Downtown Beirut has become so desolate and empty that one almost expects to find tumbleweeds rolling in between vacant restaurant tables. But a walk through the Central Business District can feel even more surreal, because while streets look barren, construction sites are working at full steam. Hundreds of cranes, concrete structures, excavation craters and trucks careening through an empty city center can make Lebanon look slightly schizophrenic. However, while puzzling at first sight, the high activity of Lebanon’s real estate industry is not (just) rooted in the country’s notorious resilience — it makes outright economic sense.
After a war whose destructive effects that cost the country billions of dollars, five months without a president, a parliament that has not met since November 2007 and an opposition sit-in that has paralyzed part of the capital’s business center, one could expect real estate investors to be looking for greener pastures. But the political limbo and uncertainty plaguing Lebanon are part of the very reason why right now is the time to invest in the Lebanese market. According to the annual Global Property Guide report, published in a Byblos Bank newsletter in March 2008, real estate purchase and rent prices of upscale properties in Lebanon are lower than in five other countries in the MENA region: Amman, Tunis, Marrakech, Tel Aviv and Dubai. The average monthly rent in Beirut, according to the same report, is $1,154 compared to the regional average of $1,740. But Lebanon’s real estate upsurge, as much as its prices, have to be put into context.
Comparing the Lebanese market with that of Dubai, for example, where the average rent is $3,140 per month, does not make much sense — Dubai is a case of its own, witnessing economic activity of a speed and volume practically unprecedented in the region. Yet while Lebanon’s prices are only half of those in Dubai, the risk of a regional war and the internal political instability did not translate into a drop. Quite to the contrary. “I think we are seeing the highest prices that this country has seen in many years,” said Nabil Sawabini, CEO of Mena Capital, which focuses on real estate development and private equity fund management. In Cairo, for example, the average purchase price per square meter is $406, while in Beirut it is $1,237. Another reason for the increase in real estate activity is yet one more thing that used to cause a lot of complaints in Lebanon — the brain drain. While the Lebanese are being hired abroad, especially in the wealthy Gulf countries where there are better-paid opportunities, these expatriates are earning enough to buy a residence in the home country.
“Eighty percent of the sales we have seen over the past 18 months have come principally from Lebanese expatriates,” said Sawabini. With Mena Capital currently building three projects with a total of 90 residential units ranging from $4,000 to $8,000 per square meter, Sawabini says that probably 65% of them have been sold already. “We have more demand than supply, at least at the upper end of the market. You have many more well-off Lebanese, especially in the Gulf or overseas, who are looking to buy. We didn’t have that before. Remittances are approaching $6 billion a year, so the brain drain turned out to be positive in that sense.” And foreigners, while not coming to Lebanon for holidays, are still purchasing properties here. “As far as buyers from the Gulf are concerned, I don’t think they represent more than 20% of the market now. However, if things were to quiet down, I think that could easily be reversed and the Gulf influx would be very considerable. That is when I think we would see a tremendous boom.”
Even before this expected boom, the Lebanese real estate market has seen a surge, and if statistics are not easily available, personal experiences are revealing. “For two years until [last] December I had sold nothing,” said Karim Bassil, chairman of BREI, a real estate developer. Among other projects, he had started to build a boutique hotel in the upcoming area of Gemmayzeh. “I thought it was quite sexy to have a boutique hotel in that area, high ceilings, 40 to 50 rooms. But I just didn’t manage to sell it.” With interest rates eating up his financing, Bassil decided to transform the would-be hotel into a residential building. And it worked, as within six to seven months he sold 70% of the units. The percentage, he explains, could be still higher, but he chose not to sell the upper floors, expecting even higher prices: “I left them for later.”
In Lebanon, land is a prized commodity, if for nothing else but because it is scarce. When coupled with the oil boom in the region and the liquidity of the economy, Lebanon is a very good investment. Another reason for the rise in real estate is that construction materials are usually priced in euro. With the euro rising against the dollar, any delay in construction would just translate into higher costs — even if the building is a hotel that will be faced with very low occupancy rates.
The hotels under construction in downtown Beirut, for example, are about to be completed with no occupancy in sight, as tourism figures are dropping steadily. In this area, managed by Solidere, much of what is being built had been planned before the 2006 War. According to Pierre Achkar, head of the Lebanese Hotel Association, the last time the association got the request to issue a hotel license was in the first half of 2006.
Hotels sitting pretty
Nevertheless, not a single hotel has sold its project to another group. According to Achkar, this is “because until now, real estate is doing well in Lebanon. In general, part of the hotel business is the operation, and the other part is the real estate of the hotel. Let’s take Habtoor [which has closed its 5-star hotel in Beirut], for example. Maybe they are losing some money in the operation, but as far as real estate goes, they have made a great investment.” And this is not only because the price of the land has gone up, by 40% to 60% last year alone, according to Sawabini. “Take steel prices, for example. When Habtoor started the construction, steel was around $400 per ton. Now it is $1,150,” explained Achkar.
For real estate developers, residential buildings are at risk only while the construction is going on. Once the residential units are delivered, the risk is transferred from the developer to the final owner. But when it comes to building anything that requires future management, the prospect of a war can be discouraging, especially because insurance against war has a very high premium.
According to Jean Hleiss, general manager of ADIR Insurance, war insurance is uncommon, even in Lebanon. The reason is mainly the price. “The actual war premium is around 1% of the total value of the property, while the average insurance issued against SRCC (strike, riot and civil commotion) is between 0.18% and 0.3%.” In the case of war, the premium rises even further. “During the last war with Israel, for instance, some clients asked to be insured and the premium raised to maybe five times what is being charged now,” he pointed out. But even with the media reminding everyone of the prospect of another war, none of the people interviewed for this article seemed to believe there will be a conflict. On the contrary – the general perception is that things will get better, and real estate prices will soar.
For Elias Abou Samra, manager of a regional real estate fund at Morgan Stanley, “one has to keep in mind that all the developments in Beirut, combined, do not match the investments being thrown in one of Dubai’s new cities, or Bahrain’s reclaimed land projects.” But the small size can, in fact, be an advantage in the real estate market. “We need to put things into a regional perspective to understand how the tiny supply in Lebanon is creating a huge demand. It is a totally different game from that in the Gulf, where large scale and volume are creating the demand.” The current surge in property prices may also be due to the fact that they were low in the first place. For Lina R. Sadek, Corporate Affairs Director of Al Habtoor Leighton Group, the price increase may be just the result of the basic law of demand and supply: “When there is a slump in property prices, people will step in to buy up land and property because the prices are low, and this will in turn drive prices up.”
Monaco of the east
Lebanon, like sort of like Monaco of the Middle East, a small country coveted for its nature and lifestyle, has very limited land with unlimited appeal. Working in Saudi Arabia, Abou Samra knows the fascination Lebanon exerts over oil-rich investors. “Arab investors know the Lebanese market very well. Unlike Western investors, they are happy to take the risks of war and conflict in Lebanon. Even those who invested before the civil war in the 1960s and early 70s ended up covering their losses and making huge profits in the late 90s and until today. I’ve heard one of the biggest Kuwaiti investors say he is willing to wait a hundred years [to sell his Lebanese land] because he knows prices will catch up with the rest of the region sooner or later.”
As far as economic indicators go, Lebanon’s situation could be much worse. According to an IMF report from April 2008, Lebanon’s “economic performance in 2007 was significantly better than expected, despite the difficult political conditions. Given a very strong fourth quarter, the authorities now estimate real GDP growth at 4%.”
Considering that Lebanon’s economy had zero growth in 2006 – an initial 6% growth completely wiped out by the war, this might be a reason to celebrate. Moody’s Investors Service also had a positive outlook, and in March 2008 raised Lebanon’s rating from negative to stable.
“If you compare prices in Lebanon to prices in the region, even in the immediate vicinity, whether it be Syria, Jordan, Egypt and not to mention Dubai and Qatar, the prices here have become reasonably inexpensive, which has never been the case – Lebanon has always been more expensive than its neighbors”, said Sawabini. But would that not be a indication that Lebanon is really not in good shape? Sawabini chose to put it differently: “[That indicates] that the prices have gone up very, very rapidly in neighboring countries relative to Lebanon. So, if things were to quiet down and we have stability, then you would see the boom that we are expecting. Prices would move much, much higher than they are now”.
Mounir Doueidy, general manager of Solidere, agreed, saying “When you compare prices between Beirut and elsewhere, given the big disparity in quality, Beirut is very cheap. So it is very logical for people to come and invest here, because they believe that it is the time to buy now before prices start going up.” In the first quarter of 2006, Solidere’s sales “went through the sky,” totaling $1.1 billion. “Then came the July War, and subsequent to that the sit-in, and sales stopped, selling land completely stopped.” From mid-2007, however, sales experienced a “revival”. With around 50% of Solidere still up for sale, Doueidy believes that waiting for a political solution to the current Lebanese impasse does not make much economic sense. He argued that if investors assume that a solution will happen in the medium term, “let’s say another year, it makes sense for them to buy the land today because it takes a year or two before you can come up with the concept, preliminary design etc. If they wait a year or two, then it may be too late because prices will have gone up.” Without giving a percentage, he illustrates how much prices have increased, even during this time of uncertainty: “In 2007, for example, we were selling the built up square meter for about $1,600. This year we are not selling below $2,000.”