The Egyptian market is looking forward to a surge in the launch of real estate funds shortly, as they offer a powerful mechanism to attract foreign investors to Egypt. They also provide a secure investment with fixed cash dividends. Real estate investment funds are among the most popular investment tools used in countries around the world.
These funds allow individual and corporate investors to invest in real estate assets by buying real estate fund documents and reinvesting them in purchasing and managing income-generating real estate projects. The profits from the rental income are then distributed to investors in specific percentages regularly.
This mechanism allows real estate projects to finance their projects and stimulate sales in the secondary real estate market. It also enables foreign investors to invest in the Egyptian real estate market easily.
The Financial Regulatory Authority amended the Capital Market Law in 2014 to allow the establishment of sector-specific investment funds, including funds directed to the real estate sector. However, only two funds were created during that period, and one of them stopped operating due to tax-related obstacles.
Sarah Hosni, Managing Director and CEO of Al Baraka Capital for Financial Investments – the investment arm of Al Baraka Bank Egypt, said that activating real estate funds in the Egyptian market will boost all investment sectors and that their activation will be faster than launching the real estate stock exchange. They will also serve the same purpose, which is trading and investing in assets through the Egyptian Exchange.
She emphasized that the Financial Regulatory Authority pays great attention to activating the role of real estate funds, and seeks to support them at all levels, through the important amendments it has made over the past years and the current amendments under discussion to the rules for establishing real estate funds to encourage the creation of these funds in Egypt.
She added that real estate funds are an opportunity to attract foreign investments and provide dollar liquidity by attracting international institutions to new investment opportunities. They will play a major role in advancing urban development plans and investing in the real estate sector without getting into the complexities of buying, selling, and registering, as well as dealing with state-owned real estate assets and underutilized assets. These efforts will complement the efforts made by the Sovereign Fund of Egypt to maximize the state’s assets.
Hosni said that the tax treatment of real estate funds, which imposes a tax on transferring property ownership to any entity, even if it is an investment fund, poses a challenge for asset owners who want to transfer them to investment funds for management and maximization of returns. She explained that this aspect needs to be modified to see a significant boom in investment funds in the Egyptian market.
She added that this represents an obstacle to the popularity of real estate funds despite the strong legislative amendments approved by the Parliament. She stressed that tax issues were the biggest obstacle facing the spread of this type of investment that supports the economy.
The legislative amendment that came into effect last July included Article 50 of the Tax Law, which explicitly stipulates a tax exemption for the profits of real estate investment funds established in accordance with the Money Market Law within the limits of their designated purpose. The exemption covers the revenues they obtain from real estate assets, their distributions, capital gains, and the returns they earn. The exemption is subject to three conditions: the fund invests its money in shares of real estate companies or built properties at a rate of no less than 80%, 80% of the fund’s revenues come from renting real estate assets, investment distributions, or capital gains, and the fund does not engage in development activity.
Hosni pointed out that real estate funds will enable the trading of real estate documents, which creates instant liquidity for real estate investors of various types, such as commercial and administrative, in many sectors, such as medical and logistical facilities. It is also a strong opportunity to support the Egyptian Exchange, and if these documents are registered in the market, they will attract a new category of investors, such as small investors who are interested in the real estate sector and cannot purchase entire real estate units. The real estate funds system allows the investor to buy a document that represents partial ownership of a property that is managed by specialists and allows them to receive the net return from the real estate fund periodically. This represents a new type of investment fund with fixed income.
She gave an example of real estate investment funds in the Emirates and Saudi Arabia, which led to a strong growth boom after companies and banks transferred their assets to investment funds for management or exchanged in-kind shares from them for documents in the funds. This resulted in strong growth in investment funds and their performance, which was reflected in real estate. It also reduced the burdens of real estate management, which was weighing on the asset owners.
She pointed out that real estate funds have many advantages, including forming a portfolio with low risks because the document is backed by multiple properties – if the fund invests in more than one real estate asset. It also reduces the burden of managing the property with a steady fixed return from cash distributions, the participation of different large shareholders, and quick liquidation to create fast cash flow for investors.
Hosni emphasized that activating real estate funds will lead to a boom in the secondary real estate market and everything related to it, such as insurance companies, building, and asset management companies, or financial institutions with real estate assets. They will be able to get rid of these burdens once they establish a fund and appoint a specialized manager for it. They will also have the possibility of increasing capital investing it in other projects and expanding the purchase of assets, which creates liquidity in the secondary real estate market.
She said that there will be some measures that will be implemented, such as displaying a banner on television to announce the issuance of documents for a certain period. She explained that most financial institutions, including banks and insurance companies that participate in real estate funds, do not usually sell these documents because they are a stable and long-term source of income, as happened in the Emirates and Saudi Arabia when they launched real estate funds in the local financial markets.
Hosni added that managing real estate funds is not that easy and has some different and specialized standards to evaluate their performance compared to other investment funds. These include the building’s occupancy rate, how to manage it and maximize rental income from it, knowing that many Egyptian properties can be rented to international companies in foreign currencies, finding a new tenant before the previous tenant’s contract expires, and maintaining the value and efficiency of facilities and buildings. All of these matters require strong professional experience in managing real estate funds to determine the strength and efficiency of the real estate fund manager, which is completely different from the investment manager of investment funds. It requires the effort of a specialized work team to maximize the targeted return.
Real estate funds expected to gain momentum after tax solution
Compass Capital’s executive partner, Tarek Abdel Rahman, said that the lack of real estate funds in the Egyptian market was mainly due to the tax imposed on them, but after the recent legislative amendments that solved this issue, he expects to see a surge in launching real estate funds, which are needed in Egypt.
Abdel Rahman added that his company is considering transforming “Bonyan”, which it owns, into a real estate fund and listing it on the stock exchange shortly. He also said that his company aims to acquire 40,000 square meters of administrative space and manage more than 150,000 square meters owned by “Bonyan”.
Hashem Al-Sayed, vice chairperson and CEO of the Egyptian Real Estate Investment Fund, said that real estate investment funds are one of the important mechanisms to provide cash liquidity to developers and attract foreign investors, as well as having a positive impact on the real estate market.
Al-Sayed added that funds are one of the modern financial tools that have achieved many successes in other countries and that their main goals in Egypt are to offer opportunities for different investors to invest in real estate easily and achieve the best returns while ensuring the security of their investments.
He explained that the activation of real estate funds requires providing good quality units and encouraging market makers to specialize in real estate funds by giving them facilities and incentives from the government.
He pointed out that the benefits of real estate funds include providing a guaranteed return and fixed cash distributions, and he stressed the need to complete the real estate registration process, which hinders many investments in the sector.
