A remarkable 2010 witnessed the wholesale destruction of records in the real estate sector. Soaring tower heights were matched by booming construction activity, high-profile conventions, more sales than ever (and of higher values) and the launching of unprecedented mega-developments. With foreign investment steadily increasing and excess liquidity at local banks, the property sector enjoyed a healthy stock of both cash and confidence.
Lending for new homeowners has never been more varied, as banks competed this year to offer housing loans across the market with rates tailored to various requirements. Some lending facilities allow residents to borrow 80 percent of a home’s value and have raised the maximum value of loans in parallel with the climbing real estate prices seen across the country, though especially in central Beirut.
As the supply of free plots runs thin and the cost of land climbs ever higher, experts agree that prices, though they have stabilized, will remain at levels too high for most local Lebanese. Bilal Alayli, president of the Order of Engineers and Architects, said there were around 100 plots left in Beirut, covering some 400,000 square meters. He added that owners are holding on to their land, hoping prices will continue to soar.
The ubiquitous cacophony of construction that has been Beirut’s soundtrack all year is scored in the statistics: figures from the Order of Engineers and Architects of Beirut and Tripoli show that construction permits, one of the major indicators of real estate activity, covered an area of 14.4 million square meters in the first ten months of 2010, compared to 10.19 million square meters in the same period last year, a 41.4 percent increase. Cement deliveries reached 3.8 million tons in the first nine months of 2010, an increase of 5.3 percent from 3.7 million tons in the same period last year, according to the Banque du Liban (BDL), Lebanon’s central bank.
Total revenue from property sales in Lebanon reached a record-breaking $6.96 billion in the first nine months of this year, an increase of 60.6 percent compared to the same period last year, according to the General Directorate of Land Registry and Cadastre (GDLRC). The number of total transactions increased by 25.3 percent to 69,501, also the highest recorded in that category. The average value of all the property sales in the nine-month period increased 28.2 percent compared to the same period in 2009.
According to the Ministry of Finance, property registration fees in 2009 made up 1.2 percent of gross domestic product, which translates into $417 million. In the first quarter of 2010 alone, registration fees jumped 87 percent year-on-year, reaching $128 million.
According to the Investment Development Authority of Lebanon (IDAL), 70 percent of total foreign direct investment in 2009 was funneled into the property sector, which translates into more than $3.3 billion. Hawlo Tleiss, executive vice president of IDAL, conceded that while some foreigners may be put off by Lebanon’s shaky national security situation, the group pointed potential investors toward the low crime and robbery rates in Beirut compared to other major cities.
A World Bank report also suggested that a growing proportion of remittances, estimated to reach up to $8.2 billion by the end of this year, are being used to buy land and housing.
Those in the sector say that the administrative red tape involved in property development — a major drawback for investors — has been more burdensome than usual in 2010, which was borne out in the “Doing Business 2011” report issued by the World Bank/International Finance Corporation in November. Lebanon was ranked 142nd globally out of 183 countries and in 16th place in the Middle East and North Africa (MENA) region for ease of obtaining construction permits. It also ranked 111th place globally and 16th regionally for time it takes to register a property.
This year, banks were more willing than ever to offer tempting mortgage deals to homebuyers, thanks to the excess liquidity on their books, courtesy of the influx of funds that flowed into Lebanon’s banking sector after the financial crisis.
Nassib Ghobril, chief economist at Byblos Bank, told the Development and Real Estate Annual Meeting (DREAM) conference in November that mortgages increased in value by nearly 50 percent in the year ending June 2010. As of that same month, mortgages accounted for 13 percent of Lebanese banks’ private sector lending, according to Executive calculations based on BDL data.
Despite easier access to credit, one of the major topics this year in real estate was the fact that most locally employed Lebanese have been priced out of the Beirut property market due to the growing disparity between prices and income. Few Lebanese can afford a home in Beirut when first floor prices in new buildings start at $6,000 per square meter. However, despite the financial crisis, wealthy Lebanese expats and Arabs living in the Gulf continued to spend on Lebanese property, sustaining the high prices.
While the real estate sector in general has experienced sustained growth and momentum, the stagnation in the upper end of the market that started in 2009 extended throughout this year. Sales of ultra-luxury apartments slowed, and sky-high prices began to — if not come down to earth — at least plateau.
“It’s probably healthy that it did [slow down],” said Karim Makarem, director of Ramco real estate advisory firm. “We were seeing 25 percent growth in prices per year for five years, which is unsustainable.”
Faris Smadi, chief executive officer of SV Properties & Construction, agrees: “After the surge of real estate prices in the last three years, we did reach something of a plateau this year, mainly due to the fact that developers put prices that weren’t achieved.”
The let-up in the market seems to be focused on prices of large apartments, which have been stagnant for the last year and a half, with some prices even falling as sales slowed. According to Joe Kanaan, president of brokerage firm Sodeco Gestion, “there is a shortage of what is really in demand — small apartments.”
Demand has clearly shifted toward 80 to 200 square meter apartments, especially on the outskirts of downtown. High-end areas such as Sursock, where developers usually build larger apartments, are also experiencing the shift.
“The mentality has changed,” said Smadi of SV properties. “Before, the traditional buyer in downtown wanted a large apartment, particularly with large traditional living rooms, and the sea view was more important to him. Now, buyers are happy to have smaller apartments in the right location with the right infrastructure and amenities. We took that into account in our new project [3 Beirut] where approximately 50 percent of the apartments are between 200-240 square meters.”
Land going through the roof
Construction prices and the price of labor remained stable in 2010 (as opposed to a slight rise in 2009), but finding reasonably priced land in Beirut was a major headache for many developers. The Beirut Central District (BCD) does have available plots, but is too over-priced to be a feasible option for most. As such, many developers have started construction — even of high-end residences — on the outskirts of Beirut. Houssam Batal, founder and CEO of Premium Projects, said that the “market noise” created by some of these developments is confusing clients, as they are marketed as luxury residences in “prime areas.”
“Developers buy relatively cheap lots [in areas such as Badaro, Zkak El Blat, Tehouita, or Sioufi] and claim that the location is prime, but they are at risk because sophisticated clients will realize that these residences are not worth the higher prices and are resistant to pay for the more expensive units,” he said.
Mohamad Chamseddine of Information International, a Beirut-based research consultancy said: “This year, land prices in villages rose because more people want to build homes there, seeing that Beirut prices and rents are too high. Tens of thousands of Beiruti families have moved to suburbs like Damour, Meshref, Khalde and Aramoun. We even saw [during the 2009 elections] that politicians who want to appease the Beirut voters visit these areas heavily because those families can’t afford to live in Beirut anymore.”
The average price per property on sale in Beirut grew 22 percent year-on-year in the first nine months of 2010, while the figure stood at 28 percent for Lebanon as a whole in the same period, according to Bank Audi. As land became scarce, prices had no place to go except up, although a period of stabilization is expected in the immediate future.
To keep prices from escalating further, Alayli of the Order of Engineers and Architects suggests higher taxation on property sales, noting that the registration tax is a lowly 6 percent. Currently there is also no capital gains tax. Kanaan, of Sodeco Gestion, also suggested axing the old rental law, in gradual phases, to allow old buildings to be demolished, freeing up new lots for new developments.
Higher price tags are causing property shoppers and potential clients to become savvier, focusing on the construction specifications, negotiating harder and taking longer to seal the deal.
Due to limited space, rising prices, and a more competitive market in general, developers are spending less time analyzing their bottom line to focus on staying ahead of the pack. To entice clients with a prestigious address, Premium Projects spent about two years buying out the old residents and combining properties to put together a 1,800 square meter plot for Sursock Yards in Ashrafieh, an 18-story complex that is already 65 percent sold. Premium Projects’ Batal said, “We are willing to consume time and cost to get these prime locations.”
The “non-professional” scourge
Many developers and brokers have complained that there have been a rising number of non-professionals in the business, attracted by what they perceive as opportunities to get rich quick in Lebanon’s booming real estate market. They say the negative side effects have affected the whole industry.
“Since 2007, we have been seeing more people developing buildings that are really not professionals in the field. If they don’t take into account the urban planning, they are harming the area around them,” said Alayli, adding that there needs to be more regulation of urban development.
Lebanon’s real estate market is predicted to grow 10 to 15 percent in the next three years, Fuad Fleifel, director general of the Ministry of Economy, said in November at the Beirut International Property Fair.
Experts agree that such growth is normal and expected for a country with so much demand, both local and foreign.
“From now until 2013 in Beirut, 90 percent of available land will be built up,” said Alayli, who adds that local demand is rising. “We have around 35,000 marriage contracts and 5,000 divorces per year; thus you can say we need at least 40,000 new apartments.”
Developers predict that even the roughly 350 projects underway in downtown will be fully absorbed, though it may take more time than usual.
Some suggest that as the Lebanese have become relatively more affluent in the past few years, more Lebanese (as opposed to Arab nationals) will be buying than before. Smadi said in earlier projects, such as Beirut Tower, 50 percent of buyers were Gulf clients and expatriates. The more recent Bay Tower is 90 percent Lebanese-occupied and most are local residents, attributing the change to the fact that the latter apartments were smaller.