Deutsche Bank - Egypt Real Estate - (6th of July 2010) - SODIC

5 July 2010 Real Estate, Construction and Building Materials Egypt Real EstatePutting regulatory risk intoperspectiveAmbiguous legal framework has heightened regulatory riskWe have looked in depth at the legal framework pertaining to the Egyptian real estate sectorand attempted to address the regulatory issues that have captured investors’ attentionrecently:• A law issued in 1979 provided rights to NUCA (New Urban Communities Authority), agovernment entity, to sell land directly (without auction process) to investors/developers.• Another law was issued in 1998 (Law 89 of 1998) stipulating sale of land fromgovernment entities through an auction process.This new law led the administrative court to issue an adverse judgment on 22 nd June 2010against TMG’s land acquisition process. This decision has put TMG’s flagship project,‘Madinaty’, in jeopardy.Madinaty judgement to set the benchmarkIn our view, the administrative court verdict against NUCA and the leading developer TMGhas increased risks on an otherwise attractive Egyptian real estate story.Egyptian developers have acquired their land bank through 3 channels: private owners,government entities (such as NUCA) and through government auction process. Thegovernment began land auction process in 2006 while in the same time developers havebeen able to acquire land from government entities through bilateral negotiations. We believeinvestors could see risks of potential new cases/negative news flow against developers whohave acquired land from the government. Our analysis suggests that TMG and SODIC haveacquired almost 95% of their land from government entities through the non auction process,as compared to 8% for PHD. Nevertheless, we estimate that c.61% of SODIC’s entirelandbank may not be at risk, as 55% was acquired before 1998 law (thus not at risk) andanother 5% was acquired through auction (also not at risk). While we see regulatoryambiguity as a risk we do not expect major cancellations of land agreements, as such ascenario would have significant economic damages, impact the government’s credibility andcould put off foreign investors.We believe investors will closely monitor the Supreme Court judgement on TMG case (notime frame yet) as this should set the benchmark. Till then, we see legal overhang dominatingthe sector.Deutsche Bank AG/London Page 17