REITs offer ownership opportunities, investment potential: Developers
Real estate investment trusts (REITs) are crucial as they provide investors with the opportunity to diversify their portfolios and gain exposure to a variety of property assets. They allow for fractional ownership, making property investment accessible to a broader range of individuals, including those who may not have the capital to purchase entire units. Additionally, these funds attract foreign investment, support urban development plans, and offer liquidity through easy buy and sell options, making them a valuable tool for both investors and developers.
Abdallah Sallam, President and CEO of Madinet Masr, stated that REITs are not a new concept and have been in use in mature markets for decades, such as in the United States, where they represent 20% of property ownership.
Sallam added that REITs, along with similar innovative mechanisms like fractional ownership, provide the ability for anyone to own property.
Managing Director of IGI Developments Sherif Mustafa said that REITs present a unique opportunity for investors to diversify their portfolios and invest in a range of real estate assets simultaneously.
He noted that these funds offer an opportunity to attract foreign investments into Egypt, supporting the country’s urban development plans and drawing a new segment of investors to the real estate sector. They also provide developers with immediate liquidity, especially as the market has seen an increase in commercial and administrative units recently.
Mustafa emphasized that REITs can also attract small investors who may not have the financial capacity to purchase an entire unit, as these funds allow for fractional ownership, enabling them to buy shares in a property.
He also highlighted the safety and security of these funds, given the strict regulations governing their operation. Moreover, these funds offer investment diversification, as investors can buy shares in properties located in various areas, and provide quick liquidity for investors when they need cash, through the ability to sell their shares.
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Tax challenges
Bassel El Serafy, CEO of Adeer International, owned by Sumou Holding, stated that tax exemptions for REITs require that 80% of the property generates income, said that the main issue with REITs is that when a fund buys a property, it is recorded at its book value, yielding an annual return of 7 to 9%, which is not profitable or appealing to investors.
He added that solving this issue requires calculating the tax value after the fund sells the property and liquidates it, rather than accounting for the buying and selling of shares within the fund.
El Serafy called for a single entity within the Financial Regulatory Authority to oversee REITs, simplifying the launch process, pointed out that activating REITs would stimulate Egypt’s real estate sector, solve financing challenges, and provide a secure way for foreign investors to enter and exit the Egyptian market.
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Banks wait
Head of Corporate Finance & Investment Banking at Suez Canal Bank, El Sayed El Feky, said that banks are waiting for the activation of the real estate market, as it benefits banks from an investment perspective. Banks have investment portfolios that can be entered into REITs to maximize returns.
El Feky added that the real estate sector is one of the biggest beneficiaries of the sukuk market and that sustainability bonds attract local investors, such as banks, which take into account, according to the Central Bank of Egypt’s (CBE) instructions, environmental activities even in credit assessments.
He further explained that the CBE supports the state’s efforts in providing sustainable financing, as financing granted to companies that consider environmental and social dimensions is seen as low risk, positively impacting the stability of the financial system.
Through sustainable financing, investment opportunities can be enhanced, and foreign currency can be injected by attracting a new segment of investors who include sustainable financing in their objectives. Additionally, the issuance of green bonds can be boosted in light of the growing popularity of environmental and social investment, he concluded.
IWAN Developments CEO Waleed Mokhtar highlighted that REITs offer an opportunity for investment without the need to establish companies, and emphasized that these funds are crucial for addressing financing challenges and assisting the government in managing its real estate inventory. Mokhtar also noted that activating real estate stock exchanges and funds could help solve financing issues and reduce the impact of high bank loan interest rates, stressing that two funds are insufficient for the large market.
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Funds boost development
Chairperson of Empire State Developments Mostafa Mohsen disclosed that REITs could be a solution to the financing issue faced by developers, which currently extends to eight years. These funds would provide the necessary financing, allowing companies to focus on real estate development.
Mohsen added that real estate investment funds and the availability of sector-related information significantly contribute to the growth of real estate companies, increasing the real estate output and supporting the Egyptian economy.
He explained that Egypt has major advantages for exporting real estate to Arab expatriates and Egyptians working abroad, especially with the current exchange rate depreciation, adding that overcoming challenges in property exportation and eliminating lengthy procedures could generate billions of dollars for the local economy.
Hayam Hassan, Manager at the Financial Regulatory Authority, stated that the securitization volume in the real estate development sector has reached EGP 70bn, of which EGP 40bn is for the New Urban Communities Authority and EGP 30bn for companies.
She explained that securitization of future financial rights involves issuing securities that are to be paid off and generate returns from an independent portfolio of financial rights and receivables due at a later date, referred to as the “securitization portfolio.”
Hassan clarified that the entity creating the securitization portfolio, such as real estate development companies, assigns this portfolio and its associated guarantees to another company with a sole purpose, which is the securitization company.
She pointed out that bondholders have the right to claim from the securitization portfolio, not from the company’s assets, and that the securitization portfolio is the sole source of repayment for bondholders. She emphasized that the documents related to the assigned financial rights, guarantees, and commercial and financial papers are deposited with the custodian and are owned by the bondholders.
REIT system
General Manager of SODIC Ayman Amer stated that the main issue facing real estate financing is the inability of 60-70% of clients to prove their income. He emphasized that the real estate sector is the main driver of the Egyptian economy due to the diverse investment opportunities it offers and its ability to attract both Arab and foreign investments.
Chairperson of the Real Estate Export Council Hisham Shoukry said that non-bank financing is weak in Egypt, accounting for no more than 3%, compared to over 90% globally, added that the interest rate is not the issue in real estate financing, as it remains fixed despite fluctuations in rates.
The real issue in Egypt is the informal economy, which represents 60% of the overall economy, making it difficult for many potential buyers to prove their income. He suggested that the property itself should act as the guarantee in case of a client’s default, he added.
Shoukry also highlighted the challenge of financing units under construction, which requires reactivation, noting that in 2008, the CBE issued a decision to halt it, explaining that financing units under construction would speed up project execution, benefiting both developers and clients, and banks could secure guarantees to protect their rights.
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