3 October 2010
Little town in the desert
The ruling earlier this month by the Supreme Administrative Court (SAC) annulling the 2005 contract of the land sale from the government to Talaat Mustafa Group (TMG) has rocked the boat for many a player on the Egyptian investment, construction, and housing scenes.
The crisis erupted when Hamdy al-Fakharani, an architect, filed a lawsuit against former Housing Minister Mohamed Ibrahim Suleiman, calling for the annulment of the sale in 2005 of 8000 feddans of desert land 30km east of Cairo to TMG to build a huge housing project. TMG aptly named the project Madinaty, literally My Town; established the necessary infrastructure for a modern, spacious, green town with integrated services and a varied range of housing units; and began selling the units to the public. Given the wide range of housing designed to suit different pockets, and given TMG’s record of establishing well-designed, well-kept ‘towns’, the units sold like hot cakes especially that payment conditions were generally affordable. Construction at the site went full-speed ahead, and the first units were expected to be handed to prospective buyers soon enough.
Then came the bombshell. Fakharani relied on the point that the direct sale of the land by the government, represented in the New Urban Communities Authority (NUCA), to TMG was illegal. State property sales, he said, should be managed through public auction. In his lawsuit, Fakharani said that the contravention of the law deprived the State of EGP147 billion. He claimed TMG had been granted full custom exemption on materials and equipment used in construction, but TMG later fully denied that. On 22 June 2010, the Administrative Court issued a ruling annulling the direct sale contract. When TMG appealed against the Administrative Court ruling, the SAC supported the ruling on grounds that the NUCA fell short of abiding by the measures and provisions stipulated by the law when managing the sale of State property.
The ruling came as a severe blow to the unit owners, who are now holding their breath until the situation is resolved. TMG shareholders are also worried the company would be negatively affected. Shares actually lost 50 per cent of their value in the immediate aftermath of the ruling, but have already regained a large portion of that loss.
There are worries over the future of the entire real estate sector, since other lawsuits could be filed to annul contracts of similar projects. It goes without saying that these satellite towns on the outskirts of Cairo offer a more decent style of life to increasing numbers of the population. They are cleaner, less polluted, well planned and equipped with services and facilities. Although luxury housing in the past was exclusive to the upper class, unit prices in these areas are increasingly affordable to sectors of the middle and upper-middle class.
As for the government, it faces an acute predicament since it has to pay huge money in compensation should it withdraw the land from TMG. Given the complications of the situation, President Mubarak intervened by ordering the formation of an independent committee to resolve the issue.
Real estate Vanguard
TMG is a leading real estate developer. Since the time it was founded in the 1970s, it executed landmark housing projects that attracted upper and upper middle classes. The group has built new towns far from the heart of Cairo, characterised by elegant architecture and large-scale greenery. Among the projects executed by TMG is al-Rehab, east of Cairo, and al-Rabwa in the west. Built on 9.8 million square metres, al-Rehab accommodates 120,000 residents. It has a variety of unit areas. Services and facilities—including schools, a shopping centre, medical centre, post office, sports club, cinema, pharmacy, fire station, mosques and a church—are available there. Al-Rabwa is a distinguished neighbourhood built on 1.4 million square metres. It consists of two-storey villas, each with a garden and some with swimming pools. It has a club-house, a golf course, three swimming pools and health club. The town has a shopping centre and a mosque.
Ayman Sami, one of the unit owners at Madinaty says that they are waiting for the President to interfere to put an end to their plight. “I wish the President would consider the interests of the investors and the group, which is one of the most credible real estate developers in Egypt. Now my family lives in fear; we know that we will probably be handed our unit on time, but we are worried that things could develop in a way that end up with the government interfering to complete the project. This will be disastrous since it could change the features of the town. When we paid our first down payment, we sought a certain standard of housing and green areas, which we fear may be jeopardised if the government interferes.”
Mahmoud Mohamed, a bank employee, is a shareholder of TMG. He has put all his savings into the group’s shares. Mr Mohamed called for the issue to be taken to international arbitration: “This is our right and we should use it to get our money back,” he says.
Economic expert Mahmoud Hussein expects the case to affect the investment climate as a whole. He indicates that “it is very likely that the problem will result in negative repercussions on the real estate sector. It has to be borne in mind that a host of industries depends on this sector. The prospective homeowners of Madinaty will also be harmed since the ruling implies that thousands of contracts between unit owners and the group are now null and void.”
Former judge Mahmoud al-Khodeiri rules out prospects of international arbitration on the grounds that the contract had been signed by the government and group, while shareholders are not a party in the squabble. “Similar to shareholders everywhere, those of TMG have to share losses in the same way as they shared profits. But the unit owners should be protected because they made no benefits off buying residential units and they had no idea of any legal contravention. If they suffer any harm, they should go to court,” Mr al-Khodeiri adds.
In a development that might quell the fears of unit owners and shareholders, the committee ordered by the President has managed to find a way out of the predicament. The NUCA will retrieve the land; then article 31 of law 148, which allows for direct sale in cases of seizing land without written contracts, will be put into action. Abdel-Rahman Nafie, the committee chairman, said that such a solution takes into account the interests of unit holders, investors and society as a whole. But there is talk of revising the terms of the sale contract, which might raise the price TMG pays for the land. How far shareholders are willing to take this has yet to be determined. Some have again sworn they would resort to international arbitration.
The crisis has yet to be resolved. Following the committee’s announcement of the proposed settlement with TMG, head of Egyptian Centre for Social and Economic Rights Khaled Ali said that we are before a case of manipulation of law and vowed to use all possible means to prevent such manipulation.