Yaara and Tarek Kessouf are blissful newlyweds, full of excitement over their young marriage and the home they could afford to buy in the capital last year. They moved into their new 120 square meter (sqm) flat in the trendy Mar Mkhayel neighborhood in Achrafieh as soon as they got married last summer. The young couple initially considered renting but soon realized that buying was the better option for them, taking advantage of one of the 96,000 home loans subsidized in 2013 by Banque du Liban (BDL).
While it represented a welcome benefit that Tarek qualified for a subsidized loan available to buyers of a primary residence, it was not, however, a decisive factor in their decision to buy. The couple were determined and would have made the purchase even without the subsidies, they tell Executive, mainly because they found an apartment of convenient size, at a reasonable price, in the area they wanted.
The couple, both 28, are a perfect example of a new category of property buyers who, according to real estate experts, are moving the Lebanese housing market now that foreign investors are scared away by political instability in the region.
Although there are currently no statistics available regarding their market share in the past years, new families looking for their first house are identified by market experts as the segment of buyers who benefited from, and will keep taking advantage of, lower interest rates on mortgages — made possible by the central bank’s stimulus package for economic growth.
Over 50 percent of the $1.47 billion that BDL put at the disposal of the country’s commercial banks at 1 percent rate of interest in 2013 was aimed at supporting the real estate sector by encouraging lenders to lower the cost of mortgages. Every subsidized loan has a ceiling of LL800 million, or $530,700.
Boosting local buyers
The central bank announced at the end of last year that the plan would be extended to 2014 with a total of $800 million available to commercial banks; after they used 75 percent of the initial funding by the end of September last year.
Easier access to housing loans is now expected to help boost internal demand and help the property market — one of the leading sectors in Lebanon’s economy along with services — pick up again after a significant drop in sales in 2013.
“We have noticed that this program is really interesting,” says Mireille Korab, head of sales with FFA Private Bank’s real estate subsidiary. Although she says that it is still too early to estimate the impact of the central bank’s measures on the housing market, Korab remains convinced that it has produced some positive effects.
“It did boost the demand for specific products, although this does not concern high-end buyers, but couples who want to get married and get a house,” she says.
According to Korab, demand in the Lebanese housing market is now mostly domestic and dominated by low-volume transactions involving small-sized flats below 100 sqm. Buyers, she says, are mainly newlyweds in need of primary housing who are likely to keep benefiting from more accessible loans through this year.
“The year 2014 should be a good one,” Korab says. “And this is because of the local demand. Local buyers are the ones who are moving the market now. Before, it was the foreigners.”
Korab said that local demand from couples is particularly steady and reliable as it involves players who “need to buy, whatever happens in the market.” In this sense, she adds, BDL’s package supporting housing loans may be hitting the right target.
However, these interventions can only be effective within a framework of potential demand. “Loans are for people who want to buy, not for those who don’t want to,” says Korab. “Those who didn’t want to buy will not buy anyway but couples who were reluctant because of the financial risk are now feeling more comfortable as they are keeping more cash in their hands.”
Financial risks or high costs of mortgages are not the only source of concern for real estate buyers in Lebanon, and there is nothing that the central bank can do to alleviate these other concerns.
Instability and the Syrian conflict are fueling reluctance to invest, which is affecting the demand for residential property in all parts of the country. The security fears are a huge factor in Tripoli, the country’s second biggest market after Beirut, because local tensions are adding to the burden of external instability. But in Beirut too, the danger of conflict influences people’s investment moods.
“Lebanese do have a lot of cash,” says property broker Christian Baz, who has run a real estate agency in Achrafieh for the past decade. “But nobody wants to buy because they are saving in case there is a war and they have to leave. Even someone who really wants to buy would think twice now and prefer to put the money in the bank, which gives you 5 percent interest or 7 percent if it’s in Lebanese pounds.”
According to what Baz has observed while dealing with his clients, this preference for keeping assets liquid is now predominant despite a traditional Lebanese tendency to invest in property and land. The real estate agent said his business has declined by 50 percent in the past three years and he had to launch a property management service to support it.
He has little faith in the stimulus package. “It works but very slowly,” he says. “Banks are giving special loans to help families, but they come with many conditions. You have to occupy the house and can’t rent it out. And the difference in the interest rate is not very big, so some people would still prefer ordinary loans.”
A connoisseur of Lebanon’s real estate market, Baz said that if he had the money he would definitely invest in property. “I would buy three or four small apartments close to downtown Beirut. It would be a good investment as I could rent them out to foreigners who come here to work without their families.”
But, he says, he has three kids and a struggling property business to focus on. The stimulus package will not be enough to help him invest, especially as the prime area he mentioned is among the most expensive in the country’s property market.
According to Simon Neaime, director of the Institute of Financial Economics at the American University of Beirut, buildings in these high-price areas are often owned by foreigners who are not in any rush to sell up. “Thousands of flats are left empty in downtown, and their prices are not moving downwards,” he says. “Owners prefer to keep the assets rather than selling them at a loss.”
What worries Neaime is that the combination of inflated prices and reluctance to sell is not sustainable in the long term. “We may have a market crash similar to that of Dubai real estate,” he warns. The central bank stimulus package in his view will not be able to boost the real estate market as it does not remedy the main problem.
“The problem with real estate in Lebanon is not a lack of subsidized mortgages,” he says. “The problem with real estate, especially in Beirut, is prices. They have been structurally high because most of the demand was foreign, mainly coming from the Gulf. This means that prices are determined by outside factors. In Beirut, prices are outrageously high. They have lost 10 to 20 percent [in the past two years] but they remained abnormally high.”
According to Neaime, though, the ongoing retreat of Gulf buyers, who are slowly deserting Lebanon’s real estate investment market, may soon lead to further adjustments. “Due to political tensions there has been a decline in the Arab demand. In 2014 I see an additional 15 percent for a total 30 percent decline in prices. However, whether this will allow locals to purchase flats in Beirut is a different story.”
Foreign investors have been fleeing Lebanon’s property market in the past two years, according to research by Bank Audi, which places the decline of transactions involving buyers from abroad at 8.9 percent in 2012 and 8.6 percent in the first half of 2013 only.
This slowdown has already had a heavy impact on Lebanon’s property sector. Particularly in Beirut’s prime areas — where foreign investors have been traditionally predominant — the effects of their departure are visible in the number of empty flats still on sale.
According to experts, this category of buyers was not addressed by BDL’s measures, as their current reluctance to invest in Lebanon is not related to the cost of mortgages.
“The central bank has an excess in liquidity and they need to channel it somehow,” Neaime says. “But my impression is that the real estate market was never affected by low credit from banks. It has never really relied on loans but on fresh capital coming from outside. What we need is a market correction, which may happen if political instability prevails for some time.”
Although he believes that the effect of the stimulus package in boosting the property market will be very limited, Neaime admits that its outcome is likely to be a positive one overall. “It won’t produce any negative effects. This is the reason why they renewed it,” he says. “Real estate is driving the economy anyway and it’s better to have banks involved in that market rather than in government treasury bills.”