Mismatch made in the heavens

Lebanon’s real estate market is adjusting to new realities, thanks to subsidies

Greg Demarque | Executive

As cities go, Beirut has every reason to be regarded as the grand dame of regional urbanity — a proud dowager that stands out among Arab metropolises as queen of style and savoir vivre. But she is filling out like a high school senior, especially around the upper floors of the priciest residential towers. Those epitomes of luxury, construction of which began during the real estate boom five or six years ago, are now finally almost ready for delivery and provide a near full image of the skyline that the Lebanese will have to live with for generations to come.

Whether they are individually perceived as top engineering and architectural accomplishments or mere misshapen tributes to greed, Beirut’s new towers perhaps more than anything illustrate two aspects of the Lebanese economy: the fact that property development is a vitally important activity for the country’s economic well being and the bipolar reality of an economic nation where production is heavily concentrated in the center, but whose productive majority can less and less afford to live in it.

What is new in this picture is that the detrimental split between a rarified class of high end developments and an ignored demand for intelligent and affordable projects has apparently started to impact professional property developers. While they continue to break ground on projects in Beirut, developers today acknowledge that sales in the pricey market segments remain sluggish at best.

“Below $500,000 it is a fantastic market — it’s booming”

“The market is very rigid now in anything above $2 million. Between $2 million and $500,000 it’s okay, it’s sluggish, but below $500,000 it is a fantastic market — it’s booming,” says Massaad Fares, property developer, consultant and head of the Real Estate Syndicate of Lebanon (formerly an ‘association’, it still goes by REAL).

Essentially, these assessments are estimates and carry credibility because numerous developers share similar views based on their market experience. Beirut based real estate consultancy Ramco, in 2013, produced some rare statistics that quantified the sluggishness of high end demand. From a survey of 65 projects in Beirut — with asking prices starting at $2,800 per square meter — the consulting firm found that of 1,236 such upmarket units that had been completed in 2013, 277 remained unsold by April 2014. The average apartment size of unsold units was 305 square meters with a cumulative value totaling $437,583,544.

All indications are that apartments in Beirut this spring have also been lingering on the market like last summer’s fashion line — prices are now more flexible and, at many developments, reduced. Where before purchasing an apartment in one of Beirut’s prime areas meant paying the asking price, today real estate marketers boast their pricing flexibility as a selling point. It is, as Plus Properties’ marketing manager Amanda Hajjar points out, the “best time to invest in this market because you have negotiation power with the developer.”

The eager sales pitches do not find all that many takers, however. The high starting prices in the capital put homes out of reach for almost all first time buyers, while Lebanese expatriates and wealthy foreigners look to other locales to safekeep their real estate investments. The market has expressed an uneasy dualism for several years. At the upper end of the scale, luxury units in Beirut’s prime areas — downtown, Verdun and Ashrafieh for example — theoretically generate fantastic profit margins but are, in polite terms, selling slowly. At the opposite end, and this means lowbrow developments outside of Beirut, margins are slim but apartments sell like hotcakes.

Developers have of course noticed this trend not just yesterday but several years ago, and have talked in many an interview about the need to shift their strategies. Some champions of luxury real estate used almost every opportunity to speak glowingly about the beauty of developing small units and about the wisdom of undertaking humbler projects some distance from the capital.

All the while, however, the really notable initiatives of the past two or three years were those where branded developers promoted projects in Beirut whose ‘affordable’ unit prices just camouflaged the attempt to achieve even higher profit margins per square meter in built-up areas. A whole wave of such projects were launched in ‘trendy’ areas of the capital whereby the much lower meterage of offered living space made the value propositions of the units’ lower asking prices look, at the very least, doubtful from a buyer’s use value perspective.

Leading developers’ professions of interest in the affordable market are becoming more than theoretical

Increasingly today, leading developers’ professions of interest in the affordable market are becoming more than theoretical. With growing numbers of unsold units on their books and luxury developments looking like shakier propositions in longer and broader terms, it seems that leaders of the property development industry are finally getting serious about the Lebanese real estate market’s ‘democratization’, meaning development of a developer skill set where project quality and affordability are not absolute opposites.

Despite central bank backed financing being relatively accessible for first time home buyers, many of Lebanon’s high end developers are only in the early stages of learning how to build for this market, where profit margins become tighter and the timing of project delivery is critical. They’re also keeping an eye on Syria — when the raging war will end is anyone’s guess, but reconstruction of that country’s high end housing needs represent a shining opportunity for Lebanese developers.

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Unorganized market

“Today in Lebanon the real estate market is unpredictable,” says general manager of Al Mawarid Real Estate Rania Akhras. Unpredictable market conditions are among the sector’s challenges that organizing bodies REAL and the Real Estate Developers Association — Lebanon (REDAL) hope to address. The real estate sector remains fragmented with only limited planning addressing Lebanon’s housing needs. Part of the issue lies with the government’s almost complete absence as a regulator and policy planner. At the project level, developers encounter difficulty in planning housing projects due to a lack of statistics and, as Fares points out, current indicators — like real estate transactions and cement deliveries — are not accurate and are inadequate to use for planning purposes.

Both Fares and Namir Cortas, head of REDAL, say the lack of statistics is a weakness. “I cannot write a feasibility study … [I] don’t have reliable references,” Fares says, with Cortas noting data is needed to “understand what the sector is paying and understand how it affects other sectors because [real estate is] the central sector — we affect just about everybody.” While the two recognize it as a fundamental need they both say neither organization has the resources to compile the right statistics.

In other ways both REAL and REDAL are making headway towards the professionalization of the real estate sector. Fares, at REAL, is focusing on improving the home buyer’s purchasing experience by standardizing the broker profession. “It’s so important that they know how to sell an apartment … Your client is so important because he brings the bread and you have to be honest and give him the right information and advice,” he says. To do so, REAL has teamed up with the American University of Beirut to offer courses and certification for realtors, a planned prerequisite for REAL membership. Formed in 2013 REDAL has focused largely on issues of taxation because, Cortas says, when it comes to the real estate sector “such a big proportion of it is indirect. In other words you suffer it before you realize the profit.”

Unsold Luxury

The slowdown at the highest end of the market means many units that have or will come online remain unsold. Fares says there are some 1,000 unsold units at a value above $2 million, with an estimated cumulative value totaling $3 billion. While that might look to some like a glut in the market Fares nonchalantly reasons that, “The real estate market in Lebanon is around $6–7 billion per year, so $3 billion in the sector is not really dangerous. These type of units — this sector of the market — is normally developed by well to do developers so they can sustain it.” Similarly, Akhras agreed that this money sitting in the market is part of the attractiveness of investing in real estate — “There is cash to be stored,” she says.

The ability of real estate to serve as a safe store of wealth is of course well established in Lebanon. Many projects in the country are not leveraged because the owners execute them through project companies whose capital consists of a mix of owned land and an investor’s financial contributions. Professional market studies and demand assessments are often not a priority when these projects are designed because the shareholders have no exposure to bank loans and can simply wait, sitting on unsold completed units until the day that somebody meets their asking price.

Affordable segment

When it comes to designing more complex projects with tight margins that include the need for leverages, on the other hand, different business models and other skill sets are needed. That may be why it takes market players more time to venture into downmarket specializations.

“There is certainly a need [and] there is certainly a shortage in housing for the market at affordable prices,” says Cortas, also the director of Estates, a property developer. Demand outstrips supply at the affordable end of the Lebanese market yet few options exist for home buyers in the city. “Today the market is outside Beirut, not inside … [In some places] you can buy an apartment for $1,000 per square meter. You can’t buy anything in Beirut for this price,” says Fares.

One of the main concerns for this segment of the market is the government’s limited involvement offering no holistic policies that encourage the construction of affordable housing. Financing of homes has nonetheless been possible and has recently become more doable for prospective home buyers — but only because of central bank initiatives that have brought benefits to mortgage based borrowing first in 2009–2011 and then again since 2013, due to Banque du Liban’s stimulus package.

“If it wasn’t for the stimulus plan we would be in deep shit — it’s as simple as that”

“[Riad Salameh] is, with all objectivity, the only government representative working on a productive economy — everybody else is not working on a productive economy,” Fares says, remarking that, “If it wasn’t for the stimulus plan we would be in deep shit — it’s as simple as that.” Cortas points out that “The central bank has realized this particular sector of the market is totally dependent on the availability of mortgages and a system of relatively low interest [rates].”

A Syrian future

It would be inconceivable to have business confidence in Lebanon’s economic future without some innate personal optimism and willingness to embrace risk. In the case of the current property market, this seems to be shaping out as wagers on a reconstruction boom in Syria. Of course there is no current outlook for an end of violence and armed conflict in the neighboring country, but phases of rebuilding may intermingle with the ongoing conflict, at least in speculations driven by the Lebanese experience of the country’s earlier conflict that lasted more than 15 years.

Both Cortas and Fares agree that the reconstruction of Syria, once it begins, will be a huge boon for the Lebanese. “I believe that the reconstruction of Iraq and Syria will only happen through Lebanon,” says Fares, with Cortas adding that, “We are poised as Lebanese developers to be very effective in the reconstruction and development of Syria.”

This is not to be understood as a wild dream of doing megaprojects in the big neighboring country. These projects would be government driven, financed by international programs, and carried out by large international contractors and developers, Cortas says. However, he and Fares both point to the potential for projects outside the mass reconstruction needs — such as building new luxury apartments and offices for wealthy Syrians — as lucrative activities where Lebanese developers will have a huge edge once Syria’s war subsides.

A surge in Syrian rebuilding and development activities might even wipe away quite a few of the headaches that plague the Lebanese property market today. And bring a few new, different ones. A non conflict dividend of Syrian development would generally translate into a boost for the Lebanese economy and any unsold property stock would quickly find demand, for example.

On the other hand, Fares fears that reconstructing Syria will drain the supply of unskilled labor, expert manpower and even machinery from Lebanon. He says, “It is going to be very difficult for Lebanon because we will not find an engineer here anymore — they will all be going there. We will not be able to find any Syrian construction workers — they will all go back.” This would mean the current buyer’s market would flip into a property seller’s market in Lebanon, possibly big time.

Jeremy Arbid

Jeremy is Executive's in house energy and public policy analyst.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.

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