Despite cautious optimism in some areas of the residential market, development anywhere in Lebanon is and will continue to be fraught with problems, especially corruption and suffocating and over complicated bureaucracy. Developers are at their wits end
“You try to be very legal but they always find a way to tell you it’s not legal so that they get what they want. They want money,” said Karim Bassil of La Constructa, who said that bribery was costing him 1% on every project.
This was a sentiment echoed by Karim Ibrahim, managing partner of Contract s.a.r.l. “We want less corruption,” he said. “When we do a budget for a new project, we must allocate at least three percent for bribes. I’m talking about projects of $50 million, of $40 million. If not, you will never get a permit.” Ibrahim has three projects on hold because he is missing one, seemingly unobtainable signature. “I think we may have to wait for two years, because one guy is not good friends with another. Meanwhile, we are paying 10% interest at the bank, and they don’t give a sh*t.” The situation is unlikely to change soon, predicted Ibrahim. “It has to be changed from top to bottom. I don’t feel that’s going to be the case soon … when you bribe in Lebanon today, it’s like paying tax. There is an unwritten quota: this guy has to get $20, and this guy has to get $1,000 and this guy has to get some gold pieces.” Unchecked, corruption will continue to exact a heavy toll on foreign investment: “We’ve noticed that many foreign investors either let go or are not interested because of corruption and the bureaucratic procedures they have to go through,” he said.
And it goes on – Chahe Yerevanian, managing director of real estate firm SAYFCO finds himself allocating bribes under “miscellaneous costs.” “The developer has to give left and right, even though he is getting his permit on the dot legally, according to every single law. It’s not called corruption. It’s a way of life,” he said. Elsewhere, a sluggish market will have to be aided by lower interest rates. Ibrahim branded the 12% rate developers must pay on construction loans “humongous.” The financial burden is rendered all the heavier by the government corruption-induced delays. Meanwhile, “the banks are just making money, more profits,” he noted wryly. For his part, Yerevanian believes the government should, over the next two years, lower the apartment registration tax from 6% to 2%, or even a symbolic 1%. For other real estate areas in Lebanon, the news is not much brighter. Office space is in slow demand and prices have tumbled by as much as 60% in the last eight years. Demand will continue to lag behind supply “for some time to come,” industry insiders agree. According to Raja Makarem, managing partner of RAMCO Real Estate Advisers, only new buildings in the BCD will fare better because they boast modern facilities, parking, and plenty of open plan floor space. Thus, the new downtown Atrium building is fully occupied, he said, and the An Nahar building is 50% to 60% full. “In the short- and mid-term, there are big question marks,” conceded Yerevanian. Demand in the BCD, say many professionals, is being created primarily by domestic companies that want to open offices there to bolster their image, not by international newcomers. “There is now quite a bit of stock that can be obtained for between $80 and $250 per square meter, depending on the quality, amenities and location,” observed Makarem.
Despite the take up of new stock, older offices in the BCD continue to perform poorly and the excessive supply phenomenon has hampered Solidere’s efforts to fill the space available. “If you look up at the offices [in the Solidere area], the majority are empty,” said Ibrahim. He said clients are opting to rent elsewhere – for example in the Sodeco Square building, which he manages and where 150 offices are all full. “Why? Because I rent for at least 25% less than downtown, I am only two minutes away from the area and I have secure parking,” said Ibrahim, adding that the paucity of parking space downtown is one of Solidere’s biggest problems. According to Yerevanian, the retail market has proved far more vigorous over the last two years, advancing at a tremendous pace. Noticeably, the mall is in. Testimony to this is borne by the numerous shopping center projects recently completed, on the verge of completion, underway, or in the pipeline. “They all seem to be attractive for major retailers,” said Makarem, “but the traditional retail market is going to suffer.” Yerevanian agreed, saying, “The future is for these kinds of malls to flourish.” “This is going to change the way retailing happens in this country. We’re going to have enormous, acclimatized centers with lots and lots of parking,” said Michael Dunn of Michael Dunn & Co. “Where you go shopping today isn’t where you’re going to go shopping in five years.” Although prices at the ABC Achrafieh mall can exceed the $1,500 per square meter mark, demand for retail space has been high. The center is reportedly fully booked, but its hoped-for success may be offset by potential traffic problems – it is slap bang in the middle of a somewhat constrictive residential neighborhood. “I think they got the position wrong,” remarked Dunn. “I think they’re going to struggle.”
As a retail project, Solidere is flourishing relative to other retail areas and will do very well in the long-term, industry executives said. Most available retail space in the area has been taken, with Maarad Street forming a principal artery. And the downtown “Souks” project is eagerly awaited. “The downtown city center may possibly take over from Dubai in terms of quality shopping,” Dunn remarked. “Architecturally, Solidere is gorgeous … and big names are going down there like Virgin, Nike and so on,” noted Ibrahim. “It has become an attraction. Today, if you do not have a branch – whether you are a bank or a shop – in Solidere, you’re out, you’re not among the top players.”
Consequently, since Solidere’s inception, retail prices have risen from about $400 a square meter in 1998 to, in some instances, over $1,000. “It has become a fact that Solidere’s commercial stock is a success. It’s become irreversible,” Makarem stated. In fact, according to a survey executed by real estate consultants Cushman & Wakefield, the BCD ranks 34th on a list of the most expensive retail locations, behind areas in Turkey, Israel and Kuwait. Solidere’s commercial triumph has not, however, affected the trendy Verdun shopping area much because the latter has proven a strong, up-market retail street, with retail costs surpassing $1,000 per square meter in some areas. “In the future, though, Solidere will affect everyone with its shopping,” predicted Dunn. As for Hamra Street, although it is no longer as resplendent as before the war, it remains an established market. “It’s still the most successful retail street in Beirut because it offers what a real retail street requires – a straight line continuity of shops,” he said, adding that the face-lift Hamra is undergoing should further buttress its evolved position as a caterer to the mid- and low-end market. Real estate prices dropped in Hamra during the war but have since regained the $500 to $700 per square meter range. However, east of Beirut, Kaslik has been squeezed by the emergence of Solidere and the migration back to town, with the architecturally ailing main shopping street of Furn al-Chubbak likely to be hit hard. “But the Jal al-Dib, Las Vegas-style strip, complete with its MacDonald’s, Burger King, Roadster Diner and B-to-B will prove resilient,” predicted Yerevanian. “It’s got a niche, as it has its own market. It will never suffer because of the success of Solidere.” Finally, a tip: Gemaizeh is the buzzword in the real estate sector. Industry insiders are tipping the area as an up-and-coming residential neighborhood that will mix modern with relatively untarnished traditional Lebanese architecture. The area’s assets are self-evident: it is close to the commercially thriving BCD, but has retained an almost bohemian identity – setting it apart from the artificiality that critics say typifies much of the reconstructed, post-war capital. “Gemaizeh is my tip for the future,” said Dunn. “It’s adjacent to the BCD, it’s dirt cheap, it’s got some beautiful architecture. What an investment for the future.”