The property mortgage financing market in Egypt is still in its infancy. Egypt’s Housing Minister Ahmed El-Maghraby said in October that 97 per cent of privately-owned houses in Egypt are self-financed, with mortgage activity contributing 1 per cent to Egypt’s GDP in 2007.

Given that Egypt has a population of 76.5 million, it is clearly a vastly untapped market that has the potential to be vastly profitable.

Although Egypt passed the Mortgage Financing Law in 2001, with the aim of stimulating the market, its growth has been stunted by a number of factors.

With only 9 per cent of properties registered in Egypt, mortgage finance companies and banks have been reticent to extend mortgages, knowing that if customers default on loans, these unregistered properties cannot be used as collateral.

In turn, the high registration fees have deterred owners from registering their properties.

New entrants

Owners were also put off by the rates on mortgage loans reaching 14 per cent, which are not viable in a country with low wages and purchasing power and where an estimated 17-20 million people live at subsistence level.

Over the past few years, the government has worked to remove these barriers. In 2005, it cut the registration fees from 12 per cent of the property’s price down to 3 per cent and capped the maximum fee at £E2, 000 ($361).

Property taxes have also been cut from 46 per cent to 10 per cent of the annual rental value.
These amendments are helping to facilitate property registration, which it is expected, will make banks and mortgage finance companies more confident about providing mortgages now that the money is secured in some way.

The bureaucracy that was involved in registering a property has also been reduced. “It used to take about 18 months to register a property,” says Hala Bassiouni, managing director of Egyptian Housing Finance Company (EHFC). “Now it takes roughly three to four months.

“The law also now allows us to finance properties that are eligible for registration,” says Bassiouni.

“The sophistication of the products has also increased. So, for example, we now offer a step up or step down mortgage, whereby you can start with a small instalment and increase its size or vice-versa throughout the course of the years.”

With so many growth barriers removed, the mortgage sector has started to pick up. Mortgages have seen year-on-year growth of 38.7 per cent to £E3.2bn from September 2007 to September 2008 from £E1.9bn, and there has been a sudden increase in new entrants into the market.

Six new mortgage finance companies entered the market last summer, a huge increase, given that prior to this only two mortgage finance companies had been set up since the establishment of the mortgage authority in 2001.

The first was Taamir Mortgage Company, which was founded in January 2004 with a total capital of £E500m as a partnership between 11 of Egypt’s biggest companies in the real estate, banking, and insurance sectors.

Taamir was followed six months later by EHFC as Egypt’s first private company providing individual mortgages to first-time buyers.

Today, there are 10 mortgage companies including the UAE’s well-renowned Amlak and Tamweel, the latter being the largest provider of real estate finance in the UAE.

Bassiouni says that the appreciation in property prices over the past few years has seen EHFC’s average loan size increase from roughly £200,000 to around £500,000 today.

Banks also increasingly want a slice of the business. Of Egypt’s 37 banks, there are now 18 that have established mortgage finance departments.

While mortgage loans represent a small percentage of banks’ overall balance sheets – none of the banks have yet achieved the regulatory maximum of 5 per cent of their total assets in the housing sector – this form of financing is now one of the growth engines within the banking sector.

Between June 2008 and September 2008, the value of mortgage loans provided by banks increased to £E2,097m from £E1,804m.

Mortgage lending opportunities are also receiving a boost after the establishment of The Egyptian Mortgage Refinance Company (EMRC) in June 2006, Egypt’s first mortgage refinancing company, which provides refinance to its shareholders comprising primary mortgage lenders, banks and mortgage finance companies.

Supporting growth

The establishment of Egypt’s first credit bureau has also helped support the growth of the market. According to the 2006 census, the number of residential units reached 16.5 million that year, representing approximately 60 per cent of total units in Egypt.

The value of this housing stock now stands at $270bn. The recent strong growth of the real estate sector, which contributed 8.6 per cent of GDP in 2006-07, is also stimulating the mortgage market.

Despite this success, there is concern that global financial turmoil and the associated shrinking of the project finance market is going to curtail the growth of the real estate sector and hence restrict the future growth of Egypt’s mortgage sector.

With so much of Egypt’s real estate investment coming from the Gulf, there has been a fear that banks will pull these investments in an attempt to recapitalise.

However, Iman Ismail, chairwoman of the Egyptian Mortgage Refinance Company (EMRC) does not believe the mortgage market is under any threat.

“Given the very small size of the Egyptian mortgage market and the fact that several major housing projects, both private-sector and public-private partnerships, are in the implementation stage, it is not likely that the Egyptian mortgage sector will be seriously impaired,” says Ismail. “Demand, especially in the low and middle income sectors, still far outstrips supply.”

Indeed, the cumulative shortage in housing supply for mainly the low and middle income sectors is estimated at 2.5 million units.

An additional 360,000 housing units are needed annually while 13 per cent of the existing housing stock needs replacing.

And yet, while the general opinion is that the desperate need for low-cost housing, coupled with the healthy population growth, will help to drive the industry onwards, there has also been concern that property prices have been over-inflated and that the property market is heading into a recession.

To date, most of the real estate projects have focused on the high-end of the market and, in terms of average per capita GDP, Egypt’s property prices are considered to be extremely high.

“Prices have been really over inflated because there has been a lot of hype around these big high-end developments taking place, but they still haven’t sold huge numbers of their properties,” says Sara Hinton, managing partner of the Cairo office of UK law firm Trowers & Hamlins.

“I can’t imagine that there are that many people still waiting to buy, so the real estate market is already in recession. That is a pretty accepted view, it had started to bite in the summer.”

However, given that Egypt still lacks the basic data systems to show the numbers of new homes or average prices, it is impossible to make an accurate evaluation as to whether or not the housing market is in recession.

Another factor that should contribute to the growth of the mortgage market are EMRC’s plans to issue long-term corporate bonds to stimulate the Egyptian capital market in 2009.

“But this will be dependent on the health of the economic environment in six to eight months,” says Ismail. She says the company will not issue the first bond until there is a stable interest-rate environment with investors willing to take on long-term corporate bonds.

And yet, while the legislative hurdles to the mortgage sector have vastly improved in the past few years, those in the industry maintain there are still problems regarding the registration of titles and mortgages.

“Egyptians are unaware of the legal procedures for registration, even though it has been markedly simplified since we began operating in 2004,” says Bassiouni. “It used to involve more than 100 steps. Then, as a result of negotiations with the Justice Ministry, we cut it down to around 30. But people are still reluctant to step into the notary public and register the property.”
Consequently, the government has embarked on designing a new registration system that should make the lives of mortgage companies easier, although this is not scheduled for completion until around 2011.

A committee has been set up to oversee the development of registration pilot projects and assess their success. The members of the committee include the Administrative Development Ministry, Justice Ministry, and the Mortgage Finance Authority, the government body that regulates Egyptian mortgages.

Until such things are in place, the development of more sophisticated mortgage
products and the maturation of the market will be constrained.

“Issuing mortgage-backed securities (MBS) is part of our mandate, namely to tap the best source of finance for our funding needs,” says Ismail. “However, to issue MBS requires a lot of preparation and a robust regulatory framework, especially regarding title registration and mortgage registration. So, although we are preparing for them, we do not think they will be feasible over the next two to three years.”

Potential growth

However, the potential growth expected in the mortgage segment has induced the Central Bank of Egypt to allow banks increasing the share of loans allocated to the real estate sector from 5 per cent to 15 per cent of their total loan books, although this has to be equally distributed among real estate developers, mortgage borrowers and tourist development companies.
For the time being and given the current mortgage crisis afflicting the west, it
appears that Egypt’s slow but sensible approach to developing its mortgage market is proving fruitful.

The central bank’s restriction on banks investing more than 15 per cent of their loan portfolio in real estate is ensuring the market develops at a healthy pace and as Bassiouni says, there’s a lot to be learned from the global economic crisis.