Paying the price


June 7


Zainab Fattah and Mahmoud Kassem

The Egyptian revolution that swept Hosni Mubarak from power threatens to hobble the real-estate developers that profited from their ties to the former president.

Talaat Moustafa Group and Palm Hills Developments SAE, the biggest publicly traded builders by assets, have already suffered legal defeats that may force them to give up land they bought cheaply from the old regime. Now the caretaker government, under pressure from the public to clean up the industry, is trying to settle disputed transactions without scaring off investors.

“The main challenge is to avoid putting off private investors, who make up 90 percent of the Egyptian property market,” said Ahmed Badr, head of Middle East property research at Credit Suisse Group AG in Dubai.

When Mubarak was toppled in February, real-estate companies lost the government allies who had shielded them from court decisions challenging land purchases. Two former housing ministers and a tourism minister have since been jailed for squandering public funds. On April 7, Egypt’s public prosecutor ordered the arrest of Magdi Rasekh, chairman of Six of October Development & Investment Co. The company, known as Sodic, is the country’s No. 3 developer.

“In the short term, what’s happening means uncertainty for the market,” said Roy Cherry, a Dubai-based analyst at Shuaa Capital PSC. “In the long run, it should mean transparency and a better basis for real estate investments.”

Boom Interrupted

The sprawling suburbs outside Cairo formed one of the Middle East’s hottest property markets after economic reforms made in 2003 propelled more people into the narrow middle class in this country of 85 million. Egypt’s six biggest developers have 109.6 million square meters (1.2 billion square feet) of land in Cairo, AlembicHC Securities estimates. About 44 percent of that is subject to dispute.

On May 17, the interim government of Prime Minister Essam Sharaf said it’s preparing a law to protect investors from criminal prosecution and will create a committee to settle investment disputes.

“Our goal is to preserve and encourage investments while observing the law,” Ahmed El Simman, a Cabinet spokesman, said on May 26. “The solution became a committee headed by the prime minister with the minister of justice as a member.”

The government might resolve disputes by having developers make up the difference between the prices they paid for land and the value deemed fair by the courts, said Ankur Khetawat, an analyst at AlembicHC in Dubai.

Pay the Difference

“The difference would be around 300 pounds ($50) per square meter for land in Cairo, which should be feasible for the companies,” he said. “But we can’t rule out the possibility that, even if they paid, some might object to these companies being allowed to keep the land at all.”

Shares of property companies plummeted after demonstrators occupied Cairo’s Tahrir Square for the first time on Jan. 25. As of June 1, real estate accounted for seven of the 10 worst- performing stocks on the EGX 100 Index of the most actively traded Egyptian companies this year. Palm Hills was last, with a 67 percent drop. Talaat Moustafa, Sodic, United Housing and Development, El Shams Housing & Urbanization and Rowad Tourism Co. were all in the bottom 10.

“We don’t think the government will take all the land back,” Khetawat said. “They will prefer to settle because it’s all about money at the end of the day.”

Growth Engine

Construction made up 12.5 percent of gross domestic product last year, when the industry grew 13.2 percent, according to Ministry of Planning data. Economic growth in the fiscal year through June 30 will probably slow down to 2.6 percent, Finance Minister Samir Radwan said on May 30. The Egyptian economy expanded 5.1 percent in the previous fiscal year.

“Legal proceedings against the businesses may be limited to a measured correction of the transaction terms,” Shuaa Capital’s Cherry said. “But the corrupt government officials who created the old system will face more severe punishment such as prison terms.”

Developers have sought to play down the threat to their businesses, stressing that a minority of their land purchases are at risk and predicting that the government will seek a compromise. Sodic Chief Financial Officer Salah Shafei said that about 13 percent of the company’s 6 million-square-meter land bank is under scrutiny.

“None of that land is subject to being taken back,” Shafei said in an interview in Cairo. “We might have to pay some sort of fines and fees that were due at a certain point.”

Shafei said the prosecution of former Chairman Rasekh is a personal matter and not connected with the company.

Demonstrators’ Demands

It’s not clear how much leniency the Egyptian public will accept. Links between developers and Mubarak’s government and family fueled corruption allegations that helped drive Egyptians into the streets in the first place. Demonstrators returned to Tahrir Square in April to demand prompt trials for Mubarak and his top officials and family members.

Rasekh, who resigned as Sodic’s chairman on May 10, is the father-in-law of Hosni Mubarak’s eldest son, Alaa. He’s wanted on charges of squandering public funds and hadn’t been found by authorities at the time of publication. Representatives of the former minister couldn’t be located for comment.

Former housing minister Ahmed El Maghraby owned a stake in Palm Hills and approved a land sale to the developer that was later declared illegal by a court. He was sentenced on May 26 to five years in prison for corruption and misusing public funds. Two funds partly owned by Mubarak’s son Gamal hold stakes in Talaat Moustafa.

Criminal Charges

Maghraby’s predecessor, Ibrahim Soliman, is in custody on charges of squandering public funds. His representatives couldn’t be contacted for comment.

Jihad Alsawaftah, chief financial officer at Talaat Moustafa, and Bassem El Shawy, head of investor relations at Palm Hills, didn’t return e-mails or calls made to their mobile phones.

Some of Egypt’s biggest land deals are under scrutiny. A court last June annulled the sale of 33 million square feet of land to be used for the country’s largest housing development, Talaat Moustafa’s 120,000-home Madinaty project. An appeals court is set to hear the case on June 21.

In April, judges reversed a 966,000-square-meter land purchase by Palm Hills and Egypt’s Tourism and Development Authority retracted its preliminary approval to sell 20 million square meters of land on the Red Sea to Egyptian Resorts Co.

Foreigners Targeted

Foreign developers weren’t spared. Dubai’s Damac Properties was stripped of 30 million square meters of land on the Red Sea coast and its chairman, Hussain Sajwani, was sentenced to five years of hard labor for his part in the property deal. Damac responded by suing Egypt at the International Centre for Settlement of Investment.

Saudi billionaire Prince Alwaleed bin Talal agreed in April to give up 315 million square meters of land in southern Egypt that his Kingdom Holding Co. bought in 1998 after the public prosecutor sequestered the land, saying the purchase violated the law. Kingdom Holding didn’t acknowledge any wrongdoing in the case.

Developers may struggle to revive sales even if they end up keeping most of the disputed land. Property purchases dropped since the revolution and cancellations are increasing rise amid political and economic uncertainty.

“We expect a 10 to 15 percent backlog cancellation and zero pre-sales for 2011,” Deutsche Bank AG analysts Athmane Benzerroug and Nabil Ahmed wrote in a note to investors on May 11. “From a liquidity standpoint, Palm Hills appears the most vulnerable, while Sodic is most resilient given a solid balance sheet.”

Sales Plunge

Medinet Nasr for Housing, a builder of middle-to-low-income homes that holds no disputed land, had sales drop to zero in the weeks following the revolution after a “phenomenal” January, Vice Chairman Hisham Akram said in an interview. Sales have fallen 25 percent this year and the company is placing advertisements in newspapers across the Gulf aimed at Egyptian expatriates.

Holding companies responsible for past corruption may foster more open investment culture that can encourage new companies to enter the market, said David Cowan, a London-based Africa economist for Citigroup Inc.

“If these steps lead to more transparent framework of land allocation and deals, new companies will come to exploit that,” he said.

–With reporting by Abdel Latif in Cairo and Alaa Shahine in Dubai. Editors: Ross Larsen, Andrew Blackman, Christine Maurus.

To contact the reporters on this story: Zainab Fattah in Dubai on

To contact the editor responsible for this story: Andrew Blackman at



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