many retail spaces in its recently established entities, and some found in Porto developments, which have sold approximately 19,571 units since 2005.

Porto Group is not the only real estate company that provides such services; many competitors have emerged recently to the scene, such as Italian Square, which mainly focuses on running and managing properties for its owners.

Italian Square is a commercial brand that was developed and managed by Misr Italia, which focuses on running the unit and renting it with what they describe on their website as a guaranteed income that increases annually.

The company the focused on renting and managing an investor’s business offering approximately 119 retail, administrative, and service units for coffee shops, offices, clinics, nurseries, beauty centers, etc.

The company has stated on its website that their main goal is to develop a higher return on investment (ROI) than from other sectors, such as banking, the stock market, and real estate investments.

According to Misr Italia, it is internationally recognized that the return real estate commercial investment reaches 18%; a number that is uncontested in any investment project.

The company recently began selling its commercial units in the final phase of its projects in New Cairo and 6th of October City, which boast a modern design and superb location, with shops, cafes, restaurants, banks, and nurseries, a salesperson told Invest-Gate.

She also added that customers make a down-payment of as little as 10% of the total price of the unit as prepayment, and can choose to pay the rest over six years from the date of purchase, describing this as the “competitive edge that makes Italian Square different from other companies.”

“The price of one meter costs EGP 84,000, and will be rising by 5% next month. The increase is primarily based on supply and demand,” another Italian Square employee told Invest-Gate.

Brouj for Real Estate is another competitor with a business model based on income property management. It is known for marketing projects in accommodation, administration, and luxury resorts, and is dedicated to property management and real estate investment.

The company’s real estate marketing analyst stated that there has been a noted increase in the supply of commercial units since 2009. In addition, with the expansion of commercial and residential units for rental usage, businesses have an opportunity to operate in new buildings rather than old ones, which is considered a form of an income property investment.

There are two primary factions behind the expected increase in demand, according to the company’s analysis; multinational businesses seeking a presence in Egypt and Middle Eastern companies that have recently started to relocate in Egypt to escape avoid the challenging environments and cost of operating in Dubai and Lebanon.

“Our current projects include properties in North Coast resorts, where customers buy a residential chalet at a starting price of EGP 650,000 and sign a contract with the resort’s hotel that will be further responsible for attaining the monthly rental rate and providing maintenance before offering it for rent,” said Ayman Kamel, a sales administration employee at Brouj.

Considerations before Investing in Income Properties

Considering the challenging investment climate in Egypt and the volatility of the Egyptian pound against the US dollar, some Egyptian real estate companies advise investors to answer certain questions before investing in an income property in order to cut potential losses.

Investors must decide on several factors, including whether they will invest in a unit for accommodation or investment, the size of the space needed and its internal division, the facilities that can be provided by the residential or commercial unit, and the price compatibility with similar projects in the same area.

The concept of income properties has existed in the Egyptian market for some time, and similar investments have also been applied in other developing countries with economies similar to that of Egypt, such as India.

Investment in income and commercial properties in India have witnessed both advantages and a number of challenges due to the same disadvantage Egypt is facing currently, one of which is the Indian rupee’s continuous depreciation against the dollar. Therefore, the quest for high returns poses a challenging task.

Similarly to Egyptian investment laws, Indian investment laws stipulate that non-residential Indians can own unlimited residential and commercial properties. However, they are not allowed to purchase agriculture lands, farm houses or plantation properties. The law also states that a maximum of 80% of the property’s value can be funded by a financial institution.

The Indian investment market has witnessed advantages behind income properties, including confirmation by Indian private bankers and clients of wealth management firms that they have strategically started investing in income commercial properties because of the gained assets that can protect their portfolios from inflation and stock market instability.

Another potential advantage, which can also be found in the Egyptian market of income properties, is the availability of chances for small investors who can invest in newly-built retail units and offices of smaller spaces.

Investors, however, also face a number of challenging potential disadvantages in the market when running an income property, which include the unstable increase of net rental income; according to the Global Property Guide, it is taxed at progressive rates ranging between 20% and 30%.

One example is the rental control in Delhi, which is based on the maximum annual rent, i.e. 10% of the construction cost and the land’s price, which are assessed based on historical value rather than the property’s current value in the market.

Similar to Egyptian investors, Indian investors may face trouble as landlords in protecting their property from unwanted or overstaying renters, and although the case may be taken to court, the enforcement process may take years.

The very low Indian gross rental revenue is another disadvantage. In other words, the percentage of return on purchase of property is low, even though residential property prices are high.

Bottom Line

Income property, while a new and emerging trend, currently can be seen as one of the most lucrative investments in Egypt. Combining both the safe haven of turning a devaluating currency into appreciating brick and mortar, and securing regular income.

Delegating companies to run and manage your property, ensuring maximum output is an ideal process for those seeking a detached source of capital, and one which will pave the way to income regardless of economic status.

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