After a late start and years of lying dormant, the Egyptian mortgage industry has sprung to life, driven by economic growth, rising property prices and a clearer regulatory framework. The next stage of development is likely to see mortgage lenders flourish and the market extended to lower income groups.

According to the Ministry of Investment, outstanding mortgage loans totalled LE 2.13 billion in March and are expected to hit LE 3 billion by the end of this year and LE 4 billion by mid-2009.

The development has gone hand-in-hand with an increase in the range of mortgages available. Some seven mortgage finance companies now operate, up from only two last year, and 16 banks offer home loan schemes.

Egypt's mortgage law was passed in 2001, lagging behind other countries in the region, including Jordan, which had established its first mortgage refinance bank (an institution which issues housing bonds to the capital market to fund fixed-rate mortgage lending) five years previously.

To encourage the emergence of mortgage lending, Egypt's property registration rules were eased in 2004 -- an important step, as a building must be officially registered before a mortgage can be extended on it. Fees were cut and then capped at LE 2,000, and the time required for a building to be catalogued was reduced from 18 months to three.

It was natural that a mortgage sector would take time to grow after the establishment of the legislative and administrative basis for its development. The first mortgage was, in fact, not extended until 2005.

Therefore Egypt still has very low levels of mortgage penetration and home ownership remains the exception rather than the norm, with only 32% of the population owner-occupiers. The figures for Jordan and Tunisia are 75% and 67%, respectively.

Given Egypt's population of 80 million and dynamic economy (the IMF expects GDP growth of close to 7% this year and next), the market is seen as having much potential, rather than being too small to be worth operating in (as is the case with some countries with low penetration rates).

"The mortgage industry is the most interesting niche of the banking sector," Gamal Moharam, CEO at Piraeus Bank, says. "Demand is huge, because the population is growing."

Swiftly rising house prices have helped kick-start the mortgage sector and should continue to drive its expansion over the next few years, at least. With property inflation steaming well ahead of wages in some parts of the country, traditional short-term home loans are not a viable option for many people. A mortgage gives them the chance to acquire a home, repaying the loan over a longer term (say, 20 instead of five years), using the house as collateral.

With prices rising, the option of purchasing a property before being priced out of the market is a valuable one. For young middle-class people with a lot of earning potential but few savings, mortgages are particularly attractive.

The fledgling sector has also received a boost from recent foreclosure cases. Some market observers had concerns that the new laws might not stand the pressure of court cases, and that refusals to take action on non-performing loans might undermine confidence in mortgage lending. However, a handful of recent cases brought when the borrower defaulted have been closed without mishap.

Minister of Investment Mahmoud Mohieldin says, "those who are interested in the sector are not only interested in seeing the entry rules apply, but they also want to make sure the exit rules work. After having the legal framework, it is also important to ensure the application of the law."

Mortgage lending has also received a shot of liquidity from the US-based Overseas Private Investment Corporation (OPIC), an organization which aims to promote growth and American investment in emerging markets. In July, OPIC extended an LE 1.3 billion loan to Commercial International Bank (CIB)Commercial International Bank (CIB), Egypt's biggest bank by market value.

Now mortgage lending has gained momentum, attention has turned to how the sector will take shape. Of current outstanding mortgages, LE 1.49 billion, or 70%, was extended by banks, and the remaining LE 640 million by specialist mortgage lenders. But analysts expect mortgage finance firms to grow more quickly, and eventually take the lion's share of the market, as they have fewer limitations on lending. The Central Bank of Egypt (CBE)Central Bank of Egypt (CBE) has restricted banks' maximum mortgage commitments to 5% of their total invested portfolio. The cap is designed to limit banks' exposure to mortgage risk but it also curtails their potential involvement in the sector.

There will also be greater focus on increasing mortgage coverage in the middle-to-lower income segment. The government has already started promoting this trend though its Mortgage Guarantee and Subsidy Fund. This offers applicants earning LE 1,000 a month or less (and households bringing home LE 1,500 or less) a grant of up to 15% of the value of the property they are purchasing, to a maximum of LE 10,000. Thus far, the fund has provided subsidies totalling LE 32 million to around 4,000 people.

Meanwhile, of its OPIC package, CIBCIB plans to extend LE 1 billion to other lenders in the market, while directing the remainder of the funds to middle-income earners.

According to local media reports, the US Embassy in Cairo has stated that 80% of the proceeds of the loan will go towards low-income home buyers to finance houses valued at less than $21,000 (LE 111,300). While OPIC has a development brief, this is not altruism alone -- there is a strong market motive.

"We are seeing new developments of smaller, one bedroom apartments," said Moharam. "And there is a real opportunity for banks here."

For all the enthusiasm, incomes in Egypt still tend to be relatively low, and the process of registration of property and applying for mortgages is an unfamiliar one for most people. Furthermore, the condition of much of the unregistered housing stock is poor, and surveyors may be reluctant to give the all-clear, or banks extend loans, if they feel that the building is unsound or that its value will depreciate as newer residential units go up. This has been an issue in Turkey, another emerging market with a relatively new mortgage market, and obviously has a particular impact on lending to the less affluent. The less well-off are unlikely to spend money on rehabilitation, meaning that lenders have concerns about their ability to sell the property for at least loan value if the borrower defaults.

Finally, the global credit crunch and the subprime mortgage collapse which is said to have precipitated it has led to less liquidity for banks to extend to borrowers - particularly to those with insecure incomes. While Egypt has been sheltered from the worst of the crunch, the high inflation rate and occasional rumblings of social discontent may contribute to wariness.

Therefore while growth is likely to be rapid at first, there are still considerable constraints on the development of a widespread mortgage market. Nonetheless, the immediate prospects are positive for both the lenders and the property market.

"Mortgage schemes will bring more and more people into the real estate sector, " says Samir Farag, vice president of real estate firm Coldwell Banker, "people that used to be out of the system."

By Andrew MacDowall, Oxford Business Group

© Business Today Egypt 2008

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