Real Estate Investments Funds in Egypt In light of the recent regulatory amendments

Sherif Samy

13 April 2014

Investment Funds Regulatory Changes Closed end funds: The fund is a company and has its own legal personality Activation of Real Estate Investment Funds (REIFS)

Allowing closed end funds to offer new issues of the same fund Possibility of calling up capital in tranches Introduction of fixed income funds Activation of exchange traded funds (ETFs) Rules for Shariaa monitoring committees

The Real Estate Investment Fund Closed end fund aiming to invest in: Real Estate: lands to be developed and built and buildings to be developed, sold, leased or exploit by any mean. Financial Assets associated with the real estate activity: bonds of real estate companies, Securitization bonds of mortgage portfolios, Securities of real estate companies,…… The fund may accomplish operations related to its activity i.e. licensing, building, renewal, rent and exploitation of its real estate assets Reselling of such real estate assets may not be the only purpose of the fund Percentage of certificate holders owning 10% or more of fund’s certificates shall not be more 75% of total fund’s certificates

Fund’s related parties Fund Manager

Developer

Real Estate Investment fund

Other service providers

Fund Admin Services

Fund’s investment policy The fund’s investment policy stipulated in the prospectus or information memorandum – as case may be- shall disclose: Type of properties Concentration ratio of each category of assets Nature of targeted revenues and its percentage to total fund’s revenues Geographical diversification Dividend distribution policy

Structure of fund’s assets

≥ 2/3 capital

Determinants of funds investment policy ≤ 95%

Percentage of real estate assets(including financial assets related to real estate activity) to total fund’s assets

≥ 70%

Percentage of revenue generating assets to total fund’s assets

≤ 30%

Percentage of ownership in a single real estate project to total fund’s assets

≤ 20%

Percentage of total ownership in listed companies to total fund’s assets

Fund manager’s responsibilities • The preparation of a feasibility study for any real estate project in which the Fund intends to invest

• Signing the technical services contracts with specialized real estate developing companies • Signing technical services contract with real estate management \ operations companies • Providing the necessary competencies to minimize project risks associated with cost overruns and implementation delays • Assigning real estate assets valuation to two real estate appraisers prior to transacting

Board of Directors Responsibilities In addition to the general duties of the board of directors in the other funds -stated in article 163 of the capital market law executive regulation the BOD of a real estate fund shall approve all contracts and decisions that the fund’s company is a party of Contract with the developer

Contract with real estate management company Marketing contract of real estate assets of the Fund Ownership contracts of real estate assets of the fund Insurance contracts of real estate assets of the fund

Methodology & content of appraisal reports Methodology of appraisal report The evaluation process begins by determining the scope of work of the appraisal expert

And ends with the preparation of the evaluation report in accordance with the requirements and terms and conditions agreed upon and set forth in the scope of work

The report Shall: Be clear and accurate and written in a non-misleading manner Contain sufficient information to enable those who are addressed to understand it correctly

Reveal any unusual or exceptional assumptions or additional conditions or specific considerations affecting the assessment and value of the property

The minimum contents of the appraisal report

Fund Admin Services co. Responsibilities In light of article 167 of the Capital Market law executive regulations the fund admin services company shall perform the following for REIFs:

Safekeeping all documents related to the Fund's assets, namely: Appraisal reports

Decisions of the Investment Committee of the Fund Manager

Loan, mortgages or guarantees contracts

Ownership Contracts for property and land Fund’s assets management contracts administrative licenses and permits

Periodically undertaking the valuation of the total assets of the Fund (at least every three months) based on appraisal reports prepared by two property appraisers, acting independently from each other.

Condition to be met by the fund’s founders Fund company founders equity ownership: The contribution of legal persons of the total capital of the Fund Percentage of Egyptian founders

≥ 75% ≥ 51%

Eligible founders Financial institutions not less than 25% of the capital Companies engaged in financial activities, other than mentioned in the previous item ≥ 51% promotion & developmental entities  Investment  Qualified investors

Valuation of fund’s assets and certificates

Fund’s assets and securities, owned at the time of preparing financial statements according to Egyptian Accounting Standards, shall be valued in light of the fund’s scope of investment.

In all cases, financial statements foot notes shall include the basis of measurement and the accounting standard that have been adopted to determine the book and market values of the assets and securities.

EFSA’s Direction Developing Egypt’s Real Estate Appraisal mechanism -Preparing and approving the first Egyptian standards for real estate appraisal. - Determinants of classifications of appraisal experts. The need to adopt appraisal standards for unlisted investments. - Financial appraisal standards.