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Egypt's moneyed classes are buying houseslike there's no tomorrow!
In turn this sparked extraordinarily high inflation. In May 2017, Egypt's headline inflation stood at an astonishing 29.7% while core inflation was 30.6% - three times higher than last year's 10.2%.
It may come as something of a surprise therefore, that Egypt's housing market is widely expected to rise strongly in value in coming years - and high-end construction is booming to meet demand.
Consider the situation from the perspective of the Egyptian. If he lives abroad, Egyptian property has suddenly become much less expensive, because of the currency depreciation. If he lives in Egypt, his savings are falling in value by 30% per annum.
What to do? Invest in property! Even if that too is falling in value (in real terms), it is falling in value less than cash. During the year to May 2017, the nationwide real estate index rose by 11.5%, according to Egypt's leading real estate portal Aqarmap. Of course because of inflation, in real terms the house price index actually fell by 14% y-o-y to May 2017. But that is a much lesser fall than the decline in value of the Egyptian Pound.
So Egypt's moneyed classes are buying property like there is no tomorrow.
In the long run, the flotation of the pound - long overdue, according to some economists - will improve Egypt's external competitiveness, and thus attract more foreign investment into the real estate market.
The high inflation has been exacerbated by the decision to substantially increase fuel and electricity prices, also believed to be economically necessary. But the high inflation is expected to gradually subside when the market has fully adjusted.
In recent months, the government implemented several reforms, 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 prices were raised by up to 42% since May 2017.
- The price of sugar was raised by 40% for some Egyptians.
- 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.
But the economic transition is full of risks. The competence of the Egyptian government is low. Grand schemes such as the expansion of the Suez canal and the move of the administrative capital out of Cairo have been adopted with too little input from rational economic planners.
Yet for all that, property seems a sure bet. Other reforms are also boosting the property market.
In 2015, Law 17/2015 was ratified by President el-Sisi, relaxing restrictions on foreign ownership of land and property, and allowing the government, Egypt's biggest landowner, to contribute land to the private sector as part of public-private partnership schemes against a share of the revenue.
The government is now expected to fast track a new Investment Law, further relaxing foreign ownership rules, introducing tax windows and easing current restrictions on the repatriation of capital.
"This new law should increase investor confidence and create new development opportunities," said Jones Lang Lasalle (JLL).
Buoyed by strong demand from both domestic and foreign homebuyers, some even expect Egypt to become the world's fastest-growing real estate market in 2017, according to Euromonitor International.
"With a negative real interest rate and a devalued Egyptian pound, domestic investors are likely to increasingly turn to real estate, which they perceive as a relatively safe investment option that provides a hedge against inflation and further currency fluctuation," said Craig Plumb of JLL MENA. "The devaluation of the EGP also makes the Cairo market more attractive for Egyptians living abroad and overseas investors."
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.
Egypt's economy grew strongly by 4.3% in 2016, up from 4.4% in 2015, 2.9% in 2014, 3.3% in 2013, 2.2% in 2012, and 1.8% in 2011. In Q1 2017, the economy expanded again by 3.9% from a year earlier, according to the Ministry of Planning.
The economy is expected to expand by 3.5% this year and by another 4.5% in 2018, according to the International Monetary Fund (IMF).
Egypt: real estate market relatively unscathed by revolution
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 22.50%.
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 external competitiveness improving, but inflation remains stubbornly highEgypt’s economic outlook is positive. The economy is expected to grow by 3.5% this year, amidst the government’s decision last year to float the pound and introduce economic reforms. Economic growth is projected to accelerate to 4.5% in 2018.
The economy grew strongly by 4.3% in 2016, from annual GDP growth rates of 4.4% in 2015, 2.9% in 2014, 3.3% in 2013, 2.2% in 2012, and 1.8% in 2011, according to the IMF.
Egypt's dramatic step of allowing its domestic currency, the Egyptian pound, to trade freely, was a necessary condition for the IMF to grant the country a US$12 billion loan.
On November 3, 2016, the CBE had set the exchange rate tentatively at EGP 13 per USD 1 (a 46.3% decline from its previous exchange rate of EGP 8.88 per USD 1). But the EGP quickly depreciated sharply, reaching EGP 18.12 = USD 1 in June 2017.
“The flexible exchange rate regime will improve Egypt’s external competitiveness, support exports and tourism and attract foreign investment,” said IMF Mission Chief for Egypt, Chris Jarvis. “All of this will help foster growth, job creation and stronger external position for the country.”
The floating of the pound has helped the country narrow its trade deficit. During the first half of 2017, imports declined by 30% while exports increased by 8%, reducing the trade deficit by 46% from the previous period.
“Encouragingly, new exports orders rose at the fastest rate on record in May, suggesting that the sharp devaluation of the pound in November is having a positive impact on exports,” said KhatijaHaque, head of MENA Research at Emirates NBD.
Investor confidence has also increased sharply. “Foreign investment in domestic treasury bills and bonds reached $1.25 billion in June alone, and about $9 billion since the flotation,” said Deputy Finance Minster Ahmed Kojak. This compares with just US$1.1 billion the previous year.
Egypt’s budget deficit fell to 10.9% of GDP in FY2016/17, from 12.5% of GDP the previous year. The deficit is projected to decline further to 9.3% of GDP in FY2017/18 and to 7.3% of GDP the following year, according to the World Bank.
This improvement is surprising, given the almost complete collapse of Egypt's previously huge tourist industry. The industry was crippled by the political turmoil, and by the ISIL bombing of Russian Metrojet Flight 9268 over the Sinai peninsula in 2015, which killed 224 people, indefinitely halting all Russian flights to the country, and by the deadly bombing of Coptic churches in Tanta and Alexandria earlier this year. The number of tourists visiting Egypt plummeted from 14.7 million to 5.4 million in 2016, according to the United Nations World Tourism Organisation.
Despite this, the high inflation has aggravated social tensions, given the country’s persistently high unemployment and poverty incidence.Around half of Egypt’s 92 million people are living near or below the poverty line. Unemployment was 12% in Q1 2017, a slight decline from 12.7% during the same period last year, according to state statistics agency CAPMAS.
In July 2017, Egypt’s annual inflation climbed to 33%, up from the previous month’s 29.8%, according to CAPMAS.
“The reforms are making us move faster,” said SherifElkholy of equity firm Actis. “The harder steps have been done, but make no mistake: it will still be a challenging period with inflation and the middle class struggling with disposable income.”