The region’s real estate markets have seen better times. Jordan’s property prices continue to plummet. Dubai’s real estate bubble has burst. The rest of the Gulf Cooperation Council hasn’t fared much better. In Lebanon, prospective buyers waited for prices to follow suit; figuring the past year’s decrease in construction cost and the lower demand from Lebanese expatriates would bring prices down. But Lebanon’s real estate has had a very different experience from its regional colleagues since last fall’s crash began.
Real estate prices in Lebanon are not going up — but they’re not going down. Demand from expatriates has slowed, but prices have not taken a plunge mainly due to strong local demand and scarcity of land and properties. Still, some prices have decreased 10 to 20 percent because developers who had the luxury of inflating prices due to high demand are being forced to return to the original, fair market value of properties.
Demand leveling out
Local demand for Lebanese real estate has not decreased, since the Lebanese economy, as a whole, has not been severely affected by the financial crisis. The banking sector is still performing well and making loans available. Companies operating in Lebanon are not shutting down or sacking employees, leaving the local demand for properties intact.
What is triggering a concern is the demand from Lebanese expatriates, who represent the largest portion of the market and dominate the mid-range and high-end segments. There is an ongoing debate about how hard the crisis has hit expatriates, and how that will affect the real estate sector.
“Definitely we are seeing the impact,” adds Hani Haddad, managing director of A&H Construction and Development, of his firm’s performance over the last few months. “The demand was much lower. But it is starting to pick up again,” he says.
A&H specializes in high-end properties, whose clientele is comprised mainly of Lebanese expatriates. Haddad says one of the reasons for the lower demand was that people stopped buying. They assumed prices would go down, as in other countries in the region.
“They waited and prices didn’t go down. So maybe now they are starting to change their mind,” he says.
Some say that demand in Lebanon has not been impacted at all, while others say expatriates have started to return with no money to buy a house, consequently lowering the demand for properties in Lebanon.
Coldwell Banker President Elie Harb says that there is no evidence that demand has gone down.
“It is a normal cycle,” he says. “Every year, we see these months have the lowest activity.”
Harb says expatriates who drive Lebanon’s real estate market are highly educated managers and professionals with high incomes. He says it is doubtful large swaths of these professionals would lose their jobs, and is optimistic the real estate market will recover soon.
Christian Baz of Baz Real Estate disagrees.
“All market segments will be affected,” says Baz. “People are coming back broke. They either bought their house already, or are broke and will live with their parents.”
Those who are still buying are currently enjoying the luxury of making an unhurried choice, at least compared to how the Lebanese market was a year ago. Stable prices mean buyers have more time to compare properties, without having to worry about prices going up the next day, or another buyer aquiring the property.
“Properties are not selling as quickly as they used to,” says Karim Makarem, director at RAMCO. “While not so long ago, if you saw a property, the next day it could be sold. Now it is not sitting, but you might have a few days, a week or two before you make an offer.”
Sandro Saade, co-general manager at Greenstone, says prospective buyers are now “pickier.”
“[The consumer] is asking questions, and making sure that the product that is delivered is of better quality and is reflected in the price being asked,” says Saade.
A fair price?
Many factors play a role in determining Lebanon’s property prices, the most important being the availibility of land, construction materials, profits and demand. When the market was peaking, all these indicators were heading upwards. Land became scarcer and construction material more expensive. People rushed to buy properties for fear of further price increases. Some developers jacked up prices, confident consumers would buy out of necessity.
“People have overpaid… because they were either mislead, or they refused to get advice and they went with their gut feeling,” says Makarem. This created a vicious circle where prices rose and buyers rushed to make purchases, which then caused prices to rise again.
Developers who took advantage of the rush are the ones who are now being forced to rollback inflated prices. The lower cost of construction material and dwindiling demand has left them with no other option.
“Certain developers have reduced their asking prices by up to 20 percent,” Makarem says. “But their asking prices were overpriced to start with.”
He adds that there is a huge risk in doing so, because when the market slows down, buyers will know the price increase was unjustified and it will hurt the developer’s reputation.
Other developers who set their prices according to ‘reasonable’ parameters are not finding it necessary to decrease their prices. They did not use the increase in construction material costs as an excuse to inflate prices. And now they say the decrease in the cost of construction material is not substantial enough to trigger a price decrease.
“The cost of construction has not lowered substantially, as people think,” says Karim Saade, the other co-general manager at Greenstone. Saade says this is one of the reasons why Greenstone and other reputable developers are maintaining their current prices. Haddad from A&H concurs.
“We stick to our prices, we don’t lower them and we don’t increase them,” he says.
Even if conventional wisdom says the cost of construction material has decreased and prices should go down, land remains very expensive. In densely packed Beirut, finding a plot to build on has become more difficult, and developers are now including the high cost of land in their cost structure, making apartments expensive.
“There is no land anymore [in Beirut]. And if there is, they are asking for ridiculous prices,” says Haddad.
Makarem says the city’s spatial limits may drive prices up in the boom times, but generally the limited supply helps contribute to the stability of Beirut’s real estate market.
“As long as that is the case, I don’t see any reason why the prices of end products should collapse,” he says.
Money to give
Most Lebanese buyers rely on financing to purchase property. With a healthy banking sector, Lebanon has not been hit by a lack of liquidity, and buyers can acquire home loans or mortgages provided by banks in partnership with the Public Corporation for Housing.
“Conditions are still the same,” says Antoine Chamoun, general manager of Bank of Beirut Invest. “The flow of people is still the same, and I may say even more than before.”
But the situation has changed for expatriates. The crisis has put a lot of expat’s jobs at risk, and Bank of Beirut, and other banks, are increasing the level of scrutiny on the financial status of applicants, the stability of their jobs and other sources of income.
“We are looking more at the source and the stability of the income. We are also seeing if the employer is affected or not,” says Chamoun.
He says the heightened scrutiny and generally bleak economic conditions outside Lebanon has caused expatriate applications to decrease.
The credit situation for developers is better. Developers in Lebanon, compared to their regional colleagues, are not over-leveraged and they continue to apply for loans. A bank not only provides project financing depending on developer’s financial situation, but also on the specific project. The bank studies market activity in the area, the expected sales and other factors.
“We are receiving a lot of applications from developers for project financing — the number [of applications] has not changed,” says Chamoun.
Developers sitting pretty
Most developers are in a good position in Lebanon due to having sold a majority of their projects. Consequently, they have not been forced to sell at a discount as demand has slowed, which has kept prices stable.
“We started the sales process in September 2008, and have sold so far 35 percent of the project, which is a very good result. So we are quite confident” says Greenstone’s Saade.
Developers have not changed their operating strategies. They did not feel the need to. On the contrary, they are still planning ahead and looking for new projects and future investments. Currently there are 300 new construction projects in Beirut, according to Makarem, totaling some 1.6 million square meters of built up area.
A new trend that is coming to the market is the construction of smaller, cheaper units because the financial crisis might lower the budget of some people looking for more affordable units to rent or buy. Brokers are advising developers to focus on the mid-range market, and several developers are considering the change.
“The true demand is to build a house of 150-160 square meters with three bedrooms, and having the price below $200,000, so that 90 percent of the local market can buy” says Harb from Coldwell Banker.
Haddad says that his firm, A&H, might consider building smaller units, but it is still a dilemma because in the high-end segment the target market is usually families who are used to big spaces. Still, they might consider it for their next project. “Our budget is $1.5 million. Maybe you can go smaller, take it down to $500,000,” adds Haddad.
Awaiting the summer
Real Estate professionals are optimistic about the summer. Most believe that if elections go well, the real estate market in Lebanon will bloom again, since it will represent a safe haven for those who still have money and are willing to invest.
“I think in the summer you might find a lot people looking to buy,” says Makarem. “If ever [people] needed evidence that no matter what happens, the [real estate]sector in Lebanon is extremely secure, they have it.”