Banks around the world have been in the news over the past year because governments have been stepping in to bail them out from poor balance sheets and too much debt.
The Egyptian government this week, though, announced a plan to turn the tables so that an Egyptian bank can bail out a struggling real estate firm.
Egypt’s Housing and Development Bank (HDB) will lead a consortium to buy 60 percent of Damac Egypt’s New Cairo projects.
The Egyptian government on Sunday gave HDB and two other firms the green light to buy the stake of the Egypt unit of Dubai-based Damac Holding.
HDB is an arm of the Egyptian government, so this purchase constitutes something of a government bailout of a firm once thought to be a lion of the Egyptian real estate landscape.
When the deal is finally processed, HDB will control 30 percent of the New Cairo projects, 20 percent will go to the Egyptian Arab Land Bank, and 10 percent to the Holding Company for Development and Investment.
To execute a trade like this, the government even had to overcome its own rules, dictated by the Central Bank of Egypt, that don’t allow a bank to purchase more than 40 percent of a company.
Though no analyst would commit to a number, most said that Damac’s New Cairo projects represented between 30 and 50 percent of the company’s overall holdings in Egypt, which include property in Sixth of October City and Gamsha Bay on the Red Sea.
Damac’s New Cairo properties include Centre Ville, Park Avenue and Hyde Park.
The deal “will provide them with greater access to liquidity because the bank will be a major shareholder, said Khalid Khalil, a real estate analyst for Egyptian investment bank Beltone Financial.
Damac purchased the properties in New Cairo in May of 2007. It bought 6.3 million square meters for LE 4.7 billion, or LE 753 per square meter. It was a significantly higher cost than the company paid for most of its other properties, said one analyst speaking on condition of anonymity.
Just as Damac experiences a low-ebb in its financial circumstances, HDB seems to have completed a long haul back from the brink.
Five years ago, the bank suffered from a number of non-performing loans and it relied on its relationship with the government to keep it afloat.
But the bank underwent heavy restructuring over the past several years and shifted its focus from the real estate side to the banking side, offering services more to individual clients than to real estate firms.
Last year it was reported that only about 7 percent of HDB’s outstanding loans were non-performing, a solid number representing a major resurrection for the once wayward bank.
Most economic observers agree that Egypt has fared better in the current economic crisis than most other emerging economies. The government has signaled its willingness to proceed cautiously and use its resources to prevent the collapse of any one industry. Subsidies, export bans and bailouts have all figured into the equation.
“We believe that the transaction was backed by the Egyptian government’s efforts to somewhat prevent the market from being affected by the negative implications that might rise from the collapse of Damac and its projects in Egypt, wrote Monsef Morsy, a research associate for Pharos Holding.
“Therefore, the government decided to acquire the stake through its real estate and banking arm, Housing and Development Bank (HDB).
The government likely saw the proposed deal between HDB and Damac as a slam-dunk. It has been widely reported that Damac’s central shortcoming has been a lack of liquidity, something that the government is in a firm position to help with.
“It has been rumored, said Khalil, “[Damac] had a lot of liquidity issues. There was a lot of speculation about debt they acquired from Egypt to fund projects in the Gulf.
But Damac skirted the liquidity issues when asked directly about them by Daily News Egypt.
“As an organization with a long standing track record in the region, wrote Damac Egypt CEO Alaa Ayoub, “HDB can assist and support Damac Properties in a number of ways that extends well beyond a financial partnership. This association makes us much stronger for the development of our projects in New Cairo.
There’s no telling what HDB will do with the properties it has bought a stake in. The high-end real estate market has suffered across the board in the recession, and the appetite for buying these sorts of properties may be slow to return.
Twenty-five percent of the properties HDB has purchased from Damac have already been sold, and development plans have already been set between Damac and the individual buyers. HDB has not said what it will do with the rest.
This effort by the Egyptian government to give a cash infusion to a preeminent real estate developer is, more than anything, a sign of how it wants to keep its hands on the pulse of the real estate industry. Tightening control to avoid collapse seems to have been the government’s mantra so far. And through the Damac deal, that philosophy seems to be continuing.
To read the other stories in our monthly special focus on Egypt s banking sector, click here: