by Eman Ibrahim & translated by Shimaa Abdel Aziz
Despite the unparalleled growth of the Egyptian real estate sector witnessed during the past seven years, the question on real estate funds remains unanswered. Yes, despite the growth, Egypt has only one non-competitive fund, Egyptians Real Estate Investment Fund, which signifies the lack of interest in establishing real estate investment funds. Invest-Gate seeks answers on the impeding matter, identifying its problems and proposed solutions.
Real estate funds are one of the most prominent investment tools used globally, generating trillions of dollars. They aim to maximize the exploitation of real estate assets, whether rent or exploitation right, and convert them into financial tools with a diversification of private ownership for each shareholder, providing higher returns as well as attracting investors, and obtaining financial liquidity that allows an increase in return on assets.
Experts attribute to “Invest-Gate” the reason behind the lack of interest in establishing these funds to the absence of that culture among citizens and investors, as well as the inconsistent legislative and tax environment, despite the real estate sector being considered one of the safest investment havens.
They also call on the government to speed up tax facilities to help investors establish more real estate funds, stressing its role in financing real estate developers to further support the sector. Let alone, the anticipation of banks promoting such product and the guarantees they request.
Obstacles of Establishing Funds
Mahmoud Gad, an analyst at the Arab African International Securities, clarifies the three main obstacles to establishing real estate investment funds. According to Gad, the first is the culture. “Real estate funds are new to the Egyptian culture, hence the Egyptian real estate market; therefore, raising awareness is a must by revealing the importance of this investment tool,” he explains. The bureaucracy behind its development and longtime frame its procedures may require comes in second.
The third obstacle, the analyst highlights, is the imposed taxes on income and distribution set by the Egyptian government, “whereas most countries rely on facilitating and exempting taxes on the distribution of real estate funds,” he clarifies. “This hurdles this major investment tool from flourishing by reducing its ROI and attractiveness,” Gad says.
The Egyptian Real Estate Fund has been listed in the Egyptian Stock Market for three years now. Addressing the taxation issue, Fathallah Fawzy, vice chairman of the Egyptian Businessmen Association and a member of the Egyptians Real Estate Fund, confirms, “The major obstacle facing this investment culture is indeed that all fund documents are subject to tax.”
Alsherif Wahdan, one of the founders of the East Coast Real Estate Consultancy, agrees on the matter and confirms that the Egyptian market has only one fund due to the current exaggerated fees and taxes associated with it, “which will disable policy holders from achieving a large positive return,” he says.
During the past few years, there has been attempts by some companies to establish several real estate funds, but all were deemed unsuccessful, including that affiliated with Al-Naeem Company, with a target of EGP 1 bn. According to the statement issued by the Egyptian Exchange, such experiment failed, and all subscribers’ capital was refunded. The National Asset Management & Investment is another example. The company has permanently retracted from the establishment of its real estate fund, because of the stalled negotiations. Furthermore, the company found other alternatives represented in its new project, New Heliopolis in El Shorouk City, according to its recent issued statement.
Legislative Environment Development
Experts call for the development of an updated legislative and tax environment in Egypt, by placing more incentives for all parties operating within the real estate sector, in addition to calling for a reduction in incorporation procedures.
In this regard, Gad stresses on supporting investors. “The investor must be supported by placing a tax exemption on income or distributions and a binding clause for the fund to distribute specific percentages of profits,” he suggests.
Also, Fawzy says that the only solution is to give tax incentives on fund distribution, which “will contribute to concerted efforts between the state and investors to achieve the Egypt Vision 2030,” he believes.
Currently, the Egyptian Cabinet reveal its intention for a proper reform by introducing new amendments to the rules regulating the procedures of real estate funds with the aim of providing more facilities and attractive features that would increase this investment product in the Egyptian real estate market. Back June 2019, the cabinet issued a decision to amend some provisions of the capital market executive regulations related real estate funds procedures, including the reduction of the time period required to evaluate assets and securities of funds that are not listed in the stock exchange from once every three months to once every six months.
Provide Liquidity to Developers
Gad points out that the real estate investment fund is an important method to generate liquidity into the sector by pouring in capital and reinvesting it in the real estate sector. “It will also flourish other important entities, including real estate appraisal and management companies,” he says.
Fawzi states, “The construction sector makes approx. 16%, if not more, of the national product with around 120 other industries relying on that industry; so all must facilitate everything related to the real estate sector and make it a successful industry,” he comments.
Wahdan believes that Egypt needs at least 100 real estate investment funds in the current period given the amount of assets currently available. Furthermore, it will help real estate developers reach their targets quicker.
Banks’ Attempts & Real Estate Funds Popularity
Recently, Banque Misr announced its real estate fund management company with an initial capital of EGP 500 mn, a move thought hopeful among some economists. Hani Aboul Fotouh, an economist, says that “this move constitutes a good start for creating this type of investment culture in Egypt and will help grow the popularity of real estate funds among investors,” he comments. Aboul Fotouh believes that this move will encourage banks to take this step, in accordance with their individual investment strategies.
With the growth of the real estate industry in Egypt today and the large investments that are pouring in from border to border, there is a general call among market leaders, funds experts, and economists to utilize real estate funds as it is the sole mean of benefiting from the abundance of assets this industry is soon to witness. They all call for the Egyptian government to facilitate the development of this investment product to maximize resource and generate liquidity.