Translation: Muhammad Khalid
The fast-paced economic developments and crises all over the world resulted in surging prices of many commodities, including building materials, which – in turn – pushed higher the cost of real estate projects and, therefore, caused inflation in property prices. Thus, mortgage finance has become the best and only option to maintain activities in the real estate market.
Implementing a mechanism of mortgage finance for both developers and individuals will revitalize the market, boost sales, accelerate capital turnover, and protect developers from the risk of price fluctuations and potential crises. Therefore, the state did not spare effort in supporting mortgage finance and launched two initiatives for low- and medium-income citizens. The first initiative has a 3% diminishing interest rate for a maximum term of 30 years, while the second has an 8% interest rate for a maximum term of 25 years. Both initiatives were launched by President Abdel Fattah El-Sisi and supported by the Central Bank of Egypt (CBE) with participation from many companies and Banks.
Despite the success achieved by the two initiatives, there are still some challenges facing mortgage finance in Egypt. Invest-Gate sheds light on relevant challenges and obstacles and highlights top recommendations to tackle them, in order to address the current inflation wave and support the real estate market’s efforts to overcome the current economic crisis.
Challenges and Obstacles
In this regard, Alaa Fikri, a member of the Real Estate Investment Division, says: “We have two fundamental issues in the mortgage finance sector. The first is the interest rate which represents a hurdle. For instance, in a 10-year payment plan, the cost of finance would reach 80% of the original amount of the loan, which is a huge percentage.” He adds: “The purpose and philosophy of mortgage finance all over the world are based on low-interest rates and long-term installment plans at values equivalent to those paid in cash purchases. However, that system doesn’t exist in Egypt.”
Fikri notes that the second issue is the procedures of the finance process, which differs from one bank to another and from one company to another, but it generally takes a very long time and, in most cases, customers prefer not to complete the plan with the bank and opt for installment payment systems offered by Developers.
Fathallah Fawzy, Chairman of the Construction Committee at the Egyptian Businessmen Association (EBA), says that interest rate is among the key challenges that face mortgage finance whose success in Egypt depends on granting customers 80% of the value of units, but there are no active initiatives for units offered by the private sector.
In the same vein, Osama Saad Eldin, CEO of the Real Estate Development Chamber, reiterates that mortgage finance is a must, because it has a major role in expanding the financial solvency of real estate developers and customers, but banks set tough executive regulations limited the implementation of mortgage initiatives, which made units inaccessible to many people.
He reveals that Prime Minister Mostafa Madbouly was contacted to solve that crisis, adding that there was a proposal to set units as guarantees for the loan and dictating that, in case of default by customers, developers should pay the whole value to banks.
Furthermore, Basheir Mostafa, CEO of First Group Development, explains during a recent Roundtable by Invest-Gate that the system of mortgage finance in Egypt should be simpler, as it sometimes contradicts the interests of developers. He suggests that banks should modify their internal regulations to finance developers to enable them to launch projects after completing 30% of them, according to presidential directives.
Many developers requested the CBE to reconsider regulations governing lending real estate developers to avoid high interest rates that are shouldered by real estate companies, which led to hikes in the prices of property products and made it harder for companies to secure financing.
Fikri stresses the importance of adjusting prices to new costs, as the Egyptian pound recently lost 60% of its value, noting that the CBE couldn’t continue with prices set before the devaluation of the pound.
Saad Eldin states that a meeting was held with the CBE to discuss borrowing conditions and the Real Estate Development Chamber set some relevant parameters that are currently under study. He comments that, apart from the overestimated interest rates, additional administrative expenses and other fees raise the value of the rates, after the financer and the developer agreed with the bank on certain rates for the loan, which puts more burden on the developer. Saad Eldin hopes for interest rates to include all expenses, otherwise, developers would be discouraged from borrowing.
The CBE Suspends Mortgage Finance
On November 20th, Prime Minister Mostafa Madbouly issued a decree transferring the responsibility of low interest rate mortgage finance initiatives from the CBE to other government bodies, including the ministries of housing, finance, and tourism. Accordingly, the Ministry of Housing bears the cost of subsidized interest rates of the 3% and 8% initiatives. The CBE also reduced the allocations of the 8% initiative from EGP 50 bn to EGP 15 bn.
Commenting on the decree and its impact on mortgage finance, Abeer Essam, a board member at the Real Estate Development Chamber at the Federation of Egyptian Industries (FEI), explains that the decree was issued after a thorough study and it entails a lot of advantages that are currently considered by the chamber to serve the interest of customers and developers. She adds that mortgage finance is the only way to buy a property in Egypt nowadays and the only solution to the recession in the real estate sector.
She highlights that the chamber introduced recommendations to the Cabinet that aims to determine the amounts of mortgage finance based on the completion of the project, including financing 30% of the unit’s price if the concrete structure of the building is completed and 50% if bricks and other layers are completed. By these rules, Essam adds, companies would receive financing in tranches and, consequently, so would customers. She notes that a law on these rules is expected to allow banks to cover part of the prices of property units.
Recommendations to Facilitate Mortgage Finance
Saad Eldin hypothesizes that if mortgage finance initiatives expand to include buildings under construction, not just those that are finished, developers would be encouraged and the market would become more active with more sales. He explains that 90% of developers don’t carry out finishing, and when requested to do so, they set exaggerated prices which causes some to decline their offers, as finishing typically takes longer time.
Amin Massoud, Secretary of the Housing and Utilities Committee at the Egyptian House of Representatives, reiterates that it is necessary to look for a new mechanism to include buildings under construction in the mortgage finance initiative to encourage developers, adding that the state must prioritize mortgage finance to vitalize the economic activity.
On the sidelines of one of Invest-Gate’s roundtables, Nader Khozam, Chairman of IL Cazar, calls for the financing of units under construction. He says: “The mortgage finance plan should include units under construction alongside the land of the project as a guarantee and the market value of both should be financed. Should that be applied, it would reduce prices for customers and cut costs for developers.”
On the other hand, Firki objects to financing mortgage of buildings under construction, maintaining that this would be construction finance which is another service provided by banks and has special procedures. However, he notes that mortgage finance’s procedures must be fast and initiatives should have a timeline. He remarks that initiatives should be long-term to allow for the devising and implementation of investment plans, and should match the average level of income in Egypt. He comments that the state can achieve these suggestions in its projects and tailor conditions of mortgage finance to average income, but the private sector couldn’t.