By: Mohamed Elsheikh, director of Egypt Real Estate Hub, a UK-based agency for new property.
Despite recent challenges following the currency devaluation in 2016 and the subsequent increase in construction costs and decrease in purchase power, Egypt’s real estate market remains one of the most important sectors of the economy contributing up to 10% of GDP. Being a major tourist hub and one of the world’s fastest-growing economies, Egypt has the potential to take on a decent share of the global real estate market; however, several key issues remain to be addressed. With my following proposed six steps, I believe Egypt can compete on the world real estate export map and attract foreign homebuyers.
1. Regulation of Developers Offering Off-Plan Property
The market has recently witnessed several new developers acquiring lands and launching new developments. It can often be a challenge for a foreigner trying to carry out due diligence before embarking on a purchase. The presence of a government regulator to oversee the whole process would provide much reassurance for foreign investors. Similar to what is in place elsewhere, developers that intend to sell off-plan units must be registered with a regulatory authority and are obliged to open a separate escrow bank account for every development. The escrow account receives all amounts paid by purchasers as well as loans obtained by the developers to fund construction works. Such accounts are closely monitored by the regulatory authority to ensure that any withdrawn funds are used only for the purposes of completing the development.
2. Payments Linked to Construction Progress
Most property developers offer extended payment plans of up to 10 years at no added interest with a promise to hand over a new home in three to four years. Problems may arise if developers are behind schedule and are unable to deliver on time, yet they still withdraw payments. Clients, who refuse to pay installments due to delays in handover, may risk losing their units, according to the purchase contract. If payments were linked to the completion of certain stages of the development, this would alleviate many of the worries, which foreign investors may have when purchasing off-plan property in Egypt. Knowing that payments will only be required when pre-agreed construction stages are completed increases the confidence of foreign investors in the developer they choose to buy from.
3. Bank Cheques for Completion of Off-Plan Property Purchases
Some of Egypt’s biggest developers require clients to provide cheques from an Egyptian bank as a means for collecting installments. Without this, an off-plan property purchase cannot be made. The only alternative offered to foreigners, who have no bank account in Egypt is to pay for the property in full by handover… meaning they would only have a three to four-year payment plan. This is off-putting to many foreign investors as they are unable to take advantage of the longer extended payment plans. The developers consider bank cheques an important mechanism to ensure the collection of funds in a timely manner; whilst the foreign investor may not want to go through the hassle of opening a bank account in Egypt. This requirement makes the process a lot less smooth for the foreign purchaser. This is another reason why the presence of a regulatory authority to supervise the entire process of off-plan property development is essential. The authority can set out the procedures for a developer to terminate an off-plan sales contract when a purchaser defaults on payment obligations.
4. Mortgages for Foreign Homebuyers
Egypt’s property market is largely cash-based with mortgages forming a small proportion of transactions. Financially strong developers are able to offer extended payment plans, which range from five to ten years on off-plan property. Foreigners would usually prefer to finance the purchase of a property through mortgages, which enables payment over a longer number of years (up to 20 years) with an added interest. In case of buying an existing key-ready property, a larger deposit or the full property price would usually need to be paid up front, and this is when mortgage schemes become necessary to enable foreigners to complete their purchase. The provision of mortgages in Egypt by banks is likely to boost sales made to foreign homebuyers.
5. Semi-Finished Vs Fully Finished and Furnished Homes
The majority of developers in Egypt deliver semi-finished units. Homebuyers in Egypt may prefer to buy a new home, which is delivered semi-finished so that they can complete the final finishes of their property to their own taste. When it comes to foreigners, who are buying a holiday or retirement home, the cost of finishing as well as furnishing the property becomes an added amount that needs to be considered. Therefore, developers aiming for international sales- must be able to offer fully finished units as well as furniture packages so that a foreigner can be clear on the exact amount they would need to come up with before they can make full use of their new home. In addition, developers must be able to provide foreign homebuyers with reliable and accurate information regarding the cost of registering a property, associated legal fees, and taxation as well as average charges for utilities such as water and electricity. Although this information might not seem so critical, it is quite important for example in the case of retirement homebuyers to enable careful financial planning and making an informed decision on their property purchase.
6. Property Management and Guaranteed Rental Income
It is well known that one of the advantages of buying off-plan property is capital appreciation by completion. Equally important for investors is the potential for rental income. Offering foreign purchasers guaranteed rental income schemes could be very effective in attracting investors. Many foreigners prefer to purchase from a developer that can manage their property after handover, including maintenance of the property as well as renting it out when it is not being used by its owner. Property management includes helping the owner find tenants, prepare contracts, property inspections, and handling paperwork. Other similar management services that would make developments more attractive include pool servicing, garden management, air conditioning service, pest control, weekly inspections, cleaning services, utility bill payments, and property insurance.
Find this opinion piece in our January issue, page no. 41.