Investors are anxiously waiting to see how the Madinaty case will be wrapped up, reports Niveen Wahish Never has an individual shot in the dark come so close to bringing such a major project to a halt and threatening the future of a LE13 billion company. This is exactly what happened when Hamdi Al-Fakharani, an architect, filed a lawsuit against former Housing Minister Mohamed Ibrahim Suleiman, calling for the annulment of the sale of land on which Talaat Mustafa Group's landmark project, Madinaty, is being built. His argument: the land should have gone through an auctioning process rather than direct sale. When El-Fakharani filed the lawsuit a few months ago, he probably did not expect to see results so soon and so clear-cut, seeing that Egyptians are used to lawsuits lingering for years in courts. The High Administrative Court annulled last Tuesday the sale contract for TMG's Madinaty project, citing a 1998 rule that said there must be public auctions for state property sales. The New Urban Communities Authority (NUCA), a Housing Ministry body, had been selling land directly. El-Fakharani is out to get others. He already filed a similar case against Palm Hills Developments. The government in the meantime has been trying to assure the public that neither unit owners, nor TMG shareholders, or the company itself would be affected. Already a special committee has been formed to find the best legal exit for the problem. The committee was scheduled to report back yesterday. Overturning the ruling at this stage is seen by legal experts as difficult. By forming the committee, the government is hoping to calm fears that the ruling opens the way to an endless number of lawsuits threatening the future not only of existing developments but the economy as a whole. Nagwa, one of the homeowners in question, together with her son and daughter are finding their backs against the wall. They have put their life savings into the project where the price per square metre is in the range of LE7,000. If they were to withdraw from the project and return their units to the company, they would lose seven per cent of the value of their unit, which is more than the downpayment and instalments they have paid so far, meaning that they would be in debt to the company. Putting her unit on the market is not an option either; not only has its value fallen because of the ongoing squabble, but nobody would actually be willing to buy into a project the future of which is uncertain. Her only option is to wait and see. She says government assurances are not enough. Should the government take over management of the project, she fears the whole system would collapse. However, it is not only unit owners that are worried. Shareholders lost around 20 per cent of share value following the ruling and threaten to take the case to international arbitration. It picked up when President Hosni Mubarak stepped in ordering the formation of a committee to resolve the case. For TMG, the loss of the Madinaty land is a disaster seeing that it represents 60 per cent of its land bank of 50 million square meters. Others fear for the investment climate as a whole. Ashraf Swelam, director-general of Egypt's International Economic Forum (EIEF), a non- governmental business organisation, told Al-Ahram Weekly that the ruling adds uncertainty about the Egyptian economy and takes away from the positive momentum that had been building up in the past five years. A recent EIEF CEO Economic Outlook Survey showed that although 81 per cent of CEOs surveyed viewed the current state of the Egyptian economy favourably during the first half of the year, only 52 per cent expressed confidence in the ability of the Egyptian cabinet to steer the economy in the next six months. And only 45.2 per cent saw the business environment as friendly. Swelam pointed out that construction and real estate has been one of the strongest sectors, even in the midst of the global financial crisis, and "changing the rules in the middle of the game has left the market in disarray." The circumstances of the Madinaty case can be applied to any number of developments, he said. "This is only the tip of the iceberg." Swelam further warned that any harm to the real estate sector would have a ripple effect on its backward and forward linkages. It is estimated that there are around 100 industries that depend on this sector. And the speed and efficiency of response to the problem will determine whether the consequences will be contained to the sector or passed on to the rest of the economy. Swelam also underlined the importance of the transparency of new rules: "Any ad hoc solution will not solve the problem, but will have a sustained long-term effect and could affect the ability of the Egyptian economy to attract investment outside the traditional petroleum sector." Alaa Lotfy, member of the Real Estate Investment Division at the Cairo Chamber of Commerce and head of the Real Estate Export Council iterated a similar opinion. "One should not question the legality of a contract when signing with the government," he said, adding that agreements must be respected. "If this is an administrative mistake then the developer should not have to pay for it." Lotfy stressed that before the project adjacent towns and land were not sought after. "It is the project that has put a price tag on the area." According to Lotfy, Egypt cannot afford to scare developers away at a time more of such projects is needed to enable Egyptians to go outside the four per cent of Egypt's land they currently live on. He underlined that the real estate sector cannot afford a slowdown -- it would mean thousands of job losses in related industries as well. Madinaty alone boasts some 150,000 employees. Nehad Adel, vice-president at Coldwell Banker Egypt, is not worried about the sector as a whole. He says so far the effect of the case has been limited to the company. However, he said that should there be repeat cases, that could cause developers to hesitate and to take more time to ensure the legality of the purchase of their land. Adel said that the market would not have a problem with changing policies as long as it is transparent and in the meantime it does not annul previous contracts. In the meantime he expects to see the controversy directing investor interest in residential, retail or commercial units towards older units that are registered or being resold. Reham El-Desoki, senior economist at Beltone Financial, the investment bank, has a mixed view. On a negative note, the case reflects the extent to which many laws contradict each other and highlights the need to unify and filter laws that govern economic activity. Yet, she said, this will indirectly push reform in the real estate sector and the system by which land will be sold. El-Desoki does not foresee a slowdown in the real estate sector; the sector of late has seen a lot of construction in various segments, whether housing, commercial or retail, and it is now at a stage where developers need to stop and examine what else is needed by the market. In the meantime, she finds it positive that despite the case other companies are still on track and have not cancelled any projects. In fact, Palm Hills Development (PMD), the second company El-Fakharani is said to have targeted, is not worried either. Heba Bilal, director of public relations at the company, says the company has not been served any legal proceedings. She pointed out that Madinaty is a different case because it involves the bulk of the land bank of TMG. Meanwhile, she said, the land of only one of its projects in New Cairo, around one million square metres, has been bought directly rather than through bidding. And that project is 95 per cent complete and due for delivery next year. El-Desoki sees the ability of an Egyptian citizen, through legal channels, to take corrective action against a wrong that concerns the general public, and to succeed, as the most positive outcome of the case.
