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Investment Strategies In Egypt

Property investors are drawn to Egypt due to its warm sunshine, crystal seas and exotic culture, giving rise to a booming tourist industry on which to base their investment strategies.


General Factors

Foreign property purchasers in Egypt see now as the time to enter the market while Egyptian property prices are suitably low high potential returns on investment are in the offing. Target areas tend to be on the Red Sea resorts in preference to many other areas and this has been reflected in the impressive property price increase of around 25% per annum. In addition to Egypt's natural beauty, homebuyers are also attracted by a low cost of living and excellent transport links to the UK. Today Egypt is a favourite holiday destination for those seeking the charm of a new culture, within a safe and luxurious environment.

Egyptian property investors rely largely upon the fast growing tourism sector and the fact that property prices remain low for now. With increased annual tourist numbers, property investors are identifying the Red Sea region as a great opportunity to buy up units on the best beach front locations, right at the beginning of the market while prices are low. Buy-to-let investments profit from the growing tourist industry and are seen as an excellent opportunity to maximize returns on investment. Second homes are equally popular as Egypt grows in popularity amongst the international jet set who regard Egypt as a highly appealing and exotic medium haul holiday destination.

Property purchasers have been benefiting from the Egyptian government's sweeping reforms designed to attract further inward investment and the country has seen a sharp increase in tourism in recent years. Last year Egypt received a record 8.6 million tourists and is experiencing growth of up to 60% from some Middle Eastern markets alone.

Economic Factors

The economic climate in Egypt is ripe for investment with a number of government incentives now attracting a growing native middle class, and giving foreign investors a wider market than ever before for their investments in Egyptian property.

Low off-plan prices (from around £35k for a beachside apartment), guaranteed rental yields, holiday homes in the sun and high returns on investment (up to 25% per annum in some locations) are all reasons behind the current success of Egypt as a holiday and property location. An increasing number of visitors are buying into the current vogue for luxury apartment complexes in the major holiday hotspots, safe in a strong belief in the current Egyptian government's commitment to further economic growth and stability.

So far the Egyptian government's commitment to economic growth and reform has paid off and since 2004 a number of new Customs reforms, tax incentives and privatisations have created an economic climate that encourages foreign investment in Egyptian property. Today several heavy weight international property developers have invested in Egypt and worldwide purchasers widely regard Egypt as a safe and solid investment.

Tourism is a mainstay of economic activity in Egypt and represents around 25% of Egypt's total foreign currency income. With strong policies in place to entice foreign investment and improve infrastructures in tourist hotspots, this sector continues to develop steadily.

Political Factors

Despite unrest in recent years, Egypt's political situation today is stable and a completely democratic republic is expected within the near future. This bodes well for the country as a whole and puts Egypt firmly back onto the tourist map.

Egypt was ruled by many countries before establishing independence and today it is run by a multi-party semi-presidential system where the executive power is divided between the president and the prime minister, although in practice the president tends to hold a greater share of the power.

President Mohamed Hosni Mubarak has been in office since 14 October 1981 and he is currently serving his fifth term in office after re-election in September 2005. He is the leader of the ruling National Democratic Party, while Prime Minister Dr Ahmed Nazif was sworn in as Prime Minister on 9 July 2004.

Egypt was the first Arab state to establish diplomatic relations with the state of Israel, after the signing of the Egypt-Israel Peace Treaty. Egypt is a major influence amongst other Arab states and has always played an important role as a mediator in resolving disputes between various Arab nations, as well as in the Israeli-Palestinian dispute. Egypt's political system currently receives much needed financial support from the US which is helping to project the country into a new era of optimism.

Natural Factors

It is clear to see why so many visitors pick Egypt as their choice of holiday destination. White sandy beaches, colourful coral reefs and desert landscapes are all part of the exotic Egyptian experience. Resorts such as Sharm El-Sheikh on the Red Sea are firm favourites amongst international diving and snorkeling enthusiasts, the Red Sea being one of the world's most popular scuba diving destinations, and second only to Australia's Great Barrier Reef. Other water sports such as windsurfing are also popular in the region and draw tourists to the area.

The River Nile also offers a rich cultural experience, with luxury cruises on the top of most tourist agendas. Egypt is also well known for its ancient history and Alexandria boasts a rich Graeco-Roman history which for many centuries was at the centre of the culture and learning of the entire world. Alexandria was, and still is, of prominent cultural interest for knowledge seekers the world over, while today the city of Cairo offers visitors a great cultural experience combined with good accommodation, restaurants and shopping.

The warm desert climate in Egypt means that visitors enjoy temperatures ranging from 14 °C in winter to 30°C in summer, creating a year-round tourist season. Egypt is only 5 hours direct flight from the UK and, with increased flight availability; it is an increasingly popular tourist destination.

Many resorts and major cities in Egypt are becoming increasingly cosmopolitan with real estate buyers from all over the world planning investments here. One bonus for many buyers is that English is spoken widely in professional circles, in addition to Arabic.

Egyptian culture dates back some five thousand years of recorded history and the country is rich with ancient Egyptian treasures, particularly around Luxor and Alexandria which continue to lure visitors every year. This ancient history blends in perfectly with a modern, international way of life to be enjoyed in many popular towns and resorts in Egypt.

Logistical Factors

Egypt is only 5 hours direct flight from the UK and, with increased airline schedules coming into play, Egypt is now well-known as a top medium haul luxury destination for European travelers.

Many airlines serve Egypt and new services and fares are constantly being added to their routes. Main operators are; Egyptair, Excel Airways, First Choice, Flythomascook.com, GB Airways (Operating as BA), Sudan Airways, ThomsonFly.

Egypt is well served by its major airports at; Abu Simbel, Alexandria, Aswan, Borg el-Arab, Cairo International, Luxor and Sharm el-Sheikh/Ophira. Cairo International airport is being modernised and a new terminal is to be built by early 2007, encouraging an even greater influx of tourists.

Short Term Investment Strategy

Key Opportunity

As a growing tourist economy, Egypt has much to offer investors looking to profit from short term off-plan investment opportunities. Growing tourist numbers and an ongoing influx of foreign investment into Egypt bring buoyancy to the real estate market and overseas buyers are encouraged by a reliable and expanding property and tourist arena.

Low off-plan prices (from just £30k for a beachside apartment), guaranteed rental yields, luxury holiday homes in the sun and high returns on investment (up to 25% per annum in some key locations) are all reasons behind the current success of Egypt as a holiday and property location. An increasing number of visitors are buying into apartment complexes in the major holiday hotspots, safe in a strong belief in the current Egyptian government's commitment to further economic growth and stability. At only 5 hours from the UK, Egypt is now already well known as a number one medium haul top end destination for European travelers, offering investors a ready-made market for their properties.

Egypt offers investors the type of all-purpose, self-contained holiday resort option so popular in the current overseas property and holiday marketplace. Easy to maintain Red Sea properties on secure communities within easy reach of golf, beach and other resort facilities are firm favourites, enabling short-term investors to achieve their off-plan contract re-assignment within a relatively short period of time.

Egypt's economy is on a dramatic growth curve and in the last quarter of 2005, the annual growth rate in Egypt rose for the first time to 6.1% and inflation dropped dramatically from a huge 18.1% in 2004 to only 3.1% in 2006. The IMF, with which Egypt long had bad relations, now glows with pride over the Egyptian government's stabilisation programme – all great news for today's investors in Egyptian property.

IPIN often has access to interesting pre-release prices, allowing its members to take full advantage of below market prices as well as high capital appreciation over the construction period.

Timescale

Investors in off-plan developments factor in between 18 and 24 months for construction from reservation to completion stages. Short term investors normally look to profit from a carefully selected, promising market, selling on their unit to mid or long term investors approximately 14 to18 months after making their initial reservation, regardless of whether or not the project is yet completed.

Of course, the earlier the investment is made, the greater the investment returns. As importantly by entering the project at the earliest possible stage, investors get the best choice of units which will always be first to attract buyers in the future.

Level of Complexity

Short term strategies offer the lowest level of complexity as the purchase has not yet been officially made; therefore, no property taxes or maintenance or management charges are due. This is a simple capital investment, often with no need to proceed to Purchase Contract, or make any mortgage finance arrangements. Remember to check with the developer if there are any charges made to “flip”, or reassign your contract, and at what stage you are permitted to do so, before you proceed

Risk Assessment

All investors must carefully assess the particular project and units in which they wish to invest. In many cases a wide range of other projects will be under construction and a choice will need to be made. A decision will need to be based on how a particular development or project will outshine its competitors in terms of appearance, location, on-site facilities and the unit itself. Investors will also need to consider issues such as the number of other units available within the particular development, predicted demand as well as competition for the type of property they wish to invest in.

To curb risk, a short-term investor should normally seek to buy the best possible unit, i.e. a corner unit, a penthouse or ground floor unit with a private garden, which will always sell in preference to a standard first floor unit.

Investors need to be clear how their exit strategy is to run. How will the unit be marketed and by whom? How much will the selling agents charge in commission? Should a buyer not be found prior to completion of the property, investors must be confident they can cover payment to completion of the unit and adapt their strategy if necessary. IPIN offers a substantial Investor Care package, which adds significantly to investors' chances of a successful exit.

Short term “flip” investments are undoubtedly more risky than longer term strategies, but, with careful research and planning in place, off-plan purchase in well located Egyptian resort projects offers a sound investment with lucrative returns.

Return

Estimated returns of up to 25% per annum are being achieved on off-plan projects within major tourist hotspots along Egypt's Red Sea Coast. Shrewd investors have the opportunity to reach the highest figures possible by selecting prime resorts at pre-release pricing levels, allowing investment at below market value. An earlier than normal reservation of course affords the maximum possible returns on investment on any given project.

By reserving at pre-release stage, investors profit from discounted prices and, in many cases, these are subject to successful planning applications, allowing for additional pricing uplift. Reservations on this type of IPIN recommended project allow for full refunds if necessary and secure escrow accounts are in place to protect investors' funds.

Financing

The short term investment strategy is purely based on capital outlay as mortgages cannot generally be raised against property that is not yet built. In order to cover all eventualities, investors MUST be confident they can complete the purchase if necessary, even if using a buy to flip strategy.

Payment terms will vary; good projects often offer terms of as little as 20% initial payment with stage payments of 40% to final completion. This system allows short term investors to operate their strategy with minimum capital outlay and it can be assumed that they will have exited the strategy, at the latest by the time the final payment is due.

If necessary, IPIN can help its investors arrange equity release from their existing property to fund the initial capital payments, which could later be covered by a mortgage once the construction period is completed.

Taxation

Purchasing a property and then re-selling prior to completion is a tax-efficient way to invest in property. However in Egypt the current absence of stamp duty and other taxes allows for ease of transaction even higher returns on investment.

IPIN always recommends research into any double taxation treaties in place between Egypt and the investor's country of residence.

Medium to Long Term Investment Strategy

Key Opportunity

Although a successful tourism market is nothing new to Egypt, the country is currently undergoing unprecedented growth in tourist numbers. Last year Egypt received a record 8.6 million tourists and is experiencing growth of up to 60% from some Middle Eastern markets alone. As a result, Egypt is also undergoing a boom period in terms of property investment in coastal tourist resort areas, particularly along the Red Sea Coast. Here beautiful beachfront purpose-built complexes are going up to serve the growing demand for luxury self-contained holiday resorts in Egypt. As is the case the world over, these provide a full range of recreational facilities to satisfy today’s most demanding of tourist requirements.

With current economic strength and government initiatives to encourage further investment from foreign investors and a growing native middle class, investors are acting now while property prices are still very low. Beachfront apartments start at around £30k and, with capital growth of around 20% per annum, it is clear to see why many overseas property buyers are focusing on Egypt for their next investment.

Off-plan developments for buy-to-let investment are attracting many buyers who look to supply a high demand for quality holiday accommodation in prime locations, while many projects come complete with rental guarantees of up to five years.

Second or holiday homes are also popular as Egypt becomes the holiday destination of choice for the international jet set. Here they can find affordable holiday properties located within the stunning natural and cultural setting that Egypt provides. Many purchasers help cover costs by renting out their properties when they are not in use, while benefiting from longer term capital appreciation over time.

Timescale

Average construction time on IPIN Global recommended Egyptian projects, from project sales release to completion of construction, is approximately one year. Mid to long term investors look to hold onto their units after construction, normally for at least 18 months from initial reservation, either to rent it out and/or benefit from capital appreciation upon eventual resale. Many long term investors wish to generate significant and reliable rental income over a period of time as sustained rental returns are their main focus, followed by eventual gains through high steady capital appreciation.

Growth is expected to continue to be strong over the next 5 years, notably along the Red Sea Coast and the longer investors are able to leave capital in their purchase, the higher their potential returns will be. Tourist levels are high and the resulting strength in the buy-to-let market allows investors to reap in solid capital growth from their properties, all the while supplementing this income with high rental yields in key tourist locations.

IPIN strongly recommends consulting with an IPIN advisor to discuss your particular mid to long-term investment strategy in Egypt, to ensure your chosen option best suits your needs.

Level of Complexity

In the case of off-plan purchase, full payment for the property needs to be completed at various stages of construction, prior to final completion of the purchase. In some cases, developer’s finance can be arranged for up to 50% of the property value, however most investors raise alternative finance or inject their own capital investment over the stage payment periods.

For mid to long term investors, all costs will be applicable, of around 10% of the purchase price while ongoing costs such as maintenance, community fees and utility bills will also need to be factored into the strategy finance plan. Bear in mind it’s advisable to open a bank account in Egypt in order to pay for the property’s utilities and other ongoing expenses.

Some good arrangements are often to be made with property management and rental companies that are usually conveniently based on or near the site. These ensure that such ongoing costs are covered and that your unit is rented out regularly. Maintaining a property abroad can therefore become no more complex than an investment closer to home.

Key Risks

A medium to long term investment strategy entails much lower financial risk than a short term plan which relies on finding a buyer within a very short time frame. Provided the right investment is made on a quality, well located project with multiple facilities, establishing a rental market and eventually a buyer for your investment should not be difficult. However, as with any investment, patience and money is sometimes required until the end user is found.

Egypt’s popularity as a growing tourist destination bodes very well for buy-to-let investors. This of course translates to an increase in buyers and renters on the one hand, but brings with it intensified competition on the other.

Bank Guarantees are commonly given by developers in Egypt and IPIN approved projects will always be protected by local or overseas bank guarantees.

By appointing independent legal representation, the client can be sure that all the necessary paperwork is in place before signing the purchase contract. IPIN ensures recommended legal services are always offered independently from project developers, therefore exclusively representing the client’s interest at all times.

Property ownership in Egypt is sold freehold, leaving no room for ownership disputes.

Return

Mid to long term investors expect to see returns of around 20% per annum based on the fact that their properties are located in resort areas of high demand. Rental yields are also very promising at approximately 7% per annum and these sometimes come guaranteed for periods of up to five years, allowing for further returns on investment to be made.

Many discerning investors not only choose property in prime locations, but also buy at pre-release pricing levels, allowing investment at below market value. An earlier than normal purchase not only secures the best unit, but also maximises future returns.

Increased worldwide exposure of Egypt’s new holiday property hotspots will also have a positive effect on the tourism market, bringing with it a further boom in the real estate arena and inevitable price increases.

Financing

Payment terms for property purchase in Egypt will vary; good projects often offer terms of as little as 20% initial payment with stage payments of 40% to final completion.

On rare occasions, developers may offer 50% mortgage finance for completed projects in Egypt as finished projects can offer security against a loan. However, for now most investors rely on alternative means such as equity release or capital outlay with which to fund their purchase. The situation is expected to change as mortgage providers soon begin offering products to support this fast growing overseas market.

If necessary, IPIN can help its investors arrange equity release from their existing property to fund the initial capital payments, which could later be covered by a mortgage once the construction period is completed.

Taxation

In Egypt the current absence of stamp duty and many other taxes allows for ease of transaction even higher returns on investment. The following tax requirements are however applicable:

  • For rental income the basic threshold for taxation is LE 5,000 per annum. Provided your rental income is less than this figure, you pay nothing and need not file a tax return. For example, you rent out a flat for LE 8,000 per month, grossing LE 96,000 in rental income per year. Simply subtract the deduction against costs of 50%, leaving LE 48,000 as taxable income. The balance owed in taxes is LE 6,100.
  • Under the current new laws, the sale of land and buildings is treated exactly the same and is simple. No deductions are made for the cost of sale. Simply take 2.5% of what is earned from the sale and report it as tax owed before April 1st. For example: Any person or corporation selling a piece of land for LE 100,000 must file a return with the Tax Authority by March 31st reporting that LE 2,500 is owed in taxes.
  • The only exceptions (under Article 42) are income from the sale of inherited land or other real estate is tax which are free, as is any income earned from the sale of land or other real estate you own through a shared capital company, provided you keep your shares in the company for at least five years after the sale. This last provision is designed to prevent the formation of “paper” companies to dodge tax liabilities from the sale of properties.

Note: Taxes on the sale of real estate bear no relation to property taxes or real estate registration fees. The Egyptian government is currently debating a reform of property registration fees and is proposing to impose international-standard property taxes.

For more detailed information regarding tax questions, please contact IPIN who will help put you in touch with a tax advisor to discuss your particular circumstances.




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