Screech! Honk! And a few polite words. That is what it takes for the 40-ton dump truck on a busy intersection at noontime in the middle of Beirut’s Ashrafieh district to make cars give him enough space to squeeze a left turn onto the district artery, Independence Avenue. Neither the narrow side street from which the trucker emerged with a load of sand and rock, nor the main street, is suited for heavy vehicles. But a fleet of his colleagues will repeat the exercise every 20 or 30 minutes throughout the day, and not only on this one sunny November day. They are hauling excavated soil from a massive construction site on the southern slope of the Ashrafieh hill over the course of several weeks, so that the foundations for another multi-story apartment block can soon be poured.
The project where these lorries are loaded is not the only hyperactive property excavation in Ashrafieh in the fourth quarter of 2012, not by a long shot. Other earth removal motorcades are operating on other sites all throughout the busy district. Construction is ongoing along the district’s perimeter, at its very center and highest point, and on many of the narrow streets in between.
Projects are digging deeper and building higher than ever before, with residential towers reaching 20, 30 and even more than 40 floors into the urban sky. Around the 600-meter-short Omar Haimari Street, which marks the district’s highest stretch, just 40 steps away from Independence Ave, three massive developments are under way, including the 43-story Sky Gate, which, at only half its final height as November ended, was already visibly redefining the Ashrafieh skyline. It, and what is slated to be the even taller SAMA Tower that is reaching toward its 195-meter target height just west down Independence Avenue, are but two of a tide of projects altering the Beirut cityscape, and the fabric of suburban areas and the countryside around the capital, in profound and unprecedented ways.
The numbers don’t tally
At the changeover from 2012 to 2013, Ashrafieh is only one of many hotspots of construction activity; other hardcore development areas are the central district managed by urban renewal company Solidere, and parts of the ring road around the Beirut Municipality territory where some trash lands spotted with ugly commercial structures have been discovered by developers. Outside of the capital and immediate suburbia, residential clusters in the Metn region and leisure areas higher up the mountainous surrounds are flush with projects.
What makes this fin-de-2012 image of high-gear development activity a puzzling picture is that it is being splashed across the small Lebanese canvas at a time when all indicators on real estate are, at face value, negative.
According to indicators compiled in the Bank Audi third-quarter economic report on Lebanon, cement deliveries, the number of real estate sales transactions and issuances of building permits were all down in the first three quarters of 2012. Property sales fell 9.2 percent for the nine-month period from a year ago, and contracted by an even higher 11.4 percent when comparing just the third quarter of 2012 with the same period in 2011.
The eight-month figures on cement deliveries were down to 3.4 million tons in 2012 from 3.7 million tons in 2011, and in square meters (sqm) worth of construction permits, issuance contracted to 10.7 million sqm 2012 from 12.4 million sqm in the first nine months of 2011. This constitutes drops of 7.9 percent on cement and 14.3 percent on licensed floor space. When factoring in the drop in property transaction numbers, the trio of real estate sector indicators shows, at least in theory, downturns on completed, ongoing and planned projects.
The caveat here is that these numbers are likely not entirely accurate. Property registrations are often delayed for purposes of tax avoidance and building permits don’t always translate into the same actual built-up area. Even cement figures have been suspected to be muddied by grey exports.
However, while developers and intermediaries in the real estate industry almost uniformly say that the situation must not be called a crisis, developers tell Executive that the slowdown in their activity in 2012 is real and the outlook for 2013 is muted.
Sales developments for the real estate projects of MENA Capital (which focused traditionally on the high end of the luxury market in prime areas of Beirut and whose largest project is Sky Gate) were negative in 2012 and 2011, confides Nabil Sawabini, the company’s chief executive. “The cumulative value of sales has been declining in the past two years; we sold more in 2010 than in [each of] 2011 and 12,” he says. Nonetheless, units in Sky Gate are about two-thirds sold, he adds.
Georges Chehwane, chief executive of developer Plus Properties, and of communications media and real estate conglomerate Plus Group, says regional uncertainty contributes to the slowdown, but adds that, “the main part is the large number of units that [have been] in the market since 2009, as there is a gap between the yearly demand and the yearly offer of supply. This is the main problem today in addition to the political situation in which people are not buying.”
The current real estate market confronts investors with a state of uncertainty, says Houssam Batal, chief executive of developer Prime Projects. “It is not very clear to say where [the market] will go. There is a feeling that there will be an oversupply in many product types. The main thing that is affecting the market right now is the political situation and instability, and the grey outlook related to Syria and to domestic issues that we have. The investors are worried about the dangers of bigger problems to come.”
Sadly for buyers, this does not mean that property bargains are going to abound next year.
“Demand has decreased, the economy is in a difficult situation and the future is somewhat blurred but prices for apartments and real estate, especially in prime areas, have remained stable and have increased in some cases. It is a weird economic picture,” says Ziad Maalouf, chief executive of Capstone Investment Group, a financial firm whose activities include real estate development.
Zardman, a developer that is fairly fresh in the market and claims to have seen moderate sales growth in 2011 and 2012 against market trends, also sees prices as moving sideways. “We have two sides to our business, addressing the middle class in the Metn region and the higher end market in Ashrafieh,” Makram Zard, the general manager of Zardman, tells Executive. “The Metn region was extremely good this year. Ashrafieh is doing well. I don’t think… that prices are dropping but sales are not quite as good as last year.”
Less for more
Maalouf’s and Zard’s assessment of unwavering prices fits with what other developers say, and statistics show that the cumulative value of property sales in Lebanon this year, despite the contraction in transaction volume, was up from last year. Correspondingly, the average value per transaction is the indicator that in 2012 showed the most pronounced gain for the year-to-date.
At $6.3 billion, the total value of the nine-month tally of registered property transactions was up 4.8 percent, but the average value per transaction increased 15.4 percent year-on-year to $120,000 from $104,000 for the January to September period, according to government figures cited by Bank Audi in mid-November.
The trend of price inelasticity is long-term. Although demand for real estate had been slowing since late 2010, expectations for lower prices harbored by property seekers had been disappointed even back then, according to Maalouf. “I have heard of a lot of people since 2009 and 2008 who had been delaying the purchase of an apartment in the hope of buying the same apartment later at a lower price. But this has not happened,” he explains.
At the junction of 2012 and 2013, the real estate market in Lebanon is a buyer’s market in terms of choice and options in up-market locations as long as a buyer has cash-stuffed pockets or a high and growing income. In terms of pricing, it is not a buyer’s market at all.
The market for the most important development resource, land, is also not a buyer’s dream. To the contrary, developers are faced with a very hard seller’s market, Maalouf adds. “Land prices have actually increased, despite everything. The weird thing is that expectations of land owners do not reflect realities. This is a catch for developers,” he explains. “On one hand you have buyers who see the prices for real estate as high and on the other hand you have land owners who have unrealistic expectations.”
Why so buoyant?
The reasons why even the oversupply of Lebanese properties does not generate much downward pressures on prices in the market for residential units are complicated.
One key factor is financial. Many developers in Lebanon self-finance, and the absence of funding pressure allows the economic self-interest of many developers to keep focused on achieving the maximal rate of return that they fixated about when embarking on their project. Developers in this category typically wait out the market if bid prices are below their expectation and can do so because they have no lending officers breathing down their necks.
Development activity may even be a one-off business for many and they base their profit modeling on building cost and land pricing, often adding in an upward revaluation of the plot during the development process — a reevaluation that, according to Zardman’s Zard, can be far higher than the amount that the interest component in a land financing agreement would represent.
Applying standard models where project companies are financed by equity from investors and by debt, or source revenues via off-plan sales, makes the developers more sensitive to market trends. This leads to more client-responsive pricing behavior and also supports rational adjustments of development activity, such as switching to more moderate unit sizes. According to Zard, developers like him — whose land value calculation in unit sales prices is based on land cost at purchase plus regular interest — transfer land value gains early on to the customer. “This is one of the reasons why our sales have been excellent when compared with the market,” he claims.
Oft-quoted rationalizations why property prices in Lebanon would not follow cyclical patterns that are familiar from other markets are the high density of the population, the small surface territory of the nation (167th among 249 countries and territories in the world by land size), and the even smaller size of land accessible for development. According to Chehwane, roughly half of the national territory is off limits for property development because of terrain conditions, agricultural usage and ownership by religious orders.
Weighing in on the demand side of the equation are not only the young families living in the country but also the outsized theoretical buyer pool of the so-called Lebanese diaspora, which comprises millions of Lebanon-born and descendent citizens of countries in South and North America, Oceania, Europe and Africa. The second notable source of external demand is from Gulf buyers. “The Lebanese market for real estate is very dependent on Lebanese living outside the country and also on foreigners,” says MENA Capital’s Sawabini.
Brand it, baby
Younger Lebanese who have acquired sufficient means to buy an apartment in the high-priced Ashrafieh market, by laboring as expatriate managers in Dubai or Riyadh, may be less attached than earlier generations to traditional ties of kin in their residential choices but they also display strong patterns of selectivity in property buying. It is the location and the “prestigious address” that matters greatly to them, according to Zard.
This means that developers are paying increasing attention to building a reputation and brand identity for their pricey towers.
Branding a project and defending this brand against copycatting is also crucial in differentiating a project, says Ayad Nasser, owner and chief executive of developer Loft Investments. “In Lebanon, 99 percent of the projects look the same,” says Nasser. “The entire market is focused on the 99 percent of the population [who buy those types of properties]. I am not marketing to a percentage. I am marketing to people who have that drive to live in a different project.”
The differentiation of his projects is not by location but by concept and design, services and quality, he claims, and in that space “it is very important to have a brand today. ”
But before discussing the future potentials of some branding or non-branding concepts on Lebanese real estate, or musing on the ironies of cement blocks bearing names such as ‘pretty house’ or ‘xyz gardens’, some much more elementary points call for clarification. Such as, how many floors of concrete are being cast presently in areas like Downtown Beirut or Ashrafieh? How many and what sizes of units are going to drop into the Lebanese market in 2013?
Prime Projects’ Batal, a university-trained professional in real estate, answers the question on the incoming supply by saying, “There are data reports suggesting that supply is broadening versus demand but I don’t know if these reports are reliable and accurate,” adding that he has no numbers on how many projects were going up in Ashrafieh in November 2012.
He is not alone. Loft Investments’ Nasser, who says his track record of delivery includes 270 apartments since he started out with a single suburban unit in 1994, is not convinced by market research or price comparisons. “I never consult statistics; I never do a marketing plan, nothing. We just feel it. I am very confident about my clientele. I have in my portfolio different clients who became friends and I know that 10 percent of those people will be my clients, so while I am buying the land [for a new project], I call them,” he says.
Nasser admits that he does not even know the asking prices in developments going up next to his projects, but he affirms on the other hand that Lebanon’s developers “need to assess the market and the government needs to put some rules.”
Both market assessment and better rules are points that Plus Properties’ Chehwane sees as paramount necessities. He is one of the players pushing actively for realizing a professional association of developers, which he envisions to have as its core activity the compilation and publication of sector data.
Chehwane adds that there are no statistics on the real property development situation in key areas such as Ashrafieh. When asked what he believes to be the number of projects and units under development in this very district, he answers , “100 projects, at least. I believe [Ashrafieh has] around 3,000 units today under construction.”
It is futile to query either public officials or private developers for an accurate number on buildings under construction in Beirut today. So to garner at least some idea of the actual number, Executive reverted to good ol’ fashioned journalism — a pad, a pen and pounding the pavement in a random part of Ashrafieh.
Within less than ten minutes walk on one trajectory only, ascending from the Hospital Dieu area toward Sioufi Gardens, Executive found six residential projects in progress, of which one looked ready for handover (14 stories), two 12-story ones were in advanced stages of construction and should be ready for occupancy in 2013, one was a six-story shell that was frozen and the two largest sites were in the excavation phase. One of these two will have 28 stories with 43 flats of 320 to 540 sqm. The other will comprise office, commercial and residential units in two towers of eight and 11 floors.
Next was a check of the cobweb of narrow passages and bumpy streets between this project site and Alfred Naccache Street. This little quarter revealed another five projects and one plot that looked ready for the start of excavation. The largest site here was an apartment complex nearing completion with four segments ranging from 13 to 20 stories. On the eastside of Alfred Naccache Street, three more new multi-story buildings added to the ongoing development tally of this southeastern corner of Ashrafieh, in an area fully coverable on foot within 15 minutes.
Expanding the random walk of Ashrafieh to a wider grid, Chehwane’s estimation of at least 100 ongoing projects doesn’t actually look far off the mark; if anything, it is an underestimation.
Bigger fish to fry
One has to note here that getting better data is a strategic need for developers; however, it is not an existential problem for the property makers. Their concerns and hopes lie elsewhere. The most important factor influencing Lebanese real estate now is Syria, says Capstone’s Maalouf. “If there is regime change in Syria tomorrow, I think this will have very positive spillovers on the market here. I foresee a boom [under such circumstances] simply because the confidence in the Lebanese real estate sector is going to be regained.”
For his part, Chehwane sees only temporary worries in the current oversupply with units. “The moment that we will have a positive atmosphere and positive situation, 50 percent of the stock that is available in the market will be sold. We need one year like 2006 before the war or 2008 before the crisis, and you will have a very good situation,” he enthuses.
From another, more public perspective, development takes on a different angle. Only reviewing the last five years, the cumulative square meter figure for building permits issued between January and August of each year comes to 39.85 million sqm. That is an addition of roughly 10 square meters per resident of Lebanon in a very short time, in a country that already feels stuffed with concrete buildings.
Despite developers chiming the marketable tune that land is scarce and unaffordable for them, it can be predicted that another tide of private real estate growth will happen, quite likely within a decade at most when considering the activity cycles of the past 10 years.
Factor that in and it becomes over-evident how urgently the Beirut metro area and the country as a whole need to achieve some crucial changes of behavior: Lebanon needs planning. It needs development norms and standards that are sustainable and applied universally. It needs infrastructure, namely infrastructure that is adequate and steers growth in directions that make sense for the future. Public and private property represent the spine and skeleton of Lebanon’s future living quality. The spine has to be straightened out.