Palm Hills: Egypt's property giant dies hard

Bassem Abou El-Abass, Wednesday 11 May 2011

Facing challenges over illegally gained land, Egypt's second largest developer is unleashing a brace of cost-cutting measures

Palm Hills homes
Not quite closing time for Egypt's builders of gated communities (Photo: Reuters)

 

It's hard times once again for PHD (Palm Hills Development).
 
Already facing challenges from the Egyptian government regarding land prices, a series of internal struggles are serving to further threaten the survival of the second largest real estate developer in Egypt.
 
In a wave of cost-cutting, the company has laid off some of its staff and ceded plots of land in a bid to reduce its financial commitments.
 
"Palm Hills has been laying off many employees in the engineering and construction sectors as well as looking into customer compensation for contract violations," said a source at PHD who prefers to remain anonymous.
 
The source added that he believes the company is in a precarious position, with no money to pay construction consultants to complete their designs for promised residential units.
 
"The administration will seek to recover its land from the government by legal means as a kind of recovery to be able to continue its projects," the source said.
 
The company will face a long battle, says one lawyer.
 
"We are not only targeting Palm Hills, but we will continue prosecuting all the lands of corrupt businessmen," said Khaled Ali, head of the Egyptian Center for Economic and Social Rights, which filed the suit against PHD that led to the confiscation of many of its plots of land.
 
Ali says that PHD acquired some plots legitimately via public bids -- such as its land in 6th October -- while others were acquired illegally.
 
"We are trying to find ways so as not to affect customers during the implementation of court verdicts," Khaled explained.
 
Rasha Shanab is a PHD customer who bought a unit in the north coast project of Hacienda Bay. Last week the governorate of Marsa Matrouh terminated a land agreement with Palm Hills Development and took back the 2,229 feddans on which the project was to be built.
 
Shanab says she tried to contact the company many times but was unable to get an answer about the project's future.
 
"'I couldn't cancel my contract due to the penalty clause which is 10 per cent of the total price of the unit," she says. This sum would exceed the amount she has already paid in installments.
 
"If the contract for this north coast plot is scrapped like the one in New Cairo, I will file a complaint to the prosecutor-general as this is considered fraud," Rasha told Ahram Online.
 
She says that many customers have stopped paying installments due to perceptions of the PHD's instability and that the company has taken no measures against them. PHD refused to disclose the number of cancellations it has seen.
 
According to an HSBC report published in early 2010, Palm Hills Development bought lands at a very low cost -- an average of LE155 per square metre -- but all its products are aimed at the richest 12 per cent of the population, with a minimum price of LE1.2-1.5 million per home.
 
PHD was severely injured from recent corruption charges and is currently implementing a strategy to dilute its once hefty land bank to secure its liquidity situation.
 
An Egyptian court ruled on 26 April that the sale of 960,000 square metres (sqm) of state-owned land in Cairo to PHD was illegal and scrapped the contract. The government said this week that it would uphold the decision. 
 
The company also willingly gave up 10 million sqm it had acquired in the North Coast and 6th of October City.
 
The January 25 revolution added to the distress as the company's former chairman, Yassin Mansour and two of his relatives and partners were remanded in custody on corruption charges.
 
PHD develops a thin proportion of its landbank, some 7 per cent, with the rest remaining undeveloped. The firm posted a 2.1 per cent fall in fourth quarter net profit to LE181m in 2010. But investment bank Naeem Holdings predicts year-on-year growth for the first quarter of 2011 due to deliveries of units worth LE234m in February and March alone.
 
Lawyer Khalid Ali believes that "new names will join the black list of real estate developers as Cleopatra [owned by Mohamed Abou El Enein], Egypt Kuwait holding [Al-Kharafi] and Sahl Hasheesh [Ibrahim Kamel]", potentially leaving the whole sector in troubled waters.
 
(Additional reporting by Michael Gunn)
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