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Tuesday, 21 June 2022

A regulatory overhaul cometh to real estate developers

The Madbouly cabinet imposed a slate of new regulations for real estate players yesterday designed to protect consumers and reduce market risk, it said in a statement yesterday. 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.

Developers are now required to divide each project into phases, with each phase subject to approvals from the Housing Ministry before it can move forward with sales from the next phase.

Liquidity requirements: Developers must prove that they are able to fund a portion of each phase of their projects by depositing in the account an amount determined by the size of the project. Developers will need to deposit:

  • 3% for projects larger than 1k feddans;
  • 5% for projects spanning 500-1k feddans;
  • 10% for projects spanning 100-500 feddans;
  • 15% for projects spanning 50-100 feddans;
  • At least 20% of the value of projects spanning less than 50 feddans.

But there are exemptions: Developers that have already built the equivalent of at least 10% of the largest tier of projects (over 1k feddans) will be exempt from the deposit requirement. They would be exempt from the requirement if they build 15% of a 500-1k feddans development, 20% of a 100-500 feddans plot; 25% of 50-100 feddans; and 30% of projects less than 50 feddans. This seems to indicate that the government is scrapping a proposed rule that would have prevented developers from selling units until at least 30% of the project had been completed.

Money will need to be kept aside in case of refunds: Companies will also need to keep aside money equal to 5% of the value of units sold to cover potential refunds. In the case of delays that exceed two years, buyers can choose to receive a 100% refund on the unit within three months of submitting a formal request.

Separate account for debts and maintenance: Any developer that has obtained a loan is required to open a debit account in a bank for the project, which will be used to make loan repayments. Developers must set up a separate account for maintenance fees collected from buyers. Those fees cannot be used as part of the funds for project phases.

New reporting requirements: Developers will need to submit semi-annual audited financial reports to the ministry. The reports will have to be submitted within 45 days of the end of the first half of the fiscal year on 31 December and the end of the fiscal year on 30 June.

Developers must commit to the timeframe approved by the ministry, and submit regular technical reports with updates on construction progress. Developers who miss their deadline will have six additional months to complete the project, before which they will be subject to the legal penalties identified in their project contracts with the ministry.

When will they come into effect? We have not read the decree in yesterday’s Official Gazette, but Tarek Shoukry, head of the real estate division of the Federation of Egyptian Chambers of Commerce and Arabia Holding chairman, told Enterprise that the regulations came into effect yesterday.

Crucially, this is not a retroactive bill, which means it will be applied only to new and ongoing projects.

There will be a year-long grace period for developers to bring their practices in line with the new regs, Shoukry tells us.

We already knew this was coming: The cabinet greenlit the regulations back in December, though at the time they lacked detail.

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