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The components of the most resilient market in the region

The components of the most resilient market in the region

by Karim Makarem

Price increases for the Lebanese real estate market are not expected for the remainder of this year, in fact the buzzwords have become stability and correction. But we must not forget that the real estate sector in 2008 has been very buoyant overall. Prices in the first half of the year rose around 40% on average and two to three years prior to that, there were also year-on-year price increases averaging 30%. The main factors for the increase in prices since 2005 have been rising construction costs, expectations, financing options and most importantly demand.

Since the economic crisis began in September 2008, we have seen a slowdown in the number of requests for new properties. In turn, prices have stabilized and for certain over-priced developments, a correction is underway, bringing them in line with the market. Whether developers are passing on reduced construction costs or simply revising their profit expectations to a more realistic level, it is both a healthy and necessary correction. Demand, however, can be explained by better understanding its source.
In our experience, the majority of buyers have been predominantly Lebanese, and expatriate Lebanese in particular. Lebanon’s expats have become the new middle class, which was lost during the civil war. Many in this fast growing community earn significant monthly salaries and have helped boost the real estate market in Lebanon. You can probably see a correlation between the number of Lebanese immigrants to the Gulf and the increase in prices over the last few years. Add to that the factor of high loan to value house loans, a recent phenomenon in Lebanon, and the demand for property grew, sustained mainly by its own nationals.
When the crisis hit outside of the US, job uncertainty and losses in the stock markets froze some of the demand from expats. Therefore, the full extent of the slowdown in demand will be partly dictated by the numbers affected and general confidence levels.
One factor that will cushion the effects of the financial crisis and its consequences is the high equity to debt ratio in Lebanon, which has meant that:
1. Banks are not witnessing the customer defaults of their overseas counterparts
2. Developers and landowners, many of whom have limited exposure to debt do not have to slash prices to appease the banks
3. Pre-mortgage day end-users have very limited liabilities if any, due to the lack of access to debt at the time
4. The great majority of recent, highly geared end-users are bound to be safe as is the case anywhere else.

Regulating stability
Recently the central bank suggested limiting the level of loans to value ratio to 60:40, which is another reason why there might have been a little bit of a slowdown in demand. There are a number of factors, ranging from the decision of the central bank to market sentiment, which has reduced demand. All of these somehow came together and have created a situation which is in fact healthy in that it has put an end to reckless pricing.
Another cushioning effect has been the lack of speculators in the property sector. Speculation such as what we witnessed in some parts of the Gulf is less common here, most likely because of the political instability that has kept those investors away. Perhaps then our political instability has served us positively for once.
In fact, the instability in Lebanon has taught us much and inadvertently inspires confidence for the future of the property sector. If the political assassinations, demonstrations, unrest and civil strife occurred hand-in- hand with an average 30% per annum increase in prices, then we must hope for the best in what is surely the most resilient real estate market in the region. We must count ourselves lucky that several factors have come into play at the same time to help us overcome what are difficult times for many.

Karim Makarem is the director of Ramco Real Estate Advisors

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Karim Makarem

Karim Makarem is director of Ramco Real Estate Advisers
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