Building for demand

Lebanon’s construction regulation process should take market needs into account, says Jihad Ibrahim

(Greg Demarque | Executive)

With the Lebanese real estate market remaining stagnant again in 2014, Executive sat down with Jihad Ibrahim, general manager of Jamil Ibrahim Establishment, to discuss ways to better regulate the sector and how to improve statistics related to real estate transactions, which he says today are misleading. 

 

We’re seeing a lot of newly built units remaining unsold in Beirut — particularly the most spacious. What happened and what’s the best way to fix this problem?

The only salvation for the real estate market is a little bit of intervention. The main issue, and the most important point, is the demand. Does the community need the project being built? This is how you safeguard [the market]. This goes a little bit against laissez-faire economics because it’s a directed economy. I’m not saying we should go into a completely directed economy, but there is some logic to it. You have to protect the sector in some way. When the Order of Engineers and Architects looks and sees over 100,000 unsold units, there should be a mechanism whereby new permits are slowed down and not given so easily.

 

Granting permits based on demand in a given area also protects the market

Do you, as a developer, have to submit a market study before getting a construction permit?

Absolutely not. No consideration is given whatsoever to whether a project is needed or not. We should have some checks and balances, and I think the best body to be responsible for this is the Order of Engineers and Architects or the municipality. They know how many permits and empty apartments they have or how much empty commercial space [there is]. Granting permits based on demand in a given area also protects the market, so you won’t end up with a bubble market or any deficiencies, instead of open investment without checks and balances just because the money is there. Otherwise, [the issue of supply and demand] will always be chaotic and will open up the sector to some points of weakness as it is doing now.

 

I understand some of the statistics coming from the sector are not well collected. For example, when we see numbers from the Cadastre detailing the value of real estate transactions in a given year, are those numbers accurate?

No. The numbers are based on when ownership of the sold units is recorded with the Cadastre in the Registrar of Deeds. On average, a residential project or a medium-sized commercial project would need — from concept to handover — let’s say three years, in a straightforward environment. Most of the sales occur either around when the concept is put forth or in the first year or year and a half of the project. Let’s say a project started in 2010 and was handed over in 2013. Most of the sales happened in 2010 and 2011 with a smaller number in 2012 and 2013. However, statistics in Lebanon are based on the record of transfer of ownership in the Registrar of Deeds, which happens when the project is finished and the units are handed over. This means that sales in 2010, 2011 and 2012 are recorded as actual arm’s length transaction sales in 2013, which is not true.

 

What’s a better way to calculate these statistics?

A better way would be to base the sales figures on when the contractual agreements are registered with the Ministry of Finance, which happens immediately since all sales over [$44,444] must be registered with the ministry, including all real estate transactions. The intelligent thing to do would be to take figures from the Ministry of Finance, not the Registrar of Deeds. But for that, the Ministry of Finance should filter the transactions and do the statistics itself. When you pull the figures only from the Registrar of Deeds it is definitely not representative of what actually happened in that year.

 

I take it the number of transactions and the total square meters of transactions are similarly misleading?

Yes. Both also come from the Registrar of Deeds.

 

You have eight years to execute a construction permit, so it is an irrelevant indicator of activity

What about construction permits? Are they a good snapshot of market activity?

Construction permits are also used as indicators, but you have eight years to execute a construction permit, so it is an irrelevant indicator of activity. It’s relevant if you want to examine investor confidence, however. The permits help show that investors are confident, they buy land and decide to do a project. Whether they will use the permit this year, next year or in the eighth year, we don’t know. We have a project in Sanayeh. We executed the project and now it’s sitting idle — we had to do the concrete phase since it hit the sixth year which meant we had two years of leeway. So we built the project not because we think the demand is “wow” and it’s going to be sold. We had to build that project because otherwise we would’ve lost the permit. By the way, most of the buildings in Solidere and most of the projects coming up now fit into this category. Most of [the developers] are just doing the facades and the common areas to make sure they don’t lose their permits, but they’re not finishing anything inside because [the units] are not being sold. 

 

It seems that Beirut is becoming a concrete jungle. What can the municipality do to create a bit more public space?

You need some breathing space, you need some parks. There are a lot of pieces that belong to the municipality that are being sold to developers. We are a main developer, and we always buy them, but we go after them because we know somebody’s going to buy them [if we don’t]. You need to study the green spaces. A park doesn’t need to be one square kilometer; it can be 100 square meters. Instead of having one huge park, you can have 10 small ones.

 

We have taxes being levied on the real estate market with each new minister of finance

What do you think of the new taxes being discussed by Parliament to fund the public sector wage hike?

We have taxes being levied on the real estate market with each new minister of finance. It’s always, it seems, the sector the Ministry of Finance targets. But look at where the sector is today. We can’t afford more taxes at the moment and just talk of it is having an impact. The talk of new taxes has affected the sales of land. Nobody will buy land. The appraisal of what the land is worth — conducted by the Ministry of Finance — is what you base your taxes on, not the actual price you paid for the land. The market has been in paralysis for a few years now but appraisals are still jumping. That’s a problem that new taxes would only make worse.

Matt Nash

Matt is Executive's Economics & Policy Editor. He has been reporting on Lebanon since 2007 with a focus on oil and gas, policy and legal matters.

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