Government addresses issues in Egyptian home finance market

While Egypt’s formal real estate market has become a crucial and high-performing segment of the economy, it has struggled to tackle the challenge of affordable housing. Egypt suffers from a chronic housing deficit of up to 3m homes, with annual demand for new homes reaching as high as 500,000 units. Previous administrations have sought to address this through large-scale building programmes. While these have sometimes engaged the private sector, they have largely fallen short of demand, and have not addressed the substantial deficit. As such, the current government has adopted another approach, focusing on demand-side management through an initiative to reduce the cost of financing and to expand the issuance of mortgages.

Given the size of the local real estate sector, the mortgage market is underdeveloped and relatively negligible, with the domestic mortgage penetration rate below 1% of GDP, according to the World Bank. This compares to figures above 70% in advanced housing markets, such as the US and the UK.

Challenges

A variety of structural issues have slowed the development of a healthy private mortgage market. Some challenges have included a lack of formal property registration, a complex process for mortgage registration, a limited secondary market, a mismatch between the duration of funding available to banks and the duration of funding required by home-buyers, and an unresolved foreclosure process. The World Bank notes that weaknesses in the framework for securitisation have also held the market back to an extent; however, some argue to the contrary, that the mortgage environment may have been overly regulated and not flexible enough to accommodate certain types of more innovative financing structures.

Traditionally, home loans from financial institutions have been handled as simple retail loans, with banks generally steering clear of true mortgages even when they had excess liquidity. It has been most common to obtain home financing through developers, in the form of instalment payment plans stretched out over several years. “Payment terms are the main issue for the lack of mortgage growth,” Ayah Ghanem, manager of strategic consulting at JLL Egypt, told OBG. “Private developers do not rely on mortgaged customers at all.”

Reform Efforts

Some reforms have been undertaken over the years, especially to streamline the legal foundation for the relevant products and improve sector processes, but until very recently efforts to address weaknesses have not had a noticeable impact on market dynamics. The current government has taken significant steps to remedy this situation. In 2015 the Central Bank of Egypt launched a LE10bn ($659m) initiative to stimulate home financing for low- and middle-income Egyptians, supported by $125m worth of World Bank funding. Under the scheme, the central bank provided funding to commercial banks so they could extend mortgages to customers at discounted rates. Such banks would offer a 20-year loan at a rate of 5% for families with incomes below LE1400 ($92.23) per month, and a rate of 8% for middle-income families. The central bank subsequently extended the programme to allow banks to offer loans with an interest rate of 10.5% for individuals earning up to LE15,000 ($988) or families earning LE20,000 ($1320), as long as the total value of the property did not exceed LE950,000 ($62,600).

The scheme has had mixed success. Mortgage terms in Egypt continue to be stricter than in many advanced markets – according to the World Bank, property loans have historically attracted interest rates close to those of unsecured loans – but they are better than the general banking interest rate. Indeed, while it varies on a case-by-case basis, the government reform has led to a general reduction in the cost of financing throughout the system. Mortgages are often extended at a rate below 10%, though at about 10 years, the loan tenor is usually relatively short. Given this improvement in terms, there has been an uptick in the volume of loans. According to Euromonitor, the number of mortgaged households was set to expand by 18.9% in 2017, making Egypt as the fastest-growing mortgage market globally.

However, this statistic is somewhat misleading. The country is starting from a low base, with fewer than 300,000 mortgaged households in Egypt. Furthermore, the government programme has not been as transformative as many had hoped. Indeed, only 14 of 39 banks operating in Egypt have signed up for the central bank’s mortgage finance initiative. Moreover, participating banks have offered relatively few loans. By February 2017 – three years after the launch – only 62,000 homes had been mortgaged under the scheme, with the 14 banks together accessing LE5bn ($329m) in financing for low- and middle-income customers.

Given that banks received 400,000 applications for mortgages under the scheme, demand is not lacking. Furthermore, the risk environment for commercial banks appears favourable; non-payment on low-income loans is estimated at close to zero. The bigger problem appears to be the legal and bureaucratic situation surrounding property. “It is illegal for companies to finance unregistered real estate units,” Sherif Samy, chairman of the Egyptian Financial Supervisory Authority, told local press in late 2016. “As of now, unregistered units account for 90% of the total.” This issue touches on many aspects of the real estate sector and will require a multifaceted reform programme.

Law & Regulation

The mortgage market in Egypt is governed by Law No. 140 of 2001, which has been amended and supplemented since its passage. Decree No. 465 of 2005 significantly altered and upgraded the administration of sector participants and processes in the market, while a number of decisions were issued in 2016 by the Financial Regulatory Authority (FRA). These dealt with refinancing guarantees, registration of mortgage holders and valuations. The FRA has also issued guidelines on the notification of changes in contracts, the appointment and responsibility of auditors, and the eligibility of managers and directors.

Opportunities

The eligibility regulations in particular should help develop the higher-tier labour force. “There is room for growth in terms of facility management, since there is a severe shortage of quality players in this field,” Ashraf Dowidar, CEO of Ardic Developments, an international property developer, told OBG.

In early 2017 the Parliament passed the Egyptian Real Estate Appraisal Standards, which mortgage finance companies and investment funds must follow. They aim to protect investors, ensuring that best practices are followed in the valuation of properties. The binding standards are expected to improve trust and reduce the possibility of corruption. Additional amendments to Law No. 140 of 2001 have been proposed, including covering ijara (leasing), beneficial ownership, lease-to-own arrangements and criteria for qualifying low-income purchasers. A mortgage financing law has also been mentioned by government officials, and the market would likely expand rapidly if such a statute is passed.