In light of the strong price performance of the Lebanese real estate market during the last three years, a popular topic of discussion across the country has been whether we are in the middle of a market bubble. Are prices destined to fall, or is there truth to the old Lebanese proverb that land in Lebanon is as precious as gold?
As with any product or service, real estate prices will always be governed by the laws of supply and demand. In addition to increasing local demand, the real estate market in Lebanon also attracts buyers from the Lebanese expatriate community (which some estimates peg at as much as 15 million), and from wealthy Arabs. In a region mostly dominated by desert plains, Lebanon’s temperate climate, lively nightlife and diverse geography stand out like an oasis in the sands.
However, in the first nine months of 2010, sales to foreigners actually dropped by 0.7 percent relative to the same period last year, according to Bank Audi.
Strong end-user demand from both residents and non-residents, coupled with a limited land area, has driven increases in real estate valuations. The average value of property sold in Lebanon increased 28 percent in the first nine months. Some areas of Beirut, such as Downtown, Verdun, and Achrafieh, are especially sought-out but also have relatively low land availability; consequently, these areas have experienced the highest increases in value.
Given the sharp increase in price, which starts around $6,000 per square meter in downtown, demand has shifted to the suburbs of Beirut (such as the Metn) where prices are comparatively more affordable.
Again, once fair value is reached in these suburbs, the trend and demand will shift further out into the outer suburbs (Keserwan/Jbeil from one side and Aley/Chouf from the other side). As in the development of any country, high prices in the city center will displace local demand farther out to the periphery of the city. A crucial factor for this continued growth is the development of an adequate transportation infrastructure for residents to easily commute from these suburbs to their area of employment.
Finally, from a financial perspective, the key ingredient in past real estate bubbles around the world — debt-fueled speculation — is for the most part missing in the local market due largely to wise governance from Banque du Liban, Lebanon’s Central Bank. Given the regulatory limits on debt extended by banks for real estate construction, most major developers fund a majority of a project’s cost with equity and, to a lesser extent, cash proceeds from the pre-sales of apartments. Even credit facilities to the buyers of a residence are typically only extended if a substantial percentage of equity has been injected into the transaction.
These positive factors do not mean that prices will forever increase at double-digit rates in all areas, or that a slowdown in sales activity will never occur. Even with positive market dynamics, the type of supply must follow changes in buyer requirements or desires. For example, as real estate prices rise in Beirut, demand is increasingly shifting to smaller apartments (below 200-250 square meters), the typical market demand of major European cities. Periodically, political or security fears may also sometimes cause a temporary drop in sales volume. However, the long-term fundamentals of the real estate sector in Lebanon are sound.
Given its distinctive cultural heritage, geography and the resilience of its people, there will always be strong demand for real estate in Lebanon from residents and non-residents alike. This demand, coupled with a relative scarcity of supply, will support prices in the long run. Monetary authorities in the United States and Europe may have the power to run their printing presses and to create dollars and euros at will, as they have recently shown, but God stopped creating land in Lebanon a long time ago.