In August this year, Capstone Investment Group was trying to conclude the acquisition of a prime piece of land on Abdel Wahab El Inglizi Street in Ashrafieh. As part of our private equity activities, we invite a select group of high-net-worth individuals to join us in each investment, and allow them up to two weeks to send us their indications of interest. In that specific deal, and since everyone perceived the real estate market in Lebanon to be bearish, we gave investors one month to get back to us. However, within only a week, the deals were two and a half times oversubscribed; demand came from Lebanon and the Middle East as well as Europe, not only from Lebanese or Lebanese expatriates but European individuals and institutions.
Of course, we were only able to accommodate a limited number of investors, but the unusual interest from Europe was baffling. After all, the political situation in Lebanon leaves much to be desired; economic growth has slowed down, the real estate sector is going through a perceived period of stagnation and the region in general is in the process of upheaval. So why would Europeans want to invest in Lebanese real estate at this time?
Simply because Europe’s economic woes are no better and the venues for viable investments are drying up. Inflationary pressures are rising, stock markets are sluggish and cash at the bank has been losing value. Furthermore, the exponential spike in public debt in many countries, without a feasible plan in sight to reduce it, has put the whole fundamentals of the Eurozone in question. As a result, some are saying that the developed world is heading towards Japan-style stagnation.
In contrast, the real estate sector in Lebanon has traditionally been one of the country’s most successful after banking and tourism. Given the scarcity of land and the steady demand from both residents and expatriates, Lebanon’s real estate has always been considered an attractive low-risk investment, which over the years, and despite the chronic political instabilities, has generated decent returns.
Furthermore, reduced interest rates, low taxes, high liquidity and the availability of long-term financing from Lebanese banks, considered fiscally conservative by international standards, are contributing to the fundamentals and resilience of the market. In addition, foreign investments remain robust and are expected to reach over $5 billion in 2011, with more than 60 percent allocated to real estate. According to the International Monetary Fund, the attractiveness of Lebanon as an investment destination has been, to a large extent, boosted by the faith in its real estate sector.
While regional peers from Dubai to Morocco suffer, demand for properties in Lebanon continues unabated and prices in general remain stable, despite certain predictions to the contrary. It is true that the market experienced a period of unusual growth between 2005 and 2009, but all indicators today point to normal growth rates, supported by the unwavering demand from Lebanese expatriates who buy real estate in their homeland as a long-term investment and not for speculative purposes. In fact, it is estimated that more than 80 percent of the market is driven by end-users and not by speculators.
There is no doubt that a significant amount of capital is sitting idle in Europe looking for viable investment opportunities. If Lebanon is to attract international institutional investors, real estate development has to be transformed into a more sophisticated and professionally run business that abides by international norms of design, luxury and quality.
Most importantly, local developers will need to sharpen up their management skills and be able to set up the right financial and legal structures that optimize fiscal benefits and maximize returns, which in normal circumstances should not be less than 20 percent per annum. In my view, such returns can be achieved today by carefully investing in the right opportunities in smaller residential units, Grade A offices (which are in short supply in Beirut today) and retail, in addition to resorts, hotels and furnished apartments, as tourism continues to be an important pillar of the economy.