The slump begins to hurt

Developers are cutting prices and looking abroad to up their cash flow

Slowing but not stalled (Greg Demarque | Executive)

Lebanon’s real estate developers are singing a different tune these days. Gone is the talk that residential property prices will never go down as three years of a slump are taking their toll.

“We’re all having to discount, let’s not kid ourselves,” Nabil Sawabini, chairman of MENA Capital, tells Executive. How much are developers knocking off the price tag of a new home? “10 to 15 percent,” he says, echoing something other developers were saying much less boldly over the summer. Not only is there more wiggle room in the pricing of new residential projects, but some developers are also putting plans on hold in hopes of better days ahead.

Indeed, MENA Capital started 2014 with bad news. In March, reports emerged that they would not be moving ahead with a three-tower gated community of nearly 200 units called Bella Casa, initially expected to be delivered in 2015. Though a sign pointing to where the project should have been under construction still stands near the Beirut river, Sawabini confirms  that that project — and another MENA hadn’t announced — are indefinitely on hold. For Bella Casa, Sawabini says, off-plan sales had reached 15 percent, but MENA doesn’t start excavation work until 20 to 30 percent of the units are sold. He says they decided to call the project off before any work began. For both projects, he says MENA is “seriously considering what to do with the land.”

A slight lift

The first nine months of 2014 saw the number of real estate transactions rise 4.2 percent to 51,975 compared to the same period in 2013, according to Byblos Bank’s economic report “Lebanon This Week”, released on October 20. This growth, however, needs to be put into context. In the first nine months of 2011, 2012 and 2013, the number of sales was down compared to the same period in the preceding year. So while sales were marginally up in the first nine months of 2014, this comes on the heels of three straight years of sales contraction. On top of that, as Jihad Ibrahim argues in an interview with Executive, property sales figures reflect the recording of the sale with the registrar of deeds within the Land Registration and Cadastre. This is a flawed measure, Ibrahim argues, because residential projects take several years to build and, as Sawabini notes, many sales happen when a project is first announced or shortly thereafter. It is therefore difficult to look at the numbers and know whether they reflect sales which actually happened in 2014 (i.e., when a customer buys a built property and registers it immediately in order to begin living in the property) or if they happened earlier and are only now being recorded because units are ready to be turned over to their owners. 

Regardless of what the numbers say, the developers and intermediaries that Executive spoke with were far more downbeat than usual. Even Chahe Yerevanian, chairman of Sayfco Holding, who argues he saw a slowdown coming and began focusing on making smaller, more affordable apartments, says 2014 has been a hard year for developers, though he still insists insists things are going well for his company. Referring to 2014 as “one of the best” years he has personally seen, Yerevanian tells Executive that, as of early November 2014, Sayfco had sold over 2,000 units, compared to 1,500 in 2013. Asked for a price breakdown of those units, he says 50 percent sold for under $200,000, 20 percent went for between $200,000 and $400,000 and 30 percent cost over $400,000. 

Resorts are king?

Even as tourism numbers are dwindling and the overall economy is in trouble, some developers still see large-scale resorts as a worthwhile gamble. In October, Achour Holding held a launch party for the Eden Rock Resort, which will include a hotel and a 22 story residential building, along with chalets and cabins. The resort is located on 22,000 square meters of sandy beach at the southern end of Ramlet al-Baida, and the starting price per square meter of a property is $16,000. Wissam Achour, CEO of Achour Holding, did not respond to several interview requests to discuss the project. However, Achour is not the only one pushing ahead with a big resort. 

Sayfco Holding is also planning a $1 billion resort just north of Beirut in Zouk. Tentatively named Azur, Yerevanian says the project, which includes an offshore marina to be built on 50,000 square meters of reclaimed land 500 meters off the coast, will be divided for permitting purposes into two, as a presidential decree is required to build a marina. He said that construction of the resort should begin in a few months while the marina will take longer. “We didn’t want to tie the permit with the marina” to electing a new president, he says, so the company is seeking one permit for the on-land resort and another for the marina. “Hopefully once a president is elected, we will work and get the presidential decree for the marina and work on the marina,” he says. The marina island, he says, will be connected to land via one bridge for vehicular traffic and another for pedestrians. The idea, he explains, is to keep the actual sandy coast open to the public, as stipulated by law. 

MENA Capital’s Sawabini says his company is also thinking of getting into the resort business. Asked if another resort is the wisest option, he keeps his cards close to his chest. “It has to be a resort that has a theme to it and is certainly different than what’s available in the market,” he says. So what is the market missing? “I can’t tell you,” he says, reiterating only, “it will have to be different.”

Looking abroad

In late 2013, both Prime Consult and Plus Properties, local real estate intermediaries, announced they were heading overseas to help boost their bottom lines. Both were interested in selling properties in Europe (particularly Spain and Cyprus) to well-heeled clients keen to get residency permits. Spain was offering residency for anyone who purchased a property worth €500,000 (around $623,000), while Cyprus offered residency permits for a little less, €300,000 (around $374,000). Prime Consult’s owner Massaad Fares told Executive in January that he was primarily looking to sell properties in Spain and figured the Lebanese wouldn’t be his main client base. For him, the scheme did not work very well. He told Executive via email in mid-November that “the whole exercise didn’t directly contribute much to Prime Consult’s turnover in 2014.” However, he says it did help the company realize “that we could start a new project in Marbella, Spain, oriented to British, Norwegian and Russian clients, totally uninterested in the residence permit issue, but in a nice upper market modern product, well designed, well built and well priced, so off we go, Prime Consult is now looking into reinvesting in Spain.” While insisting that Lebanon will remain Prime Consult’s “most important” market, he notes: “When your main market is going through a slow down, one needs to look into other services and other markets to sell.”

MENA Capital’s Sawabini agrees and says his company is also looking into visa-related property sales in Europe. Asked if more developers are making the same decision, he says, “If there was one [developer] who wanted to do this a year ago, there are 10 today in the region.” He says MENA is also looking to build in Iraq, where the company has already done work, and Saudi Arabia.

If not now…

However, Nabil Gebrael — a real estate agent with Coldwell Banker and the chief financial officer of Cascada Village, a mega project in the Bekaa near Zahle that includes a shopping mall — argues that the slow down in activity means now is the perfect time to go shopping for a new home. “It’s a buyer’s market,” he says. 

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.

2 Comments

  1. Paul Kazarian said:

    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.

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