An Egyptian court ruled on Tuesday that a state land sale to Palm Hills Development 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), the country's biggest developer, was illegal.

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.

Hisham Halaldeen, an analyst at Naeem Holding, said the company had originally bought the land for around 300 pounds per sq m, whereas more recent land auctions in the same area of Katameya on Cairo's outskirts had fetched 750 pounds per sq m.

"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 was down 0.2 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. The judicial body's decisions have in the past influenced court verdicts.

The court's ruling comes in response to a suit filed by engineer Hamdy Fakhrany concerning the state's sale of 960,000 sq m 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. - Reuters