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Thursday, 23 June 2022

What do real estate players think of the new regulations for the sector?

POLL- Real estate players react to the government’s new regulations: Real estate developers are facing new regulations designed to protect consumers and reduce market risk. Announced by the government on Monday, the rules impose new reporting and financial requirements on developers, with projects facing closer scrutiny by the Housing Ministry. We talked to several players in the industry this week to find out their reactions to the regulations.

A refresher: The rules introduce new conditions on when companies are able to sell units and require them to submit audited reports on their activities twice a year. Developers will also have to set aside up to 20% of the project’s capital to ensure they have the financial resources to finish it. Companies have one year to bring their practices in line with the new regs, sources at Federation of Egyptian Industries had told us.

Strong medicine for a better functioning market: “The rules will create some issues as developers transition into this new way of doing things, 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, tells Enterprise.

Good for governance: “We believe it’s a positive step, especially for big developers, because it adds more discipline and governance to the market,” a spokesperson for Palm Hills Developments (PHD) tells us. Tarek Kamel, CEO of Orascom Development Holding’s (ODH) O West project called the regulations “a very good move indeed,” saying that “for the longest period of time, the industry was not well organized, and this allowed … some not very reliable developers to enter the market,” harming consumers and the wider industry.

The idea here is to protect consumers: The ministry will also take a more active role in settling complaints made by buyers, who will be able to appeal to the authorities to intervene, says Amin Massoud, a member of the housing committee. Problems with maintenance fees — a frequent source of disputes — will be resolved by the financial audits and the requirement to keep fees in separate bank accounts, he adds.

But there are concerns that red tape could slow the process: Developers will need to obtain approval from the Housing Ministry for each phase of construction and submit regular reports on their progress, potentially slowing the development process. “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,” says Salah Katamish, board member at Madinet Nasr Housing and Development (MNHD). “It will boil down to how fast the authorities are to respond to these requests to keep developers on track with their schedules.”

“The new rules will act as an entry barrier for new, smaller entrants, which will be in big developers’ favor,” PHD tells us. Companies will have to deposit up to 20% of the value of the project in a bank account before they are able to start selling units, as well as set aside a further 5% to cover potential refunds. Katamish agrees, adding that they often only have enough money to cover an immediate installment or absolute necessities like land and construction.

They may not present a financial obstacle to larger developers: “Big developers will not have an issue with this because they have no problem securing funding from banks or otherwise, in addition to the fact that most of them have escrow accounts,” PHD says. “We expect banks to continue to support the sector.”

But this isn’t the consensus view: “The decision will affect the feasibility of projects and developers will have to rework the way they make financial decisions,” Katamish tells us. “It will take some time for each developer to figure out new ways of doing things before they find the right formula,” he says, explaining that companies may have to resort to new means of raising finance for their projects.

We might see fewer large-scale developments: “Developers might veer more towards smaller projects, or break megaprojects down into smaller phases,” Katamish says.

That is why the industry is relieved there is a one-year grace period, our poll takers told us.

What else does the industry need? Better financing models for developers and access to reputable mortgage finance for buyers, says ODH’s Kamel — as well as more local production of raw materials. “It would be of great value if we strengthen our performance as a country when it comes to real estate materials production locally,” he says. “This would ensure supply for developers, and probably at a more optimized cost.”

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