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Saturday, 19 April 2008

Property Review - Egypt





Egypt - The Land of the Pharoahs

Fast Facts

· GDP growth currently at 7%

· No capital gains or inheritance tax.

· Capital: Cairo

· Population: 80 million

· Currency: Egyptian Pound

Economic Overview

'I don't where to go first, the Pyramids of Giza or the Valley of the Kings? Why not do both and even add on a Red Sea scuba dive in Sharm El Sheikh'? Well, that depends on how much time you have? Oh.........about a week'

You might need a little longer than that, as you'd only be able to cover half of Cairo in a week J'

Officially, the Arab Republic of Egypt, is a country in North Africa that includes the Sinai Peninsula, a land bridge to Asia. It borders Libya to the west, Sudan to the south and the Gaza Strip and Israel to the east. The northern coast borders the Mediterranean Sea; the eastern coast borders the Red Sea.

Egypt declared its independence from Great Britain in 1922 and only became a Republic in 1953. Hosni Mubarak became Egypt's 4th President in 1981 since being declared a Republic and is currently serving his 5th term in office.

Under comprehensive economic reforms initiated in 1991, Egypt has relaxed many price controls, reduced subsidies, reduced inflation, cut taxes, and partially liberalized trade and investment. This has promoted a steady increase of GDP, as well as the annual growth rate. The Government of Egypt tamed inflation bringing it down from double-digit to a single digit..........Wanna see?! :)



And yes, I PROMISE that this graph is correct as the nosedive from 25% inflation in the late 1980's is truly incredible !! And just to top that, GDP is currently rising smartly by 7% per annum due to a successful diversification.

Egypt is currently, truly coming into its own and the emerging sectors such as IT Sector and the Investment Climate (yay !! :) are showing the way !!
The Egyptian IT sector has been growing significantly since it was separated from the transportation sector. The market for telecommunications market was officially deregulated since the beginning of 2006 according to the World Trade Organisation agreement.

The government established the Information Technology Industry Development Agency (ITIDA) as governmental entity. This agency aims at paving the way for the diffusion of the e-business services in Egypt, capitalizing on different mandates of the authority as activating the Egyptian e-signature law, and supporting an export-oriented IT sector in Egypt.

The Egyptian equity market is one of the most developed in the region with more than 633 listed companies. Market capitalization on the exchange doubled in 2005 from USD 47.2 billion to USD 93.5 billion, with turnover surging from USD 1.16 billion in January 2005 to USD 6 billion in January 2006.

Property Market Review

After years of only state-built housing, in the early 1990s the government allowed private housing projects. And guess what happened? Inexperienced companies jumped in and soon you had a massive oversupply which soon ended up with many Developers going bankrupt (Will they never learn?! : )

But now, the situation has changed.........WHY? (do I hear everyone shout !!)

Well, if you wait a second, I'll tell you........:

- Egypt offers excellent rental income returns.

- The Gulf is now exploding with new oil money, and sees Egypt as less risky than Lebanon or Jordan.

- Egypt has a rapidly-growing economy (remember the 7%?) with a fast-growing outsourcing sector.

- There is enormous European interest in Red Sea property.

The government initiated a managed float of the Egyptian Pound in January 2003, leading to a sharp drop in its value which has since recovered. And what happens when a currency weakens against international currencies, and you have a significant Expat Community? They start buying of course !!! And so did everyone else............

The passing of the Real Estate Finance Law in May 2001, created a mortgage market. (Can you believe that it took them this long??!!!) For the first time since the 1948 civil code, banks can now repossess properties and evict owners who default on loan repayments.

Total mortgage lending is expected to grow rapidly to LE 4 billion (US$690 million) by the end of 2007, as the Egyptian Company for Mortgage Refinancing (ECMR) begins operations. ECMR is likely to help lower interest rates, which have hitherto been an obstacle to lower income groups. Lending rates in the 12% - 14% range have discouraged housing purchases, but in turn increased rentals due to affordability.

Now, let's start at how we as 'Foreigners' can secure property in the Land of the Pharaohs:

Foreigners can buy property in Egypt, under Law No 230 of 1996. (Well, that's a start J) But, foreigners cannot buy more than two pieces of real-estate, and the purchase must have the approval of the Council of Ministers, which takes around two months.

Property in Sharm El Sheikh follows a different regime where foreign purchasers in cannot acquire freehold rights, but only 99 year leases. Foreign purchasers must therefore follow a procedure called a 'signature validity court verdict'.

The 'signature validity court verdict' method could well become the dominant route for foreigners, because it allows the foreigner to buy as many properties as he likes, rent them, and sell when he likes.

The following steps must be taken:

1. A 'negative' certificate for the property should be obtained from the government, stating that there are no mortgages, pledges, or any other sort of rights on the property registered to any other party.

2. The tax authorities must issue a certificate stating what taxes are due on the property.

3. A sale / usufruct contract should be drawn up.

- The validity of the sale depends on the terms of the contract.


- So it is essential for the purchaser to have a detailed contract, defining the property boundaries, the purchase price, the method of the acquisition of the rights of the previous owner, and the method of payment.

- The contract must be in Arabic, since Arabic is the only language recognized by the courts. (very NB !!)

4. Purchasers must issue a power of attorney to their lawyer so that he can act on their behalf, a procedure which requires the purchaser to obtain a multi-entry visa:

- Then the lawyer files a legal suit to obtain a court verdict certifying that the signature on the sale / usufruct contract truly belongs to the seller

(This is the 'signature validity court verdict').

- This suit will take between 6-8 months.

It's always very important to have a look at the transaction costs involved when making your purchase, and to give yourself an idea of the 'hidden costs' involved, have a look at this table:

Transaction Costs

- Registration Fee EGP500 - EGP2,000 buyer

- Legal Fees 3% buyer

- Real Estate Agent's Fee 2.75% - 3.30%

- Transfer Tax 2.50%

- Capital Gains Tax 2.50%

- Costs paid by buyer 3.10% - 4.00%

- Costs paid by seller 7.75% - 8.30%

- Roundtrip Transaction Costs 10.85% - 12.30%

Source: Global Property Guide

Now that you have had a look at the Purchase Procedure, let's have a look at what the results could be once you do decide to buy. Here is the graph of Rental Yields & Property Prices per Type of Unit for Cairo:


CAIRO - MAADI - Apartments

Size: 250 sq.m.

COST (US$)

136,000

YIELD (p.a.)

17.32%

CAIRO - MOHANDESSEEN - Apartments

Size: 250 sq.m.


COST (US$)

149,750

YIELD (p.a.)


8.01%

CAIRO - ZAMALEK - Apartments

Size: 250 sq.m.


COST (US$)

294,750


YIELD (p.a.)


6.84%

Source: Global Property Guide


So the question is: Would you buy in Maadi at 17% Rental Yield?

YES I would !!! :)

Therefore, the transaction costs in itself are not too expensive, but it's the Buying Process that needs VERY careful consederation.................as it gets pretty complicated !!

Conclusion

Although all the economic and property market indicators, correctly point to Egypt as a awesome viable investment destination, there is 1 thing that bothers me:

Egypt relies heavily on tourism.

The tourism sector suffered tremendously following terrorist attacks on tourists in Luxor in October 1997,Sharm al-Sheikh in July 2005, and the town of Dahab in Red Sea resort in April 2006. And therefore, any type of terrosist attack can upset the entire region, and bode badly for the investor.

Other than that, at properties priced starting at £19k, who'll NOT be buying?

(Sources: http://www.globalpropertyguide.com/ , http://www.wikipedia.org/ & Daily Telegraph)

2 comments:

Farah2010 said...

The Egypt property market has already shown healthy returns for early bird investors, in some cases returns have been as high as 20-30% depending on the location. In acknowledgment of this, the pro-foreign investment Egyptian government has stepped up its marketing initiatives, and has committed themselves to a far reaching infrastructure development programs.

egypt property

Eric S Doms said...

@Farah2010

I think it's still too early to call for any major improvements in the Egypt market & therefore 20-30% is a little on the overly optimistic side.

However, you are correct that the Egyptian government's pro-business stance does add to the positive so let's hope that things improve, albeit at a slower pace than last time.......otherwise we're in for ANOTHER house price bubble !