Problems on hold
The House of Representatives’ Committee for Housing and Utilities has recently approved a bill to amend the old rental law for non-residential units, meaning units in use for professional, commercial, service, or craftsmanship purposes. The bill was presented by the government and, if passed, would apply to some 3 million housing units. The Committee for Housing and Utilities stressed that the bill has been drawn to serve public interest, not the interest of a specific sector of Egyptians to the detriment of another, since that would be tantamount to discrimination categorically banned by the Constitution.
The bill stipulates a five-year transitional period starting the day the law is passed, and covers all housing units subject to its provisions. The rental value of any such unit would directly rise to five-fold its current value in the rental contract, and would apply for one year, following which a 15 per cent increment would apply annually for the following four years. Once the five-year period is over, the rental contract expires and the unit is returned to the landlord, implicitly meaning that the rental value is freed; it becomes subject to agreement between landlord and tenant according to the market laws of supply and demand. This is in tandem with the economic reform measures taken by the Egyptian State since November 2016 when the Central Bank of Egypt floated the Egyptian Pound.
Reforming the laws that had frozen rents for all housing units some 60 years ago is long overdue. These laws go back to the 1960s and came among a bunch of revolutionary, socialist decisions which aimed at favouring the ‘poor’ over ‘exploitative, capitalist’ landlords. The socialist laws deliberately sidestepped market considerations; disrupting the market balance and wreaking havoc with Egypt’s real estate wealth. It inevitably led to out-of-law corrective techniques such as khelew, a large lump sum of key money landlords would demand of prospective tenants, aiming to compensate for the notoriously low rentals stipulated by the law. But key money was quickly declared illegal and, given the irrationally low rents, it became a losing investment to own and rent houses. Builders and owners resorted to an alternative system: they would sell the housing units instead of renting them. The result was a three-pronged catastrophe. First, owners, who no longer could consider renting their houses or flats owing to the ultra-low rental values stipulated by the law, sold their housing units at sky-high prices since the market was not regulated; housing became almost unaffordable for a large swath of Egyptians. Second, the architectural quality and structural soundness of buildings nosedived. The landlord of old, who used to give meticulous care to the design, construction, finishing and maintenance of the building he owned, went missing altogether from the housing scene, replaced by the contractor / businessperson whose sole interest was to complete a mostly shoddy but bright-looking building, sell off its units at high profit as quickly as possible, and move on to another profitable building project. According to experts, this led to decline in the longevity of buildings from 75 years to no more than 25 to 50 years. The third prong of the catastrophe was the great deception which the poor woke up to after having been exultant about the laws that froze rentals for years on end. When it was their children’s turn to need housing units for residential or professional use, they discovered they had to pay hundreds of times the worth of the rental values they had been spared over the years; they had to buy near-unaffordable units, or rent housing under a new recent law that applies to buildings not governed by the 1960s law. It became no surprise to hear of a family that has been paying a monthly rent of less than EGP10 for their home, while their children rent tiny flats in inferior buildings for some EGP1000 monthly rent. The same applied to non-residential units.
The prospective law that would free rentals for non-residential units will partly recapture justice in the real estate market, so that five years after the law is passed the eternal supply and demand market law would again reign supreme. Hopefully, this would rectify many of the flaws that have riddled the real estate market in Egypt over the last six decades.
However, we must expect the new law to create some inflation that will be felt by all Egyptians, since the rise in rentals of non-residential housing would automatically raise the cost of the services or products offered in it. We have to expect that fees charged by doctors, lawyers, accountants, architects or any other professionals operating from such units would rise, as would the prices of commodities produced in them, such as ready-made garments or photography and video products for instance.
The justice applied to the rental values of non-residential buildings, however, directly brings to mind the frozen rentals of residential units. These concern such a wide sector of Egyptians of whom many are of limited means that no official has so far dared to seriously do something about the problem. Apart from some very few failed attempts, nothing has been done to tackle this file. I hope to be able to analyse that problem in a future article.
30 June 2019