Real estate legislative reforms undertaken in Egypt

 

The Egyptian property market is constantly undergoing reform. While mortgages are difficult to obtain and disputes can be complex, the system as a whole is remarkably effective. People regularly buy and sell real estate, and a functioning market exists despite the lack of a best-practices system of recording.

5000 Years

The concept of property ownership goes back centuries, and usufruct – the legal right for people to enjoy the advantages of property that does not belong to them – and a sense of ownership were evident from the earliest of times. However, more formal arrangements have developed, with rent receipts, leasing contracts and occasional sales documents having been written thousands of years ago still preserved as artefacts today.

The first cadastral survey of Egypt commenced in 1892 and was finished by 1905, and a second survey was under way in 1927. With the passage of a deed law in 1946 and a title law in 1964, the nature of property began to change. In 1989 computers were introduced into the process, and from then on there was significant international assistance. The Egyptian Survey Authority (ESA) was made into an autonomous body in 2001. Despite this, records are not very diligently kept. By the mid-1980s only half the real estate in rural areas had been formally recorded in the cadastre, and none of the urban areas were – at best, they were mapped in analogue form. As of 2005 an estimated 90% of Egyptian property was officially unregistered.

According to the US Agency for International Development, the legal infrastructure is quite strong, and the means and practices exist on paper to formally register property. Rather, it is the bureaucracy and actual implementation that create challenges. The procedures are invariably described as labyrinthine, with various directives and regulations often contradicting one another. In the registering property category, Egypt is ranked 119th of 134 countries in the World Bank’s “Doing Business 2018” report. The process is relatively cheap, at 1.1% of land value, but by other measures it lags. Eight procedures are required, and the process takes 75 days, against an average of 30.3 in the Middle East and Africa.

Despite these difficulties, informal properties have many of the characteristics of properties with titles. They can be connected to utilities, sold, leased or inherited. In the absence of proper registration, various methods have evolved to secure the property. This includes simple contractual agreements between two parties or similar contracts endorsed by a court or an attorney. Under this system it is possible for the same property to be sold twice.

Foreign Ownership

The ownership of land for residential purposes by foreigners is governed by Law No. 230 of 1996, which stipulates that a structure must be built on land owned by non-Egyptians within five years of purchase. Foreign owners must also wait five years before they can sell the property again. They are allowed to own up to two pieces of land for residential purposes, and the total area may not exceed 4000 sq metres. Foreigners may not control agricultural acreage by usufruct, and if a non-citizen inherits farmland, the government will seize the property and compensate the beneficiary. Desert property is restricted to Egyptians or corporations, and must be 51% locally owned.

Some liberalisations have occurred that allow for greater control by non-Egyptians. In Sidi Abd El Rahman, Ras El Hekma, Hurghada and the Red Sea area foreign rights of ownership are equal to those of Egyptians. In Sharm El Sheik usufruct is allowed for up to 99 years. The five-year mandatory holding period also does not apply in these areas.

Taxing Times

Property has been taxed for some time. In 1954 the country passed an agricultural land tax, mandating that 14% of a property’s rental value – determined by a once-per-decade census – would be levied. A building tax, ranging from 10% to 40% of the rental value, was also implemented, but it only covered an estimated one-third of domestic properties. It was also ineffective and often evaded, exempting buildings under construction.

First slated for 2008 and implemented in 2014, a new building tax was put in place after repeated attempts to get it passed. It charges a flat 10% of the rental value. Personal real estate worth less than LE2m ($132,000), hotels, clubs, hospitals and military facilities are exempt. Property is also taxed at 2.5% of the sale price upon transfer.

The new law is designed to correct defects in the original law, in part by including buildings under construction, closing a large loophole. It is also levied on all properties in the country, rather than only those within city boundaries, to capture new, high-end developments. Property assessments will be made every five years rather than every 10. The flat rate may also help: in the previous system the bands were never adjusted for inflation, so most people were charged the 40% rate, which few could afford. The tax is designed not only to raise revenue, but also to push the estimated 1.2m unused properties into the market and prevent speculative bubbles. Of revenue collected from the tax, 25% goes to local governorates. Funds are also directed towards the Informal Settlements Development Facility and Ministry of Urban Renewal and Informal Settlements.

However, the new law has faced some criticism, in part because increases in assessed value for residential properties are limited to 30%. With inflation running at about 20%, most buildings will hit the cap before the five-year assessment. Critics also note that the starting rate is too high, exempting the vast majority of buildings in the country.

Moreover, the tax has not generated the revenue hoped, raising only LE1bn ($65.9m) in the first seven months of FY 2016/17. It is also unclear whether the new tax will result in lower vacancy rates: property is seen as such a good store of value that people might be willing to pay the tax just to keep the property.

Previous Policies

Egypt has a long history of rent control, first implemented after the First World War under the government of President Gamal Abdel Nasser, which began in 1952 and continued through 1970. Under President Hosni Mubarak’s administration, all projects from 1996 onward had no rent controls, but many buildings remain under the old system, with some landlords profiting only a few dollars each month – a fraction of market value.

The so-called old laws are in part responsible for the housing crisis, and they have many critics, but the system persists. Rents are only adjusted after major structural changes, such as the addition of new floors. Reforms to adjust prices of properties under the old law, increase rents annually and buy out landlords have been introduced, but implementation has been stalled and rent controls remain.

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The Report: Egypt 2018

Construction & Real Estate chapter from The Report: Egypt 2018

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