Amendment of Real Estate Valuation

Dated 9 June 2019, a decision by the Prime Minister was published amending the executive regulations of the Capital Market Law in relation to the valuation of real estate in the context of investment funds in general and real estate investment funds in specific (the “Amendment”).[1] According to the Amendment, investments in assets that are directly or indirectly owned by parties related to a real estate investment fund must first pass an approval by the assembly of the funds’ certificate holders (with the exception of investing up to 25% of the fund’s assets in public entities). In addition, asset managers must conduct evaluations for their non-listed real estate funds every six months instead of every three months, and so is the case for real estate valuations undertaken by the fund’s management services company. This is while the rule for the valuation of real estate assets with respect to listed funds remains to be periodic review every three months. The amendment also requires the use of one or more FRA-registered real estate valuation experts to appraise these assets, instead of previously requiring appraisal by two experts, and it removes the requirement that the real estate fund’s auditor approves the valuation of property in which the fund invests.

Background

The rules for investment funds have undergone several regulatory changes in recent years. This started in 2014 with a significant change that replaced Articles 140 to 183 of the Executive Regulations of the Capital Market Law (the “CML ER”),[2] introducing definitions for several types of investment funds, starting with definitions for open and closed funds, and then getting more specific with private equity funds, indexed funds, capital guaranteed funds, debt instrument funds, and real estate funds, among others.[3] Following that, the FRA issued several regulations on the matter including FRA Decision No. 34 of 2014 regulating real estate funds[4] (most recently amended in 2016 and 2019), and FRA Decision No. 82 of 2016 on the registration of real estate valuation experts in an FRA registry. Furthermore, in March 2018, the Minister of Investment issued decision No. 40 of 2018[5] amending several provisions of the CML ER most of which were in relation to investment funds. That amendment allowed a real estate fund to invest in a company 80% of the assets of which is real estate with no restriction on the percentage of the fund’s equity in said company; and limited the fund’s equity in a real estate project to the equivalent of 30% of the fund’s assets only if the size of the fund exceeds EGP 500 million. The 2018 amendment also eased some of these restrictions for privately offered real estate funds, and regulated the right of minority certificate holders. Notwithstanding this regulatory push to organize and facilitate the operation of real estate investment funds, so far Egypt has only one listed real estate fund that began trading on the stock exchange in March 2018.[6]

The New Amendment to Real Estate Investment Fund Provisions in the CML ER

The Amendment modifies Articles 167(4), 183 (4), 183 bis3, and 183 bis4 of the CML ER. A new paragraph was also added to Article 183. All changes relate to real estate asset valuation for investment funds. Article 167 relates generally to investment fund asset management companies who are now allowed to – with respect to non-listed investment funds – conduct their real estate valuations every six months instead of every three months. This is while the rule for listed investment funds remains to be periodic valuation by the asset manager every three months. On the other hand, Articles 183 to 183 bis4 relate specifically to real estate investment funds. In this respect, Articles 183 bis 3 and 4 were similarly amended. The first provision now requires with respect to the valuation by investment managers of real property prior to its purchase or sale, that valuation be conducted by one or more independent FRA-registered real estate valuation experts (instead of two experts previously) given that they follow FRA’s Egyptian Standards for Real Estate Valuation.[7] Similar to the amendment of the stipulation for asset/investment managers, the second provision was amended so that real estate fund management services companies undertake their valuation of the total assets of the fund every six months for non-listed real estate funds, and every three months for listed real estate funds. The valuation is also to be conducted by one or more real estate valuating experts of those registered with the FRA. Meanwhile, Articles 183, and 183 bis set out certain conditions to guide real estate fund investments in real estate. These rules include – among other things – that the property is registered, and, following the Amendment, that it is valuated by one or more real estate valuation experts of those registered with FRA. The requirement that this valuation is then approved by the fund’s auditor has been removed. Finally, the Amendment adds a provision at the end of Article 183 mandating that the approval of the assembly of certificate-holders be obtained prior to directing the fund’s investments towards assets that are directly or indirectly owned by a related party. This is with an exception to be applied when directing 25% or less of the fund’s assets to investments in assets owned by the government or public entities, in which case the valuation will be conducted by two FRA-registered real estate valuators.

Conclusion

In a statement on the FRA website, the authority’s chairman announced this most recent amendment to the executive regulations of the Capital Market Law as aiming to facilitate the operation of real estate investment funds and “relieving some of their financial burdens”, including by limiting the valuation of real estate property for non-listed funds to once every six months given the nature of their long term investments. The statement further notes that requiring that valuation be conducted by one or more registered experts instead of two is to further reduce financial costs. In addition, the statement reveals that the FRA is currently in consultation with the Ministry of Finance to discuss tax incentives for the purpose of encouraging investment in real estate through funds.[8]   [1] Prime Ministerial Decree No. 1347/2019 amending certain provisions of the Executive Regulations of the Capital Market Law, Official Gazette, Issue No. 23 (bis) (a), 9 June 2019. [2] Minister of Economy and Foreign Trade Decision No. 135/1993 enacting the Executive Regulations of the Capital Market Law No. 95/1992, Egyptian Gazette, Issue No. 81 (cont.), 8 April 1993. [3] Ministry of Investment Decision No. 22/2014 amending certain provisions of the Executive Regulations of the Capital Market Law issued by virtue of Minister of Economy and Foreign Trade Decision No. 135/1993, Egyptian Gazette, Issue No. 45 (cont.) (a), 25 February 2014. [4] FRA Board of Directors Decision No. 34/2014 on the investment rules of real estate funds, Egyptian Gazette, Issue No. 82, 9 April 2014. [5] Ministry of Investment and International Cooperation Decision No. 40/2018 amending certain provisions of the Executive Regulations of the Capital Market Law issued by virtue of Decision No. 135/1993, Egyptian Gazette, Issue No. 59 (cont.) (a), 12 March 2018. [6] Egyptians Real Estate Fund, available through this link (in Arabic). [7] FRA Board of Directors Decision No. 39/2015 issuing the Egyptian Standards for Real Estate Valuation, Egyptian Gazette, Issue No. 130, 7 June 2015. [8] Financial Regulatory Authority, (2019, June 11), “The Prime Minister issues amendments to the provisions of the executive regulations of the Capital Market Law regulating the activities of real estate investment funds”, available through this link (in Arabic).