UPDATE 2-Egypt court scraps land sale to Palm Hills
* Egyptian property firms reeling from legal challenges
* Seen weighing on firm's cash flows, cancellations
(Adds analyst comments on wider impact, background)
By Sherine El Madany
CAIRO, April 26 (Reuters) - An Egyptian court ruled on Tuesday that a state land sale to Palm Hills Development (PHDC.CA) was illegal and scrapped the contract, sending more alarm through Egypt's battered property sector.
Property firms in Egypt are reeling under a string of legal challenges to their land holdings since a court ruled last year that a state deal with Talaat Moustafa Group (TMG) (TMGH.CA), the country's biggest developer, was illegal. [ID:nLDE6AL0W2]
Analysts said the court verdict on Tuesday will weigh on Palm Hills' cash flow in 2011, as the firm struggles with mounting debt and liabilities, as well as rattle Egypt's property market because of fear of contagion to other cases.
A judicial panel is expected to submit this week reports on whether a government contract with TMG should be scrapped and if a state land sale to Egyptian Resorts' (EGTS.CA) Sahl Hasheesh Red Sea resort is illegal. The judicial body's decisions have in the past influenced court verdicts.
Hisham Halaldeen, an analyst at Naeem Holding, said Palm Hills had originally bought the land for around 300 pounds per square metre, whereas other land auctions in the same area of Katameya on Cairo's outskirts had fetched 750 pounds per square metre.
"If the company is to pay the difference as a settlement, they will have to pay an additional 422 million Egyptian pounds," Halaldeen added.
The company's shares have tumbled 69 percent this year.
"The biggest challenge for Palm Hills is the cash flow concerns for 2011. If they have to make the additional payment immediately, it will be tough," said Halaldeen.
He said he did not think the company would need to make the payments immediately, adding that Palm Hills had said it might raise cash through a rights issue worth 400 million Egyptian pounds ($67.18 million).
"Nevertheless, until there is more clarity on the land transactions, real estate stocks will continue to be impacted."
The company had no immediate comment on the verdict.
Shares in Palm Hills, the country's second-biggest listed developer, fell 3.6 percent on Tuesday, while Egypt's benchmark index .EGX30 was down 0.1 percent.
A judicial panel said in March the sale to Palm Hills was illegal because it was priced too cheaply and the land was not publicly auctioned. [ID:nLDE7201A3]
The court's ruling comes in response to a suit filed by engineer Hamdy Fakhrany concerning the state's sale of 960,000 square metres of land in a Cairo suburb.
Palm Hills said in March the land plot had an existing project on it, Palm Hills Katameya, and represented only 2 percent of the firm's land bank. But analysts expect a wider impact, with buyers nervous about signing up for properties from Palm Hills, which sells most of its developments off plan.
"Definitely the more cancellations cannot be ruled out, and new sales are likely to remain muted," said Ankur Khetawat, real estate analyst at HC Securities.
"It's not only because of uncertainty regarding companies such as Palm Hills and others but also because the overall environment is really uncertain until the new government is elected and more certainty returns to the market."
The land suits have unnerved investors about the risks of investing in Egyptian real estate. Those concerns have been exacerbated by the political upheaval that ousted President Hosni Mubarak and prompted trials of former ministers and business executives.
"If somebody wants to buy a property there, they will think twice because although they might get their property they don't want to involve themselves in these implications and uncertainties."
Palm Hills said in March it expected low or no new reservations or contracts to be signed for the first half of the year. It also expected total cancellations for 2011 to be on par with 2009 levels of 1.6 billion pounds. [ID:nLDE7271YU]
The government had promised, before Mubarak was ousted, to change legislation on state land sales. But Egypt's new military rulers have suspended parliament, which is needed to pass the law. (Editing by Jon Loades-Carter) ($1=5.954 Egyptian Pound)