Housing has risen to the top of the policy agenda in Egypt, and for good reason. According to Jones Lang LaSalle (JLL), the country has the largest deficit in the MENA region, with a requirement for 1.5m new units, an affordability gap and under-funding of the sector. According to Marja Hoek-Smit, director of the International Housing Finance programme at the University of Pennsylvania, out of the entire population 65% is unable to afford a property produced by the private sector.
While there is strong demand in many segments of the real estate market, a good deal of this demand is concentrated amongst a small group of people who buy properties as an investment. The majority of people cannot afford to pay LE300,000 ($40,890) to LE400,000 ($54,520) for an apartment in New Cairo. It has been estimated that 80-90% of new apartments in areas to the east and west of Cairo are sitting empty.
Indeed, private domestic capital accounts for 27% of real estate funding in North Africa, marking it out as the largest investor in the region’s construction sector, according to Deloitte. Building a unit that is affordable faces constraints in terms of input costs, such as land and construction materials. This points to the common issues of affordability and viability that are not only confined to developing markets, such as Egypt. Developers in mature markets are also often reluctant to build in the affordable or social segment. The delivery of affordable housing units in the UK, for example, has been an issue because developers have argued that it is impossible to deliver units while meeting industry standard profit margins of 17-20%.
Meanwhile, demographic trends in the country are putting pressure on the existing residential stock and could potentially overwhelm the country’s existing supply without significant moves to improve the situation.
Demand for housing stands to be exacerbated by Egypt’s demographic structure. The dependency ratio, or percentage of the non-working age population in the total population, is currently just below 40%, according to data produced by the World Bank. Although there is potential for fiscal revenue generation and growth through the expansion of the labour force, it also places a burden on the housing supply, given that household formation is likely to be at a peak in the coming years. According to a report on the housing crisis in MENA by EY Middle East and the Affordable Housing Institute, in Egypt the demographic window of opportunity or the source of overcrowding, depending on one’s perspective and the state of housing provision, runs from 2020 to 2050.
Although recent government measures, such as the headline 1m affordable homes project announced in 2014, are an important step towards resolving the housing shortage, government intervention on the supply side alone is unlikely to adequately resolve the issue.
In Egypt, as with much of the region, policy makers are beginning to turn to the demand side and, in particular, financing as a means of bridging the existing affordability gap. This move will be welcome given that for the low-income segment of the Egyptian market, housing installment payments for low-price units consume, on average, over 70% of a customer’s monthly income, according to HC Securities and Investment. A more mature mortgage market could help to lessen the burden on lower-income homeowners and potentially give them the purchasing power to enter the formal privately developed real estate market.
This is already clear from the existing mortgage portfolios in the country. According to the report “Industry Insight on the Real Estate Sector” by the American Chamber of Commerce (Amcham) in Egypt, the vast majority of mortgages – 70.1% – in Egypt were extended to individuals with a monthly income of less than LE1750 ($239) per month in 2013, although by value the majority of loans are extended to Egyptians with a monthly income of over LE20,000 ($2726) per month. Wealthier Egyptians usually tap into savings to make home purchases and are predominantly cash buyers or use the off-plan installment schedules of developers.
Egypt’s nascent mortgage sector, which commenced with a 2001 mortgage law, has thus far had mixed success. Mortgage growth has been gradually improving in the country. In 2013 there were 34,000 mortgage loans, with a combined value of LE4.3bn ($586.1m) from non-bank lenders, outstanding in the country. This represents a 3.3% increase on 2012, according to Amcham, which reports that between 2010 and 2013, the value of such loans grew at a compound annual growth rate (CAGR) of 20.5%, while the total number of loans grew at a CAGR of 16.6%. However, mortgage penetration in Egypt remains low, coming in at just 0.84% of GDP in 2013. This compares to figures of 9.25% in Tunisia, 13.85% in Morocco and 80% in the highly developed UK market.
Therefore, although the country already had 13 non-bank mortgage lending institutions in place by the end of 2013, there is still much work to do to improve the home financing environment in Egypt. Part of this challenge is related to usage as there is little demand and little appetite for buying or selling units through a mortgage structure. For example, local developer Sixth of October Development and Investment Company (SODIC) estimates that 99% of its customers use off-plan payment models or pay with cash. Moreover, most other developers do not like to work with mortgage financing. Mortgage financing is only available for completed units, and most developers prefer to finance development through off-plan sales rather than debt. Typical installment terms for off-plan purchases would be a 15% to 20% down payment and a payment period of five to six years.
There are other significant obstacles in the form of high interest rates and relatively low loan tenors, which are also inhibiting growth. Moreover, in the commercial banking sector, regulation currently caps mortgage lending at 5% of total loan values for commercial banks, according to Amcham.
Despite these constraints, there is a general optimism that home financing will gain an increasing foothold in the market in the medium term. In a clear signal of this optimism, in May 2015 Egyptian investment bank Beltone Financial announced plans to open a mortgage-financing subsidiary with a paid-up capital of LE50m ($6.9m). The move will bring the total number of dedicated mortgage providers to 14, a substantial number for an undeveloped sector.
These players will undoubtedly be buoyed by the potential untapped demand in the market. However, the catalyst for growth is likely to be provided by government and non-state donor interventions. One of the major measures on the table aims to bring down the cost of financing. Indeed, beyond the general high-interest-rate environment in the country, banks are pricing substantial risk into their home loans.
Private credit bureau coverage in Egypt has increased from 4.7% of the adult population in January 2008 to 21.80% in 2014, according to the World Bank, but this rate of coverage is still low and illustrates the continuing opacity of the system as well as the difficulty of pricing risk in the market. Although the banking sector has strong provisions, a non-performing loan ratio, which according to the World Bank is currently approaching 9% across all sectors, will inevitably affect the cost and availability of lending. The government is, therefore, continuing to look at innovative ways to improve the financing environment for the sector.
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