How Egypt Aims to Drive Property Growth through New Real Estate Funds

While Egypt is poised to receive billions in foreign investment through sovereign wealth funds, the real estate industry continues to identify new ways of attracting foreign investors to the country. One of the investment tools that has been generating a lot of buzz lately is the real estate fund. Egypt may soon see a surge in the number of funds of this type available to investors.  

These funds attract investors because they are a secure investment that offers fixed cash dividends, which is something that few other easily accessible options can claim. They allow people to purchase shares in a collection of real estate investments rather than requiring them to own the entire structure. They make real estate investment more accessible while simultaneously giving developers a mechanism for fundraising. 

Changing the Law to Make Real Estate Funds More Feasible 

In Egypt, the Financial Regulatory Authority changed the language of the Capital Market Law in 2014 to allow for the establishment of industry-specific investment funds. At this early date, only two funds were created, one of which has since become defunct due to tax burden. These funds have recently gained some traction as an interesting solution to the investment problem that Egypt currently has.  

Foreign investors are attracted to these funds because they are familiar with them. Moreover, they allow people to get involved with Egyptian real estate for a much lower upfront investment. This investment goes directly into the market to help developers launch new projects and bring existing ones to fruition. Since 2014, the Financial Regulatory Authority has changed several rules to make these funds more attractive and has additional amendments up for consideration. 

The amendment likely to make a difference in Egypt involves the taxation of these real estate funds. The current law imposes a tax on any property ownership transfer, whether between individuals or entities, such as these investment funds. This law poses a serious challenge to investors who want to transfer the asset to an investment fund to manage it or help maximize its returns. The additional taxation can reduce yield.  

The last amendment passed related to the real estate funds was Article 50 of the Tax Law. This exempts real estate investment funds’/ profits from taxation in certain circumstances. The exemption applies to funds investing at least 80 percent of capital in real estate and earning at least 80 percent of returns from those assets. Furthermore, funds must not engage in development activity to enjoy this exemption.  

The Attraction of Real Estate Funds for a Range of Investors 

Tax changes will make real estate funds even more attractive to investors. However, there are many reasons to consider these investments, even without the additional incentive. Funds like this make real estate investment possible for the first time in many people's lives. Historically, investment in real estate had an extremely high barrier to entry, since investors had to buy an entire property. Furthermore, they would have to shoulder maintenance and administrative costs without any help, which sharply increased the associated risk.  

Using these funds, individuals can invest in a portion of a property rather than buying the whole thing—and likewise divvy up costs among all investors. Furthermore, the fixed income that these funds deliver help offset costs. They can even make it feasible to outsource all property management to a third party and not have to deal with any logistics.  

Another major benefit of real estate funds is the ability to diversify with a small investment. As mentioned, the entire cost of a single property is a major barrier to investment in this industry. The high cost of entry is complicated by a complete lack of diversity. With funds tied up in a single property, investors are exposed to a great deal of risk. Through real estate funds, individuals can invest in an entire portfolio of properties and benefit from this diversity with a single share. No longer is there the issue of tying all money up in a single investment. Of course, the power of this diversity to protect investment varies within different funds. Investors need to do their homework.  

Related to this benefit is the matter of liquidity. Selling a property can take a lot of time and expense as it involves transferring titles and more. A real estate fund avoids all of these complications as shares trade just like other assets.  

The Bottom Line on Real Estate Fund Development in Egypt 

With all these benefits as well as the highly anticipated new tax breaks, real estate funds may be an effective tool for attracting investors to Egypt. Funds are low risk compared to direct real estate investment, so the bar to entry into the market becomes much lower as they become more available. Furthermore, the funds allow investors to sidestep much of the administrative burden that comes with passing property between two people. The launch of real estate funds in both the United Arab Emirates and Saudi Arabia helped drive growth in the secondary real estate market and provided proof of concept. Experts assume that the funds will have the same impact in Egypt and make real estate a key market for the country.