Lebanon has all it takes to be a haven for real estate investors; no crash in property prices is known to have ever driven desperate developers to leap off their office balconies.
Even when real estate financing bubbles were bursting in neighboring countries and across the Atlantic, the case for Lebanese real estate remained strong, with compelling fundamentals and more specifically, guaranteed tightness in land supply.
Traditional real estate funding — with cash, help of family, bank loans and some government-subsidized schemes — is as deeply entrenched in Lebanon as is the national preference for real estate as an investment. So far, what remains scarce within Lebanese borders is private equity (PE) real estate funds. But some entrepreneurial minds have placed their bets on fund-type private equity investing in the local real estate scene, arguing that Lebanon’s property boom (most of the $14 billion in FDI inflow since 2008 was funneled into real estate) and ongoing maturation of the sector are signaling opportune times for professional real estate private equity investments, also called REPEs.
Lebanon’s maturing market may have created the need for REPE services, as they also serve as an alternative to (tightening) debt financing. “The 50 million square meters of construction permits obtained since 2008 will drop their final products onto the market within the next three years,” says Ralph Chahine, the head of private equity for MENA Capital, a Beirut-based financial firm. “If we estimate that 70 percent of that number is sold, and that a small portion will remain non-built, the remaining number is large enough to pressure banks to make more calculated decisions.”
Currently managing three real estate private equity (REPE) funds in Lebanon (though registered in the island of Guernsey in the English Channel) and one Lebanese offshore dedicated to investment in Iraq, collectively worth over $225million, MENA Capital is one of Lebanon’s largest managers of REPE investments.
New kids on the block
Recently a new REPE player came to the table and is raising cash for its first project, a 23-story residential tower, Trabaud 1804, in Ashrafieh. The firm’s name is Capstone Investment Group, and its chief executive officer, Ziad Maalouf, states the company’s case in similar terms as MENA Capital’s Chahine.
Now is the time for REPE in Lebanon, Maalouf says, “Money at the bank has been losing value; there are fears of inflation around the world, so people are looking for solid investments that they can also exit after a definite period of time, especially in a market that has good fundamentals and where real estate prices have not dropped.”
Private equity plays in real estate have emerged as institutional acquisitions of income-generating assets in developed markets, but their relatively aggressive, opportunistic model (which requires high capital investments to be locked in for a period of time) have higher risk-return profiles. Differences between investing in a REPE venture and partnering with a traditional real estate developer include the REPE’s systemic approach with a time-phased payout structure to the investor and a strong profit incentive for the REPE manager.
“We have the structure of the fund, without having to call it as a fund… because of the lack of proper fund regulations in Lebanon,” says Capstone’s Maalouf. “There are no ‘Lebanese domiciled’ funds investing in real estate, the ones in Lebanon [regulated by the central bank] are mostly money market funds. The laws, rules, regulations, support, back office and administration necessary to create and manage real estate funds in Lebanon leave much to be desired… so we opt to register outside [of the country].”
Capstone’s development management agreement (with the holding company which owns the land) works the same way as a fund, taking a management fee of 8 percent of construction costs. Carried interest is applied at 20 percent of the profits above a rate of return of 10 percent, meaning the fund manager will be eligible for a substantial share in profits that exceed a baseline return under the agreement with the investors.
The $45 million cost of Capstone’s first project (for land and construction) is financed by an equity-debt combination and the structure projects an internal rate of return of 25 percent or more for investors.
An investor committing a dollar in the fundraising phase (year 0 of a project) will get “back at least two dollars in year three or four; investors would double their investments in a period of three to four years,” claims Maalouf. So far, as half of the apartments (ranging from 290 to 445 square meters) have been pre-sold, revenues exceed $65 million.
PE investments in Lebanese real estate carry little risk as opposed to PE investment in other asset classes, according to Maalouf, because one can foresee an exit after a certain period of time — usually three years. “If I invest with an entrepreneur, I cannot get my money out of this company unless he takes his company public, or he sells his share to another company or liquidates his investments. In real estate’s worst case scenario, if you don’t sell the apartments, you can rent them out, and turn that investment into an income producing asset.”
Maalouf told Executive that Capstone applies “a transparent bidding process for all the tenders, and the decision is taken by [the board of directors] who are the representatives of the major investors in the project and meet monthly or as needed.”
Uphill battle
But there are nonetheless reasons why REPE and comparable schemes may face difficult market entry in Lebanon. As Lebanon does not have mutual funds, insurance companies, or other large players actively investing in PE, around 70 percent of investors in established funds like MENA Capital’s real estate funds are high net worth individuals (HNWI), “unlike developed markets where this percentage is more around 13 percent, or even the region where around 30 to 35 percent are HNWIs,” says Chahine.
Transparency of PE funds, which has been described as underdeveloped across MENA, is not exactly the Lebanese forte. Comparing promised returns or even comparing exit timings of two different funds is difficult anywhere, especially in Lebanon, even if the funds are registered outside.
The main other issue for REPE funds in Lebanon would be the limited exit options. Chahine said REPE may garner a slow and skeptical reception in Lebanon, especially if investors are asked to put their money into a family-owned and managed private equity company.
As Capstone settles into a nascent PE market, the firm is eyeing the central district for future projects. It has set a nearly $50 million budget to acquire land and construct a modern office tower in the vicinity of Solidere, “because we believe there is lack of modern office space in Beirut today,” says Maalouf.
Meanwhile, the changes in real estate demand in Lebanon are weighing on MENA Capital’s pending and future plans; “Certainly, we cannot afford to turn a blind eye on the changes in the market… in some of our projects, we did split some apartments to answer requests for smaller units. We are now working on a couple of projects in Lebanon with apartments ranging from 100 square meters to 250 square meters,” says Chahine.
