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Mortgage firms look forward to real
estate explosion
Three years on from the passage of the mortgage law,
would-be homeowners are finally taking out mortgages, despite a
host of infrastructural difficulties that have served to delay implementation
of the law.
While those in the industry admit that there are
still many obstacles to overcome, most agree that – given the
demand for the product – success is inevitable. “The atmosphere
of activity is extremely positive,” said Roderick Richards,
the managing director of Egyptian American Bank (EAB), which is
launching the £E 100 million Egyptian Housing Finance Company
in October, along with several other partners, including the Bank
of Alexandria.
An indication of the government’s commitment
to the industry was the appointment in August of Sameh El Torgoman
– previously chairman of the Cairo & Alexandria Stock Exchanges
(CASE) – to head the General Authority for Real Estate Financing
(GARF), mandated with tackling the many obstacles still faced by
the nascent sector. A number of players in the financial world,
who worked with El Torgoman while he was head of the CASE, expect
his appointment to energize the painstaking process of creating
a viable mortgage-financing system.
What’s more, the change of GARF leadership
occurred just as the authority was shifted from the Ministry of
Housing to Mahmoud Mohieldin’s new Ministry of Investment,
which also includes the authorities for trade zones and for capital
markets – bringing together several sectors key to reforming
the wider economy.
This is only the latest in a long series of moves
for the authority, which began its life under the auspices of the
Ministry of Economy. When that ministry turned into Foreign Trade
in late 2001, the authority was shunted into the housing portfolio.
Despite the passage of the mortgage law in 2001,
GARF – which will oversee new real estate finance companies,
train and license property appraisers and, hopefully, maintain a
mortgage system where none existed before – wasn’t officially
incorporated into the government budget until July 2003.
Since then, though, the project has gathered steam.
In February, the first mortgage company, the Taamir Real Estate
Financing Company, was established by the state-owned Housing &
Development Bank with capital of £E 500 million, and has even
started processing applications. “We have some files, which
is a good start – around 55,” said Housing & Development
Bank chairman Fathy El-Sebai Mansour, expressing cautious optimism.
“In some cases, we’ve already paid money – but for
very few. We cannot say the market is up and running on just a few
cases.”
After all, many obstacles remain. For instance,
most properties in Egypt can’t be sold under the new law simply
because they’ve never been properly registered: long, complicated
property registration procedures are widely considered to be one
of the biggest impediments to opening up the real estate market.
It used to be that a landowner hoping to register property would
have to pay fees of 12 to 14 percent of the property’s value
– in addition to spending months untangling red tape. Recent
reforms, however, have cut fees to just 3 percent, while the authority
is endeavoring to build a national registry of properties to speed
up the identification of saleable real estate.
Until that happens, though, industry experts say
registration will remain more cumbersome than a properly functioning
market can bear.
Determining the eligibility of buyers – in
the absence of a national credit bureau that can detail a client’s
credit history – will also be a major hurdle. Currently, mortgage
companies are certifying clients’ incomes by getting written
earnings statements from their employers. This becomes difficult,
though, when a client works in the public sector, where official
salary statements tend to be quite low, and don’t include the
many bonuses vital to employees’ wages. Those who are self-employed,
meanwhile, have to present tax statements, but problems inevitably
arise with tax-exempt entities, which can’t provide such documentation.
The Central Bank, therefore, is currently in the
process of establishing a credit bureau, which wouldn’t only
highlight negative credit behavior, such as loan defaults, but would
also recognize those who had a history of promptly paying their
bills. Such an entity would reduce the risk to banks and, ideally,
allow them to lower interest rates.
Finally, there is the issue of repossession in the
case of default. It’s no longer impossible to evict delinquent
renters from property, but it remains a difficult and lengthy process.
While such an outcome remains a worst-case-scenario, for both residents
and mortgage companies, the legal groundwork must be prepared for
such contingencies if the wider system is to work.
According to economists, meanwhile, the rewards
for a functioning real estate financing system are immense. A building
boom in the 1980s and 1990s left an estimated 2 million housing
units standing empty, while, at the same time, millions of Egyptians,
of all income brackets, can’t finance the housing they need.
Once banks are able to help people buy homes, the
effects will be far-reaching. For one, many more people will be
able to afford homes – no small thing for young couples whose
future marriage depends on the possession of an apartment. Secondly,
the millions of pounds currently tied up in vacant real estate holdings
will finally be released back into the economy. Moreover, the construction
industry will be reignited, which will in turn stimulate the steel,
cement and general building-materials sectors.
While there are only two mortgage companies extant
currently, experts say it’s still early days. “Over time,
the banking community will find it a profitable area to get into,”
predicted one US official.
Together with other international aid agencies, the
United States Agency for International Development (USAID), at Cairo’s
behest, has closely advised the government on the development of
a viable system for real estate financing.
The plan seems to have the confidence of the big-business
arena, with a number of big international real estate companies
opening Egypt offices. Multinational Coldwell Banker, for example,
is looking to open a finance section soon that will function as
a “facilitator” between its clients and mortgage finance
companies.
The first mortgage loans will probably go to more
affluent clients, as the kinks of the system are worked out. But
once companies gain confidence, client bases will broaden to include
more diverse segments of the population.
Right now, the target client is the middle-class,
two-income family that isn’t able to buy an apartment outright.
Taamir, for example, is offering 20-year loans at 14-percent interest
rates, with a 15-percent down payment – terms that will probably
become more competitive as other players enter the market. There
is also talk of establishing a government entity to offer low-interest
housing loans to lower income groups.
“This is a huge market, and it can take all
the suppliers and mortgages out there,” said EAB’s Richards.
Paul Schemm
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