The lights are on, but no one’s at home

Greg Demarque

Property developers with projects in and immediately around Beirut are in trouble. In late November, Massaad Fares – president of REAL, Lebanon’s syndicate for real estate brokers and consultants – explains that a years-long sales slump at the highest end of the market is having a wider economic impact. Developers with too much exposure to the capital can’t pay their bills, leaving suppliers, contractors and even banks in the lurch. The boom years from 2005 to 2010 saw dozens of projects offering large apartment units launched in Beirut at a time when prices of both land and finished property were skyrocketing. Market appetite for these units began waning in 2011 and was all but gone by the end of 2014.

Pretty facade, ugly interior

With this in mind, Fares says he and Namir Cortas – head of the developer’s syndicate (REDAL) – paid Banque du Liban (BDL) Governor Riad Salameh a visit to wish him happy holidays in December 2014. Fares says the two explained the problem and Salameh promised to do all he could. Not that the central bank wasn’t already doing the sector favors. Developers have been building green with the help of subsidized loans which BDL has been offering for the past few years, Fares said. Since 2013, BDL stimulus packages have targeted the real estate sector, with over 75 percent of stimulus-package-related loans facilitating the purchase of first-time homes, a BDL official confirmed during a World Bank event in early November 2016.

In 2015, BDL issued a circular aimed at helping developers with cashflow problems restructure their debt with commercial banks. However, Fares and other developers Executive spoke with since the circular’s publication confirm it is being underutilized.

These measures have helped keep the market moving in Lebanon as a whole, but have done little to benefit developers with large apartments (read: over $1 million) to sell in Beirut and some of its immediate suburbs, Fares argues. He explains that when he met with Salameh in December 2014, he assumed there were around 1,000 apartments over 300 square meters collecting dust on the market. Once the governor expressed interest in helping move some of these units, Fares says REAL and REDAL conducted in-depth market studies to understand the full extent of the problem. He says that BDL conducted its own study as well.

Fares is light on the details of the study’s results (saying they may be made public in the future), but tells Executive that somewhere between $3 billion and $3.5 billion worth of property simply will not sell. According to RAMCO Real Estate Advisors, the average asking price for a new apartment in municipal Beirut is $1 million (see comment, page 136). Prior to the market stagnation that began in 2011, Fares says developers were able to find buyers for apartments with price tags of $2 million and higher. That’s no longer the case, he argues. Offloading units in the $1 million to $1.5 million price range is becoming increasingly difficult, Fares says.

Offloading units in the $1 million to $1.5 million price range is becoming increasingly difficult

Help needed

In June 2016, BDL threw the sector another lifeline with Circular 427, which allows banks to lend to property speculators in certain circumstances. Between 2007 and 2010, property prices in Beirut soared to highs that priced most Lebanese out of the capital. Analysts and developers argued that real demand was the culprit as speculative purchases were minimal. Unlike in other markets, the rules in Lebanon barred bulk apartment sales. Circular 427 opens that door, if only a crack. The circular allows banks to lend to investors keen to buy finished property from a developer in distress. Making use of the circular, a fund can borrow 60 percent of its capital to purchase existing stock on the market, provided that 50 percent of the value of purchased property is already in debt. All purchases under 427 must be re-sold within ten years.   

While they welcomed the circular with open arms, both Fares and Mireille Korab, head of business development at FFA Real Estate, wish it had gone a bit further on the incentives front. Korab notes that lack of language allowing for a preferred lending rate for anyone wishing to raise a real estate fund could suppress appetite for such a thing. She argues that the circular will be equally, if not more, helpful for banks with nonperforming loans held by developers on their books. Pressed on just how large a problem unsold, expensive units are for the sector at large, Korab becomes philosophical. It’s not the actual market impact that matters, she argues. Rather, if one or two well-known developers were to fail, the psychological effect of that news on the market would be more disruptive than the actual bankruptcies.

“I’d be lying if I said we didn’t want subsidies,” Fares offers. “If developers’ money is stuck in these apartments, they can’t do anything else. If the developer has money, they can do more for the market,” he enthuses, pointing specifically to settling arrears and new investments. Asked if he had seen appetite in the market to make use of Circular 427, Fares smiles. In late November “two crazy guys” started work on raising a $1 billion fund. In the short term, the fund’s goal will be “to buy as quickly as possible,” Fares says. When asked if he knows who the “two crazy guys” are, he replies: “Massaad Fares and Namir Cortas.”

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.

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