Palm Hills: engine of growth or example of crony capitalism?

Salma El-Wardani , Friday 17 Dec 2010

Marriage of politics and business, allegations of nepotism, favouring the rich. Palm Hills Development has been hailed as a job-creating engine of growth, and damned as yet another example of crony capitalism

Palm Hills
Photo: Fouad Mansour

A session of the Administrative Court – mandated in cases in which a state body is involved – will today review the case of Palm Hills Development’s (PHD) land acquisition, which in recent weeks has been brandished as yet another notorious example of the land grabbing that, many claim, has become one of the most prominent features of a crony capitalism, in which government bureaucracy is in bed with business.

The PHD deal was taken to court, on the grounds that it violates the law regulating government tenders and auctions.

PHD has one of the largest land banks in the country, with most of its revenues during the period 2007-2009 coming from the resale of plots of land.

It was founded by Mansour and Maghraby Investment andDevelopment Company (MMID) and is listed on the Egypt Stock Exchange and the London Stock Exchange.

The mother company (MMID) belongs to one of Egypt's largest family-owned businesses. MMID currently owns about 50% of the shares.

Founded in 2005, Palm Hills was singled out for the limelight not just for its scale, but also for the fact that a year earlier, two of its business tycoon founders had been handed out cabinet appointments.

Mohamed Mansour was appointed minister of transport, and Ahmed Maghraby was appointed minister of tourism, and later, took over as minister of housing, in a 2005 cabinet reshuffle.

An HSBC report, published in early 2010, gave a strong recommendation to its investors to buy PHD shares, giving the company a very good rating of overweight V, partly based on an "inexpensive and diversified land bank". The report titled, "Picking winners in the Egyptian Real Estate sector" spotlighted PHD, along with Sodic and the Talaat Mostafa Group.

According to HSBC, while Palm Hills Development bought land at a very low cost, at an average of 155 LE per meter square, all its products are oriented to the richest 12 per cent of the population, with a minimum price of LE1.2-1.5 million per unit.

Buy cheap, sell dear
From the start buying chunks of cheap land was the main source of the company's revenues, as notes the same report.

Many of its plots are very well-located within Greater Cairo and the North Coast, a popular summer destination for the Egyptian upper middle class. It has also expanded along the Red Sea through two projects in Gamsha and Ain Sokhna.
It has the most diverse land bank, the second-largest in Egypt, with a very low average cost of EGP153 per sqm, which should result in high profits on land sales", according to the HSBC report.

Moreover, the value of the land pieces PHD bought kept rising exponentially, due to booming land prices in Egypt.

Thus, in a single year land worth increased by about 1 billion dollars, raising the issue of misusing the limited land bank of the country.

By October 2009, CB Richard Ellis (world's leading commercial property and real estate services adviser) evaluated the market value of PHD's properties at EGP 38.1 billion (US$6.9 billion), with an increase of 15% overthe previous valuation a year earlier, with almost no increase in the land bank, according to a press release by PHD.

During 2007-2009 (a period of peak of land prices), the resale of parts of the lands was responsible for almost all the company's revenues. In 2010 two thirds of the estimated revenues of around LE1.9 bn. will be from land sales.

Aswan Land Crisis
The ever growing company has been facing many challenges and crises over 2010.
Last June, a question was raised in parliament over the value the company had paid for the land it acquired in Aswan, back in 2007. The allegedly undervalued transaction of Tut Amoun Tourist Village, located beneath the Aswan High Dam inflamed the media and public opinion, with the transaction being tarnished with the brush of nepotism.

In its defense, the company stated that the sale was approved by all the regulatory authorities, and that it had already paid LE12 million as a down payment for the deal, which is valued at LE88 million.
Two days after the parliament session, Egyptian President Hosni Mubarak issued a decree cancelling the sale of the land, thus overturning a decision by Housing Minister, Ahmed Maghraby.

For his part, Maghrabi, a relative of the owners, told the media that he felt no embarrassment when the President cancelled the contract, since the piece of land was “too close to the High Dam” and would be better off owned by a public company rather than a private one.

More trouble for Palm Hills

No sooner had the Aswan crisis blown-over, than a lawsuit was being filed by the owner of a small development company, Hamdy Fakharany, against the Palm Hills' deal for a 960,000 square meter plot of land in a Cairo suburb. Fakhrany challenged the sale value, saying the land was offered at below market prices by the New Urban Communities Authority (NUCA), a housing ministry body.
The case, filed with the administrative court, puts the company's project in Katameya at risk of suffering the same fate as that of TMG.

According to Fakharany, the deal meant a LE15 billion waste ($2.63 billion) of public money.

PHD shares hit a seven-week low in mid September, following news of the lawsuit, and by September 20, Bloomberg reported that Foreign investors are selling shares of Egyptian real-estate companies due to concerns that court decisions may force developers to pay more for land they already purchased.

According to its semi-annual report, the company's profits reached LE 191.4 million, an increase of 22 per cent compared with the same period last year. TMG witnessed a dramatic decline in its stock prices over the past couple of months as a result of the administrative court's verdict on its land ownership.

Be it Palm hills or Madinaty (another lawsuit against the Talaat Mostafa Group), real estate companies are under public and judicial scrutiny. But it looks very much that it is with prevalent patterns of allocation of state lands that the real blame must lie.



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