Tough economic reforms beginning to pay off
Lalaine C. Delmendo | July 30, 2021
During the year to Q1 2021, the nationwide real estate price index surged 28.3% (22.6% inflation-adjusted), in sharp contrast to the y-o-y fall of 30.8% in the same period last year, according to Egypt's leading real estate portal Aqarmap.
Quarter-on-quarter, the index increased 1.1% during the latest quarter (0.7% inflation-adjusted).
President Abdel Fattah el-Sisi recently removed the last restrictions on foreign ownership of land and property in Egypt, in an effort to buoy the housing market. He also allowed the government, the biggest landowner in Egypt, to use its land for public-private partnership schemes. These improvements, together with the fundamentally strong local demand, are now beginning to boost the housing market, and the overall economy in general.
In November 2016 Egypt floated the Egyptian pound (EGP), causing a dramatic depreciation against major currencies – making real estate more attractive from the perspective of the wealthy Egyptian. If he lives abroad, Egyptian property is much less expensive, because of the currency depreciation. In May 2021, the average exchange rate stood at EGP 15.67 per USD 1 – about 43% decline from its value of EGP 8.88 per USD 1 before the decision to float the currency.
There is a huge, real demand for housing in Egypt, as the country's population increases by 2.5 million annually and there are about one million marriages taking place every year.
In addition, the government implemented other reforms recently, in line with the three-year IMF reform programme:
- A value-added tax (VAT) was introduced.
- Egypt's Investment Law was amended to attract more foreign investors.
- Fuel and electricity subsidies have been continuously reduced since 2014, as part of the government's goal of reducing spending. In Q1 FY 2020-21, spending for fuel subsidies has been reduced by 46% y-o-y to EGP 3.9 billion (US$249 million).
- The price of sugar was raised by 40%.
- The CBE has abolished a 'priority list' for imports.
- The time and day limits during which banks are allowed to execute foreign currency exchanges have been extended.
Other initiatives included the launch of several mega-projects to boost economic growth, including the expansion of the Suez Canal and the construction of a new capital city.
“We remain optimistic in our outlook for Cairo's residential market in the medium-to-long term, as the government strongly supports the sector,” said Jones Lang Lasalle. “Various initiatives introduced in 2020, such as reducing the interest rate and setting the lending rate at 10.25%, are likely to stimulate investments. Also, more recently, property restrictions on foreign ownership of land and property were removed.”
“These efforts are complemented by private developer initiatives such as introducing long-term payment plans, decreasing down payments, and launching cash-back offers,” Jones Lang Lasalle added.
During 2020, Egypt weathered the impact of the COVID-19 pandemic, with its real GDP rising by 3.6%. In fact, Egypt was the only nation in MENA that avoided a negative GDP growth last year. The economy has expanded by a healthy 4.8%, on average, during the past five years.
The Egyptian economy is projected to expand by 2.5% this year and by another 5.7% in 2022, according to the International Monetary Fund (IMF).
Foreigners can buy property in Egypt, under Law No 230 of 1996. However, foreigners cannot buy more than two pieces of real-estate, which cannot exceed 4,000 square metres (sq. m.), and their purpose must be for a family member to live in the property. If registered, the property cannot be sold or rented for five years.
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Rental rates are bottoming out in the residential real estate market of Cairo, according to Jones Lang LaSalle’s latest real estate report. The rental market seems to be reaching its lowest point and sooner or later, rental growth will start accelerating. In fact our figures already showed some growth, with a rise in rent demanded of around 10% from last year. The average rent per sq. m. ranges from USD 7 to USD 9 per month, whereas last year, it was around USD 6 to USD 8 per sq. m. per month.
The average buying price per square metre (sq. m.) of apartments in Cairo’s upscale neighborhoods remained more or less unchanged during the year to August 2012. Apartments in Maadi, Zamalek, among others, cost around USD 1,000 per sq. m.
A great majority of the apartments in our survey are located in Cairo’s old rich neighborhoods such as Maadi and Zamalek, though quite a few were located in the nouveau rich neighborhoods like Katameya Heights and El Rehab City.
Some of the neighborhoods to watch out for are in New Cairo. New Cairo is a part of the Beit Al Watan Project of the Ministry of Housing which provides 8,000 land plots (with sizes ranging from 300 to 800 sq m).
The apartments in our survey are listed on Egypt’s popular real estate websites like e-dar. In Egypt, it is a common practice among realtors to not archive old ads in their website. Ads listed as early as 2004 still appear on websites. Although we took extra proper care to include only apartments listed in 2012, we still have doubts about the veracity of the information on some of these ads.
Expats looking for apartments prefer direct methods rather than using realtors. One of the most popular methods is going to the American University in Cairo to look for apartment ads. Another one is going directly to the residential building of choice, and ask the bowab or the doorman for vacancies.
Moderate taxes in Egypt
Rental Income: Rental income earned by nonresidents is taxed at progressive income tax rates. The maximum deduction allowed to cover operating expenses is 50% of the gross rent.
Capital Gains: There is no capital gains tax.
For properties located in the Egyptian cities, a flat rate of 2.5% of the gross proceeds is levied on sales of real estate or building sites. No deductions are allowed.
Inheritance: Inheritance tax was abolished in Egypt in 1996.
Residents: Residents are taxed on their worldwide income at progressive rates, from 10% to 25%.
Moderate costs; complicated buying process
Round-trip transaction costs are around 11.30%; mostly consisting of the real estate agent’s fee (2.5% to 3% plus 10% sales tax), legal fees (3%), transfer tax (2.5%) and capital gains tax (2.5%). Investors should be cautious of the complex ownership and registration process; e.g., only around 10% of properties in Cairo are registered and there are numerous foreign-ownership restrictions.
Egypt's landlords are weakly protected by law
Rent: New tenants do not enjoy rent protection. Nor do they have the right to remain in the apartment at the expiry of the contract, although in the socialist past Egypt’s rental market was highly regulated.
Tenant Security: If however tenants do not leave, in Egypt eviction can easily take more than a year. So it is preferable to rent to foreigners, who are less likely to overstay.
Egypt’s economy remains robust; inflation moderates
During 2020, Egypt has successfully weathered the adverse impact of the COVID-19 pandemic, with its real GDP rising by 3.6%. The economy has expanded over the past 5 years by a healthy 4.8%, on average.The Egyptian economy is projected to expand by 2.5% this year and by another 5.7% in 2022, according to the International Monetary Fund (IMF).
In May 2021, S&P affirmed Egypt’s sovereign credit rating in both long- and short-terms with a stable outlook, following a similar decision by Fitch Ratings in March.
“Egypt's ratings and Outlook are supported by its recent track record of fiscal and economic reforms, which the authorities are furthering, as well as its large economy, which has demonstrated stability and resilience through the global health crisis,” said Fitch Ratings. However, the ratings agency noted that the economy is constrained by its large fiscal deficits, high general government debt/GDP and domestic and regional security and political vulnerabilities.
Egypt’s budget deficit increased modestly to about 8.5% of GDP in FY21, from 7% in FY20 and 7.9% in FY19. The pandemic also interrupted the country’s debt reduction initiatives, with the consolidated general government debt-to-GDP ratio estimated to have risen to about 90% in FY21, from 88% in FY20 and 84% in FY19.
In May 2021, headline inflation stood at 4.8%, the highest level since December 2020 but still far below the average inflation rate of 15% from 2014 to 2019. Inflation peaked at almost 33% in July 2017, mainly due to the devaluation of the Egyptian pound. This has aggravated social tensions in recent years, given the country’s persistently high unemployment and poverty incidence. Around half of Egypt’s 100 million people are living near or below the poverty line.
Unemployment was 7.4% in Q1 2021, up from 7.2% in the previous quarter but down from 7.7% a year earlier. Egypt’s unemployment rate averaged 11.3% from 2010 to 2020, according to the IMF.