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Q: Property Investment Risks in Sharm el-Sheikh Egypt ( Answered 4 out of 5 stars,   4 Comments )
Question  
Subject: Property Investment Risks in Sharm el-Sheikh Egypt
Category: Business and Money > Small Businesses
Asked by: markshaw-ga
List Price: $60.00
Posted: 15 Oct 2006 12:54 PDT
Expires: 14 Nov 2006 11:54 PST
Question ID: 773739
I'm from the UK and considering investing a small sum (Egyption
200,000) in a small 1 bed room apartment currently being built by
Sinai Property Services in Al Alamia, Nabq bay, Sharm el-Sheikh,
Egypt. This is my first property investment, and therefore quite a
small one. I have performed my own research, but would like to ask
these question, in case I have missed anything. I hope for a 40 - 50%
return within 3 years. What are the risks of;

a) Buying property in Nabq bay, Sharm el-Sheikh, Egypt.
b) Acheiving 40 - 50% return.
c) Dealing with Sinai Property Services.
d) Risks dealing with Egyptian Lawyers in Sharm el-Sheikh.

Thank you.

Clarification of Question by markshaw-ga on 16 Oct 2006 06:02 PDT
To clarify;
The amount quoted is the full price of the property (20,000 UKP).

I wasn't told the returns would be 40% within 3 years. This property
wasn't sold to me per se. However the sales company said the
equivalent property in the next phase of building will be sold 15%
higher, due to be compleated in 1 year. Then another phase is being
built. As I understand it, price increases are fairly normal for
building complexes.
Initially a friend of a friend has recently bought two properties
there, and recommended it. I found the company (and many others) on
the internet, and plan to visit the site prior to investment.

This resort has only recently been introduced to the main stream UK
package holiday market. Hopefully demand will increase.

The interest rate is 5% fixed for 3 years. 

The apartment is not expected to be rented out, although this may be
an option for additional income to vacationers. I may visit there
twice a year as the SCUBA diving is excellent. Not the words of a
hardened property investor, but I'm treating it as a cheap tester
project, which will hopefully make some money.

I also aim to invest in UK property, but the minimum investment is 500% higher. 


Thanks.
Answer  
Subject: Re: Property Investment Risks in Sharm el-Sheikh Egypt
Answered By: pafalafa-ga on 16 Oct 2006 18:17 PDT
Rated:4 out of 5 stars
 
markshaw-ga,

You know...you might be onto something!

While I didn't find information on every aspect of your question, I
did see enough to reverse my initial scepticism, and lead me to think
that the investment you propose may be a sound one.

Bear in mind the disclaimer at the page bottom...I am certainly no
expert in Egyptian real estate investments (nor any other kind), and
Google Answers is no substitute for professional advice.

Still, there is a lot of indication that real estate in tourist areas
in Egypt is experiencing a boom, and that investors are moving in to
take advantage of it, despite the many issues and risks involved.

I saw no hard figures on the rate of real estate appreciation, but a
40-50% return in the space of 3 years seems ambitious, but possible. 
As noted in the comments, below, there are a variety of factors --
most notably, currency exchange rates and taxes -- that can affect
your overall rate of return, even if the property appreciates in
value.




I've provided some excerpts from articles, below, none of which are
available online, so I can't offer links to the full articles, I'm
afraid.

However, the excerpts will give you a feel for the situation, as will,
I hope, this brief overview that I prepared:


=====

Egypt's economy seems to be slowly emerging into the modern world. 
Economic reforms, legal overhauls, privatization, and modern
accounting methods have begun to loosen the bureaucratic and
administrative stranglehold that has made doing any sort of business a
nightmare for so long.  The economy is growing and inflation, in
recent years, has been in check.

Tourism is Egypt's biggest industry, and is expanding into coastal
resort areas such as Sharm el Sheikh, creating something of a real
estate boom in many areas.

Some resort areas have been the targets of terrorist strikes, but most
comments I read were surprised at how quickly tourism has bounced
back.  At the same time, these commentators are all aware of how
volatile the region is, and how the fragile economic growth could be
easily disrupted by sustained attacks.

There is still very little in the way of legal and financial
investment infrastructure in Egypt -- it's hard to run credit checks,
secure mortgages, verify a business' credibility.  The courts are not
much help when it comes to enforcing legal contracts.  Although the
country has strict building codes, they are often not observed, and
buildings have been known to collapse from shoddy construction.

There may be legal constraints on how soon after purchasing property a
foreign-owner is permitted to sell it.  Check this out very carefully
before making any purchases.

These problems and uncertainties notwithstanding, an increasing number
of investors are finding opportunity in Egyptian resort real estate.

=====


Here are some of the more salient excerpts I came across:
 



MAK Hospitality: Growing Port Ghalib & Beyond 
1 June 2006
Hotels

...As the development opportunities heat up in the Middle East, an
increasing number of developers and diversified real estate companies
are forming hotel subsidiaries to capitalize on the many new
opportunities in the region. One such growing player of note is MAK
Hospitality...With so much invested in Egyptian tourism?in addition to
the five resorts the company already owns in big tourism areas such as
Sharm El Sheikh..."The Kharafi Group has been actively investing in
Egypt for more than 50 years,"..."We have seen many changes and
challenges over the years but two things have sustained us and
continue to do so: good business returns and a positive long-term
vision, confidence in and a game-plan for participating in what we see
as a tremendous potential for growth in Egyptian tourism."





Good vibrations 
16 June 2006
Middle East Economic Digest

...It is a strange paradox. The Middle East is arguably the most
volatile region in the world, yet the number of visitors have been
increasing at an average rate of 9 per cent annually for the last five
years ? faster than any other regional market.

...tourists and officials alike are becoming more immune to the
threats. "From the Luxor massacre [in 1997, when almost 60 foreign
tourists were shot dead by Islamic extremists], it took us two years
to recover," ..."From the Taba bombings [in October 2004], it took us
six months. From the Sharm el-Sheikh attack [in July 2005], it took
three months.




Egyptian Growth Up 6.14% in Q2 of Fiscal 2005/06 
21 April 2006
Global Insight Daily Analysis

...The July 2005 bombings in Sharm el-Sheikh seem to have had a
moderate impact on tourism in 2005. Indeed, following the July
bombings, tourism dropped 15.3% year-on-year (y/y) and 11.5%
month-on-month in August. By November, the number of arrivals rose by
8.8% ... The moderate impact of the attacks can be explained by the
fact that people have come to realise that acts of terrorism can
happen anywhere and are not limited to tourist resorts.

...The reforms recently implemented in various sectors of the economy
have led to increased investments, stable prices, and a booming
economy.



Egypt Runs With The Bulls 
1 July 2006
The Banker

...Reformers are in the driving seat of Egypt's economy. The
government is listening to entrepreneurial businessmen and
professionals rather than the bureaucrats, who have so long held sway,
and the result is a mission to instil a new commercial spirit and
implement change...While buoyancy in the oil and gas sectors...is a
part of this, money has gravitated to Egyptian privatisations and the
healthy real estate market.

...The country's inflationary record has been sent into reverse as a
result of strong internal growth. Double-digit inflation in 2004 has
been replaced by single digits, with the current rate at about 7%.



Egypt economy: Privatisation programme in overdrive
EIU ViewsWire.
Aug 23, 2005.

...The revival of Egypt's privatisation programme...has owed much to
the restoration of confidence in the Egyptian economy since the new
government took office in July 2004. It has also stemmed from the
government's readiness both to broaden the range of assets up for sale
and to adopt a more flexible approach to valuations.



Egypt
July 10th 2006
The Economist Intelligence Unit 

...Tourism is Egypt?s most important industry...In 2004/05 tourism
revenue reached US$6.4bn, by far Egypt?s largest source of export
revenue. Tourist arrivals rose by 15% to 8.6m visitors, a second
successive record.

...beach and diving holidays in the Red Sea resorts are by far the
largest growth area. As a result, the recent bombing campaign in the
resorts of the Sinai peninsula must be a cause of some concern. The
Egyptian tourism industry is vulnerable to sharp downturns in visitor
numbers because of international concerns over domestic and regional
security, and it will have suffered to some extent in the first half
of 2006 following the bombings in the Sinai resort of Dahab



Egypt
Organising an investment: Acquisition of real estate
July 2006
The Economist Intelligence Unit 

...non-Arab foreigners may own residential property in Egypt outside
city limits, following the passage of Law 230/1996...Foreigners may
purchase only two pieces of land for housing purposes, and these must
not exceed 4,000 sq metres each or be on a historical site.

...Implementation of the mortgage law has been slow for a number of
reasons. There is at present no institution capable of assessing the
credit-worthiness of potential borrowers...Egypt?s first real-property
finance company, the state-controlled El Taameer, extended its first
mortgage loans in May 2004.

...Egypt?s theoretically strict construction codes are routinely
violated, and building collapses are not uncommon.




If there's anything else I can do for you, just let me know, and I'm
at your service.


Best of luck,

pafalafa-ga
markshaw-ga rated this answer:4 out of 5 stars

Comments  
Subject: Re: Property Investment Risks in Sharm el-Sheikh Egypt
From: myoarin-ga on 15 Oct 2006 14:41 PDT
 
Perhaps you can also tell us if the amount you mention is the full
price of the flat or just your investment with a portion being
financed?  If so, what portion?  And at what interest rate?

Any promise of 40-50% return in 3 years is suspect - Period/Full stop!  
People claiming such a return are talking through their hat  - either
to neophites (sorry, but you do say this is your first real estate
investment) or to people with "untaxed" money, who need an offshore
investment to park their funds.

An eager investor may think:  Okay, I figured that, but even 20%
return is still good.  But that isn't 20% per annum, as interest rates
are expressed, it is 6.27% pa.
Furthermore, you would be investing in Egyptian pounds.  Your
investment in that currency could increase - sold or not -  but the
exchange rate could be less then, reducing the sterling equivalent
value.

Of course, the exchange rate MIGHT move in your favour.  One way or
the other, that depends on political developments in the Middle East. 
Mubarak has been in power for 25 years, he is 78 years old ...

Another point:  How will renting the flat be handled?  Is theoretical
rental income a part of any calculations?  Is it a flat for local
residents or for vacationers?

I asked about partial financing.  If you are only investing half of
the purchase price, of course, the leverage from financing the other
half improves your potential return when you sell  - if the value
increases -  less the cost of financing.

A final question:  How did you learn about this opportunity?  If it
was marketed by someone in the UK, he will probably be getting 10% or
more commission, that you would be paying, money that is not in the
value of the flat.
If this is the case, just to make the point:  he is saying your
investment will increase to E.pds 280,000 in 3 years.  But if he gets
10%, he is implying that the remaining 180,000 will increase 56% to
give you that 280,000.

I have asked a lot of questions and tried to put some numbers in perspective.
Yes, I am a cynical old banker.
If you have any questions to the above, also with additional
information, I will be happy to try to answer them.

I have only addressed one part of your question.

Cheers, Myoarin
Subject: Re: Property Investment Risks in Sharm el-Sheikh Egypt
From: frde-ga on 16 Oct 2006 04:22 PDT
 
200k sounds pretty steep for a dog box in a 3rd world country.

I assume the theory is that because the Blairs freeload there, and
they have the odd Moslem fundamentalist letting off bombs, that the
value will miraculously rise to 300k by 2010.

This sounds to me like a guy working in the Gulf who has been targeted by a shark.

To be honest, this rings bells, a casino operator I know, who is
currently working in the Balkans, mentioned something about having
bought a substantially larger property in the same area. I am not sure
of his financial acumen, but suspect that he was investing pin money.

I really think that you should look closer to home, without joking a
Buy To Let in Belfast would be virtually risk free, especially when
compared with a potentially unstable state.
Subject: Re: Property Investment Risks in Sharm el-Sheikh Egypt
From: myoarin-ga on 16 Oct 2006 07:13 PDT
 
That's only 18,750 pounds sterling.  If part of the price is financed,
and at worst, you can walk away and forget the loan  (i.e., it will be
paid off by foreclosure on the flat, so that you aren't stuck with
future installments), maybe it could be worth the risk.
Say, you put in 10,000 pds sterling, the rest financed (use your own
numbers), if you won't cry at writing off your investment and have
your own enjoyment of it, the project may be attractive, even if you
don't get the expected return.

The information that the next phase will sell for 15% more may or may
not be true, of course.

Something else:  there will almost certainly be maintenance payments
due, as with condominiums elsewhere in the world.

You still should try to get answers to your question specific to the area.

As the disclaimer below points out, nothing posted here is a
substitute for informed professional advice.

Good luck, Myoarin
Subject: Re: Property Investment Risks in Sharm el-Sheikh Egypt
From: frde-ga on 17 Oct 2006 02:37 PDT
 
Phew  20,000 or rather GBP 20,000

That makes a lot more sense.

Be careful of annual charges, obscure local taxes etc.
Even your personal will (as in Last Will and Testament) needs checking out.
Rental via a local agent is a bad idea, there is something called
'black letting' which basically means they let the place and you don't
get the money.

If you let it out yourself then you have to factor in emergency
maintenance services, maids and laundry.

I have heard that generally holiday developments go bust, it is a
convenient way of getting out of long term liabilities.

I was once in the package holiday industry, which gives me a feel for
the pitfalls - also my parents bought a similar flat in a new
development in Menorca in the early 1980's so I have had an
opportunity to watch what goes on.

I would not look for short term capital gains, the developer wants to
sell the second phase stuff, then the third phase, then the fourth
until they have sucked the juice - at which point they'll walk away.

Even if you spend your holidays there, it is unlikely that you'll be
financially better off when you compare it with renting exactly the
same or better.

However, there are advantages in having your own setup, especially if
it is with a bunch of people that you know and like. While you would
be financially better off being a regular (renting) visitor, there is
some kudos and convenience from being an 'owner'.

If you do buy, I guarantee that you will be offered an irresistable
larger appartment 'off plan' in phase II for approx 35,000.  Some
years down the line you will find that one of your 'friends of
friends' is actually a major covert shareholder in the developers,
that there will be extensive building work for years, then crises as
the developer goes bust and the sewage works need replacing.

You'll also find that properties are being sold for amazingly large
sums of money, yet somehow your place will not be sold. After that
there will be crunch and you'll find some places being sold due to
death, divorce etc, and can be bought with a credit card.

I would not regard an overseas holiday home as an investment, it is
rather like buying a very nice sports car that you keep in a garage
and thoroughly enjoy driving for about 4 weeks a year.

Since you are going to eyeball the place, you'll have an opportunity
to meet some early purchasers who will give you an intro to an
excellent local lawyer.

In my parent's case I considered the first purchase a good deal, the
subsequent trade up was fine - but they slipped up buying a 2nd
'investment property' - from a friend who was actually a covert
shareholder.

The reason why the first two were a good idea was not financial, it
was purely because it saved my father from being nagged by my mother
into looking at holiday homes wherever they went.

If you and your lass are the type that like going back to the same
place, reunions with old friends and being on first name terms with
the local restauranteurs - and you can handle unexpected bills and
hassle, then getting a pad out there could be a good 'lifestyle
investment'.

I think I would post a little more info on the financial package, what
is the deposit, is it 5% plus repayments, what is the 'lock in' after
3 years ?
Also, under whose legal system is the contract ?
- if, as it could be, under UK law then ducking out could be a problem.

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