Egypt’s government introduced a slate of new regulations on June 21 for the construction and sale of housing units by real estate developers with an aim to regulate the market and safeguard the rights of consumers.
The new regulations set how and when developers can start marketing units and how much of their own capital they must put up for a project. Furthermore, they require developers to submit semi-annual reports on their projects and activities, create separate bank accounts for each of their projects, and be subject to financial auditing.
A new phase?
Cairenes have grown accustomed over the past decade to the eyesore of their city drowning in an unrelenting sea of billboard advertisements (much of them real estate projects) inundating arterial highways, roads, countless buildings, and indiscriminately plastered just about everywhere the eye might wander. These billboards serve as an omnipotent symptom of the root problem that these new regulations are partially aimed at alleviating.
Under the new rules, developers will be required to divide their projects into phases, and they will not be able to put the units of one phase on sale until they obtain official authorization from the Ministry of Housing. They will also not be able to proceed with the development of a new phase until they have demonstrated that they have adhered to the authorized timeframe for the previous phase.
The decision to regulate the market is in the interests of citizens first and foremost, as well as to bolster the market’s overall strength and credibility, Daker Abdellah, a member of the Real Estate Investment Division of the Federation of Egyptian Chambers of Commerce told Daily News Egypt. These regulations will help increase demand, sales and engender a more professionally efficient culture.
On the other hand, Mohamed Al-Bustani, chair of the Developers Association of New Cairo and the New Administrative Capital told Ahram Weekly he is concerned about the implementation of the new rules in the current economic situation. Some companies currently operating in the market might not be able to meet such commitments because of the longer payment periods granted to purchasers amid difficult economic circumstances. Developers are trying to cope with the rising costs of construction due to the effects of inflation on the prices of building materials, he explained. Al-Bustani said he believed that the new regulations should not be applied to development projects that had obtained licenses prior to the announcement of the new regulations.
Time is money
Smaller developers who do not have the necessary liquidity will feel the pinch the hardest, especially given the high costs of land, licensing fees, and other expenses that have to be paid before construction begins.
Under the recently announced regulations, developers must prove that they are able to appropriately fund each phase up front in an amount determined by the relative size of the project. Developers will need to deposit; 3% for projects larger than 1,000 feddans; 5% for 500-1,000 feddans; 10% for 100-500 feddans; 15% for 50-100 feddans; at least 20% for less than 50 feddans. These sums must be deposited in the bank accounts developers open for each project or project phase. They can be made in the form of direct cash deposits, auditor-approved receipts of revenues from previously completed projects, credit facilities, or a letter of guarantee from the bank.
Regulations also ensure that reserve funds will be required to be held in case of refunds in the amount of 5% of the value of units sold. Refunds are deducted from this reserve, which declines in proportion to the ratio of units that have been delivered to purchasers. The remainder of the reserve is released once the phase has been completed. Exemptions will be made for developers that have already constructed the equivalent of a minimum of 10% of the largest tier of projects (greater than 1,000 feddans).
Separate accounts for debts and maintenance are now mandatory and developers must open a debit account for the explicit purpose of loan repayments. Developers must also use a separate account for maintenance fees collected from buyers and those fees are prohibited from being disbursed as funds for future project phases.
Real estate developers will also be required to submit audited financial reports to the ministry twice a year, within 45 days of the end of the first half of the fiscal year on December 31 and the end of the fiscal year on June 30.
Lastly, the slated regulations commit developers to timeframes that are set and approved by the Ministry of Housing, which will require all developers to issue routine technical reports that provide detailed updates and horizons for construction progress and completion. Missed deadlines in these regards will be granted six additional months to finalize the project, after which they will be subjected to legal penalties identified in their project contracts with the Ministry.
“While [the regulations are] definitely a positive move for the industry, I don’t know how practical it will be for developers that tend to work quickly. It will boil down to how fast the authorities are to respond to these requests to keep developers on track with their schedules,” Salah Katamish, board member at Madinet Nasr Housing and Development told Enterprise. The decision will affect the feasibility of projects and developers will have to rework the way they make financial decisions, Katamish noted.
“It will take some time for each developer to figure out new ways of doing things before they find the right formula. We might see fewer large-scale developments and developers might veer more towards smaller projects, or break megaprojects down into smaller phases.
Many see this slate of regulations as heralding a much-needed age of meaningful change in a booming sector that has fast become one of the country’s most dynamic and lucrative industries.
“The rules will create some issues as developers transition and could see some resistance in the short term, but in the long run, they will make for a healthier market,” Mohamed El Bostany, head of the New Cairo Developers Association and member of the House of Representatives’ Housing Committee said, according to Enterprise.