The slump begins to hurt

ENAR

I had written this below article about the RE in Lebanon, which I never shared with anyone. Well, it turns out I was right!
Lebanon’s Real Estate Market: the good, the bad, and the ugly
By Paul Kazarian, CFA
Date: February 2012

The Good
Needless to say in the last several years the Lebanese real estate market aggressively grasped the attention of regional investors who liked earning double-digit returns on their asset-backed investments in a country dear to them in terms of proximity and leisure. Further attention was received from the fresh and the generations-old Lebanese expats that never had the urgency or had forgotten the sense of owning a home in Lebanon for several decades, respectively.
During the booming years, numerous articles were written on how amazing was the real estate sector of this small country that defied global odds. Annual growth rates had been around 30% – 40% up until 2009.
Oil prices were at record highs; GCC economies were richer than ever, investor confidence was running high. Fresh expats who had relocated to the nearby GCC region were enjoying attractive remuneration and allocating what was left of that money into buying a home in Lebanon.
Then came the global crisis faster than a sandstorm in the desert, GCC citizens halted their purchases of expensive apartments in Beirut. Fresh expats found themselves closing the calendar year with no bonuses. People expected the crisis to have the same negative effect on the Lebanese real estate sector as it did in Egypt. It didn’t.
Surprisingly, the global crisis had a positive impact on the Lebanese economy, since it was regarded by millions of expats as the familiar safe haven for their money. Local banks were flooded with cash, while simultaneously faced with record low rates in global economies; lax credit was offered to all applicants. This drove the demand for real estate, while everything else in the world was negative. So those who hurried got themselves good bargains for their apartments. Homebuilders knowingly delayed selling, betting their dollars that prices will keep increasing by the day.

The Bad
We are now early 2012 and to the detriment of home builders and sellers, the real estate market has stagnated since the second half of 2010. Several factors could be linked to this fact.
Fresh expats mostly working in the GCC region faced the impact of global crisis by bidding farewell to their once hefty bonuses, which once was enough to cover an apartment’s complete sale price.
Generations-old expats’ money had had the time to settle into their safe-haven destinations, and thus the influx of money had settled down.
Thirdly, complaining potential buyers who had missed the chance of buying an apartment had to thank their fellow Arab brothers who carried on the Arab Spring, which fueled uncertainty throughout the region. Moreover, the extension of populous revolts in the neighboring Syria surely halted all spending in Lebanon until further notice. Having the unthinkable taken place in Egypt, what is to happen in Syria is anyone’s guess.
With real estate prices having grown faster than salaries and all that was mentioned above, it was only normal that stagnation was set to continue throughout 2011 and until such political events were resolved, which according to my uncalculated guess being in 2012 is highly unlikely.

The Ugly
Ugly is a term never used in explaining the Lebanese real estate sector, not for the fact that ugliness does not exist in this country, rather because real estate was never characterized as a sector in Lebanon. It was only people buying homes upon a successful wedding. The urgency didn’t exist, perhaps because everyone assumed prices, being stagnant for many years, were here to stay and had no reason to go anywhere else.
While currently, we are still living in ‘the bad’ era, I felt the urge to foresee what may come in this sector’s destiny. Unfortunately, my projections indicated what will come is ‘the ugly’. I base my analysis and conclusions on numerous factors, which I describe below:
• Fresh expat money: The absence of fresh expat money flowing into Lebanon, due to the continuance of the messy economic uncertainties in the GCC region, which act as direct derivatives to Western markets.
• Generations-old expat money: The reversal of generations-old expat money back to their initial locations as people have realized the reality of their local markets and hopes of the worst being over start to dominate with the US economy showing slow signs of recovery.
• Rising interest rates: This is where the Lebanese mortgage owner will learn the biggest lesson; rising interest rates can make you default on your mortgage payments. The Lebanese mortgage owner lacks the experience of assessing and incorporating the effect of rising rates into his future mortgage payments, and I don’t blame him/her, after all this is the first time in the history of the local real estate sector that mortgages are provided. Never in the financial history of Lebanon have home owners been allowed two or three decade-long facilities.
It is projected that interest rates in US will be rising in 2014 and 2015, thus in those years I expect to see Lebanese mortgage payers surprised at their new monthly payments.
• Lax credit facilities: As a child, sitting in my parents’ car, I used to pass by the Housing Bank in Rawche and I always thought to myself: Why are this bank’s windows so dirty? Why did it always seem closed? When I turned a teenager I found out, because the bank didn’t have much activity, simply because it chose not to lend to the public. Back then credit facilities were available only to those well connected and the military generals. I could’ve been wrong, but for some reason that was my conclusion. In the past few years, suddenly credit was available to the public, and recently with so much money available at banks, lending rules became laxer than ever, which even allowed many to submit fake salary proofs and the like. I knew instantly, this was a recipe for ‘the ugly’.
Lax credit facilities were what led to the American mortgage crisis, the same is yet to happen in Lebanon. However, I have to admit, the scale will not be even closely as frightening as the West. Rather, I guesstimate that the number of defaulting subprime borrowers should not be exceeding 10% – 15% of total borrowers.

Therefore, my expectations for the property price levels for the years to come would be stagnation for 2012 and 2013, and a downward correction by around 15% for the period 2014-2015.

To all those people that justify that the Lebanese real estate market is an infinitely up-trending sector, exclaiming that even in the years of war prices never went down, so why should it now? I respond: Before the war, prices never went up either! So, now that aggressive growth has taken place, what went up (irrationally), must come down.
THE END OF THE ARTICLE
From where we stand today (Dec 12, 2014) I believe the following needs to be said:
1) GCC-buyers: These guys started to sell, since they have been sitting on properties which for the last 4 years did not give them a single percent of profit from price increases. Add to that the Da3esh or ISIS phenomenon which has ignited fear in them. So why not sell? Especially that the GCC is back and obviously, ISIS is here to stay for the coming 15-20 yrs.
2) Expats: Skilled Lebanese expats are still receiving lesser compensations than the figures they used to get before the global crisis. So that middle class is not able to buy the properties in Beirut as of yet. Especially, that lesser number of Lebanese are being hired for all the political conflicts taking place.
As for the expats interested in buying outside Beirut, they feel no hurry to buy, whereby the largest investment of their life will get them stuck in the face of the Da3esh uncertainty.
3) Land Availability: Some RE researchers have argued that land is extremely scarce in Beirut and so price will never go down. My response would be, price did go down and numerous towers are empty and we still see new towers coming up, so obviously supply has exceeded the demand in Beirut. But EVEN if we hit the bottleneck of no more land, I believe the next wave of construction will be demolishing old buildings and replacing them with new towers. That will keep developers busy for the coming 10 years and that will keep supply available.
4) Metn and Beirut Converge: Due to the points above Beirut prices have declined by 40%-50%. During the booming periods, price/sqm in Rawcheh had reached arnd $12k – 18k, but a recent search I did resulted with an avg price of $6500/sqm. On the other hand, Metn has endured the downtrend. So I see the two governorates coming closer in terms of price per sqm.
That’s all for now.
regards,
Paul K.