Home financing: Improving access to mortgages could boost the real estate sector

Although Egypt lacks a strong mortgage lending segment, promoting home lending is not a current political priority. However, over the longer term, developing a stronger lending framework could assist in assuaging the country’s housing crisis.

STATE OF THE SECTOR: Mortgages are governed by Law 140 of 2001, which lays out the framework for the industry. The Egyptian Financial Supervisory Authority (EFSA) is responsible for regulating all non-banking activities and financial instruments (including mortgage finance and securitisation), and its specific tasks include preventing fraud, ensuring transparency and protecting investor rights. Despite the strong framework, however, the mortgage lending sector remains small.

Estimates from local investment bank EFG-Hermes indicate that the total value of the financial sector’s mortgage loan portfolio is just LE4bn ($569.2m), compared to around LE25bn ($3.6bn) for a large real estate developer’s off-plan portfolio. Comparing these numbers to the mortgage totals in Turkey – the best regional comparison in terms of population and development – it is clear that Egypt’s mortgage market has much room to grow. For example, as of November 2012, the Bank Association of Turkey reported that Turkish banks held a total of $46.1bn worth of housing loans.

KEY PLAYERS: Historically, two institutions, the Egyptian Arab Land Bank and the Housing and Development Bank, have offered mortgage financing, but this has long been limited to the upper-income segments of the population. In 2011, according to EFSA figures, there were just 28,000 mortgage finance loan beneficiaries in the country, although this represents exponential growth compared to the 333 beneficiaries recorded in 2005. Moreover, the average value of a mortgage fell from LE270,000 ($38,420) in 2005 to LE113,000 ($16,080) in 2011, indicating that mortgages were becoming more accessible.

While an additional nine mortgage finance firms have entered the market since 2001, four companies continue to dominate it and have a combined share of 85% of all mortgage loans, according to a 2012 report from the UK’s Royal Institute of Chartered Surveyors (RICS). The top four include: the Tameer Mortgage Finance Company (40.96%); the Egyptian Mortgage Finance Company (21.38%); Tamweel (12.99%) and Amlak Finance & Real Estate Investment (9.49%).

BARRIERS TO ENTRY: Hitherto, not many banks have shown interest in entering the mortgage market. Firstly, there are strict controls on mortgage securitisation and, in the current financial climate, government bonds yield higher returns than mortgage lending. Further, in compliance with the Basel II and III accords, banks want to increase their capital adequacy ratios, which looks likely to reduce the availability of loan capital. At the same time, most mortgage firms remain dependent on capital and loans as their main sources of funding, rather than deposits. This makes mortgage loans more expensive than they might be otherwise. The relative expense is one of the key reasons why public demand for mortgages has remained fairly low. Interest rates are also high, currently averaging at around 12-13%.

INFORMAL ECONOMY: Another reason behind the lack of a mortgage market is the large size of the informal economy in Egypt. According to the RICS study, about 90% of all properties in Egypt lack proper registration titles and some 40% of Egyptians live in informal housing. While title to use and live in a given property can be transferred and/or bought and sold, such documents do not grant title to the land on which the building sits, and as such, cannot be used by mortgage firms in the event of foreclosure. Indeed, effective foreclosure in Egypt is extremely difficult, since the law prevents anybody being evicted from their principal residence, and while it is possible to pursue tenants or borrowers through the courts for payment arrears, this is an expensive and cumbersome procedure.

Another factor is that workers in the informal economy, which is estimated to equal around 40% of formal GDP, have no way to prove their income, and as such, find it almost impossible to obtain a large loan such as a mortgage. Even if they are able to obtain a housing loan, high property prices relative to incomes constitute a further barrier to home ownership. According to a 2011 study by Jones Lang LaSalle, the ratio of house prices to household disposable income stood at 1.2 for lower-end units (often reflecting their location in informal settlements), 3.9 for mid-level apartments and 5.3 for high-end flats and villas.

CRISIS: While lower income groups rely on illegal construction or renting, the country’s large real estate groups have focused on luxury developments because, in the absence of government subsidies or other incentives under the previous regime, this segment was the most profitable. As such, over the past few decades a glut of luxury housing and a shortage of affordable housing has developed. According to RICS estimates, Egypt is currently experiencing a shortfall of some 3m units. Of this total, 2m are needed to account for the growing population and urbanisation, while 1m are needed to replace dwellings that are no longer fit for human habitation. According to the Egyptian Centre for Housing Rights, some 18% of Egyptian households live in units of one room, while some 250,000 possess three or more houses, with the number of empty units in Cairo alone at around 6m.

OFF-PLAN SALES: Most big real estate developments aim to sell off-plan, since this allows the construction phase to become almost self-financing, and removes reliance on bank loans or share capital. This mode dominates the new build market, but on the secondary market, the lack of developer payment plans or mortgage credit means purchasers must fall back on informal payment methods, often involving family support.

Currently, off-plan sales are much more competitive compared with a mortgage, but if the mortgage market can be made to function better, it will make it easier and more affordable to buy an existing property legally and securely. While property developers have rescheduled the terms of their off-plan sales, extending them from a four-year repayment period prior to the revolution to an average of seven years currently, a mortgage scheduled over 25 years, even with interest, would be far more affordable. In such a case, it would become cheaper to buy an existing house over a new build, and developers would be obliged to switch to a mortgage system for new build projects.

SUGGESTIONS: RICS has recommended a number of policy recommendations to help boost the mortgage industry. These include streamlining regulatory requirements and allowing for mortgage securitisation, finding better ways to gauge risks and promoting a stable macroeconomic environment with low interest rates. Introducing more competition to the industry is also likely to encourage lower interest rates and more affordable terms. The development of a specific mortgage insurance industry in Egypt would also help reduce risk pricing. The creation of a mortgage industry in most developed countries has helped to unleash a construction boom, providing jobs and better quality homes for a large segment of the population, and a similar process would likely play out in Egypt over the medium term.