Stock of Politics
Investing in stocks is pure speculation. But for Solidere, the most
active company on the Beirut Stock Exchange (BSE), taking
up over 70% of the total market cap at around $1.26 billion,
speculation zeroes in on what happens in the world of politics.
Whenever peace negotiations in the region have picked up,
investors have pounced on Solidere shares. During elections its
shares traded on the BSE and GDRs had an impressive rally
based on anticipation of Rafic Hariri becoming the next prime minister
(see graph). “We saw something we haven’t seen in two and
a half years,” says Jean Riachi, chairman and general manager at
Financial Funds Advisors. “Lebanese people were calling to buy.
People we didn’t know came and placed orders. It reminded us of
the good old times in 1997.”
What got investors excited is clear. When Hariri ‘s stint as premier
from 1992 to 1998 ended, Solidere’s business was stopped dead.
Hariri, the founder of the real estate company responsible for
rebuilding the Beirut Central District (BCD) and believed to be the
largest shareholder, is seen as the one who can get the company back
on track. “I believe Solidere will benefit from Hariri’s return,” says
Ziad Maalouf, vice president at Middle East Capital Group.
“When he was in office, it never faced similar problems. Hariri will
grease the wheels and make things move.”
The stranglehold on Solidere has been a permit problem. Since the
current government took charge, it has been nearly impossible for the
company or developers to finish projects (see “Can’t get no satisfaction,”
June 2000). Decrees have been brought forward to solve the
slowdown. The most important one is to settle the discrepancies
between Lebanon’s old construction code and Solidere’s building
decree 4830. According to Oussama Kabbani, department manager
of urban management at Solidere, with the speed that the decree passes
from one government institution to another, it would take up to three
years for it to pass. The high council of urbanism was established early
this year to help work out discrepancies. Not only did it provide little
help, but the council expired in the first week of August.
“We can no longer get permits through that have discrepancies,” says
Kabbani. When EXECUTIVE went to print, there were 27 occupancy
permits idling and 23 construction permits collecting dust.
Also important is the decree to let Solidere develop the souks. It’s
well known that once the area is running, business in the BCD will
pick up dramatically. No surprise: The decree, in need of only a signature,
has been with the council of ministers for five months.
Most believe that if Hariri becomes prime minister he will be able
to act fast. “He’s pragmatic and he has business sense,” says
Kabbani. “If someone like him is in power, give it three months and
all decrees will be passed and all can be resolved.” Although the municipality
of Beirut is where the permits are stopped and is under the
thumb of the minister of interior – Michel Murr who has a beef with
Solidere over Murr Tower – many believe that if Hariri is in power
and there’s a council of
ministers that he can
work with, the situation
will be fixed.
According to Hani
Shammah, senior
regional analyst at
Societe Generale, the
recession, which has
the real estate sector
in a vice, will not be a
major obstacle.
“Solidere is a bit insulated from the recession. It’s the only place where there’s hope
of economic activity during recession,” says Shammah. “Plus, it’s
been on hold. It will only grow.” If Hariri is appointed prime minister,
Shammah will increase his latest projected sales and earnings
from 2001 and onward (see graph).
But Shammah argues that for the long haul, stock investors will have
to bet on another political variable: regional peace. “Today, Hariri is
a good bet. If appointed, shares will shoot up. When decrees are signed,
the permit problem is cleared up, prices will continue to move,” predicts
Shammah. “But after that they will probably level off or drift lower
until the next catalyst: a peace agreement.” He argues that Solidere’s
growth cannot be sustained on local businesses moving into BCD.
“Solidere’s upscale properties will be wonderful for a regional headquarters,
but it needs those regional factors that will beef up demand.”
But the first indicator will come this fall when the prime minister
is supposed to be appointed. The chances are good that Hariri will
take office, but it’s not certain: There are still power plays involved
(see pp. 22-25). But most stock jockeys agree: If you believe that
Hariri will soon be back at the helm and want to see your
stocks rise quickly, now is the time to bank on Solidere.
“Solidere is a stock that is very politicized,”says Maalouf,
“if Hariri returns, investors will buy into Solidere and it
will rally.”
