The government has introduced new regulations for the construction and sale of housing units by real estate developers.
Last week, Prime Minister Mustafa Madbouli introduced a package of new rules to regulate the real estate market and safeguard the rights of consumers. The rules set conditions for the construction of real estate development projects and the sale and delivery of units to consumers.
Under the new rules, real estate development firms will be required to open a separate bank account for each project. The account will be used exclusively for all expenses and revenues for each phase of the project, apart from expenses relative to infrastructure that is not part of a particular phase of larger projects.
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 authorisation from the Ministry of Housing. Nor will they be able to proceed to a new development phase until they have demonstrated that they have adhered to the authorised timeframe for the previous phase.
“These regulations have been made in order to protect the real estate market from problems and to protect consumers from becoming the victims of mistakes made by some companies,” said Mohamed Al-Bustani, chair of the Developers Association of New Cairo and the New Administrative Capital.
He was nevertheless concerned about the implementation of the new rules in the current economic situation. He said that some companies currently operating in the market might not be able to meet their commitments because of the longer payment periods granted to purchasers in the light of the currently difficult economic circumstances.
In addition, developers have had to cope with the rising costs of construction due to the effects of inflation on the prices of building materials. Al-Bustani said he believed that the new regulations should not be applied to development projects that had obtained licences prior to the promulgation of the new regulations.
Gasser Fawzi, a member of the board of the Mina Real Estate Investment Company, welcomed the government’s decisions as a means to regulate the relationship between the developers, the land administration agency, and consumers.
The real estate market had suffered as a result of improper behaviour on the part of some new developers, especially those who lack experience and familiarity with markets in the country, he said.
“Anybody who deals in the real estate market can call himself a developer even if he only set up his company three years ago,” Fawzy commented, whose firm is about to launch a new project on the North Coast.
He said that what most concerns investors is not the substance of the new regulations but how they will be put into effect. If the implementation is too slow, it could harm serious investors.
The regulations were necessary, he said, but he feared that the initial capital outlays required by the new regulations could place too heavy a burden on developers under the current conditions affecting markets locally and internationally.
Smaller investors who do not have the necessary liquidity will feel the pinch the hardest, he said, especially given the high costs of land, licensing fees, and other expenses that have to be paid before construction begins.
This applies above all to the developers of smaller projects on 50 feddans of land or less because under the new regulations they will have to deposit at least 20 per cent of the value of the project in the project account in order to obtain the ministry’s approval.
Under the new regulations, developers will be required to prove that they have the ability to fund their projects. The required amounts are scaled according to the size of the project: three per cent of the value for projects larger than 1,000 feddans, five per cent for projects on 500 to 1,000 feddans, 10 per cent for projects on 100 to 500 feddans, 15 per cent for projects on five to 100 feddans, and 20 per cent of the value of projects on 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.
Other regulations address when developers can announce sales in adherence to approved construction and delivery timetables and financial reporting requirements. After developers receive approval for their plans for a particular phase and deposit the required funds into the project account, they will receive the go ahead to proceed with sales in accordance with the authorised timeframe for construction and delivery.
They 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 31 December and the end of the fiscal year on 30 June.
In addition to the initial proof of ability to pay, developers must maintain a liquidity reserve equivalent to five per cent of the value of the units for sale in order to cover refunds. 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.
In view of the current economic conditions, Fawzi said that additional facilities should be made available to developers. One would be to offer plots on installment plans of up to 10 years with access to facilitated loans for this purpose. He said that he hoped that the licensing process would also be accelerated.
In the event that developers are late in delivering purchased units to consumers, in accordance with the terms of the contract and provided that the developers have adhered to their commitments to the ministry and that the clients have paid their installments on schedule, developers will be given an additional 12 months to complete and hand over the purchased units.
If they exceed that period, remaining installments will be carried forward until the unit is delivered. In the event of a 24-month delay, the purchaser will have the right to choose whether to continue in accordance with the foregoing provisions or to demand a refund that would be payable within three months.
Fathallah Fawzi, president of the Association of Egyptian Businessmen and chair of the association’s Building and Construction Committee, said that he feared that the new regulations would cramp the market.
While it would force out some developers that have entered the market without sufficient liquidity and therefore have relied on upfront sales to fund their projects, it would also generally hamper smaller developers while larger firms would not feel the impacts as severely, he said.
On the other hand, the regulations were needed to protect consumer rights, Fawzi said. Some developers had become routinely late on their delivery commitments, and the new regulations were a response to complaints the government had received regarding firms that were far behind schedule or that had misrepresented themselves as larger and more established companies than they in fact were.
It is unclear how and when the new regulations will be put into effect. Fawzi said that the executive mechanisms and whether or not they would be applied retroactively would become clear in the coming days.