For a country facing economic turmoil and new business risk at every turn in the road this year, Lebanon sports an alarmingly content real estate sector.
Intermediaries whose livelihoods depend directly on commissions from arranging sales and rental contracts are not frantically waving red flags as many other of the country’s economic agencies are.
“The [sales] market is in slow motion since the beginning of 2011 until today, but there is still a market and it is not down,” said Walid Moussa, chief executive of PBM, a real estate brokerage and facilities management company, as well as secretary of the board of the Real Estate Association of Lebanon (REAL). “I always say the market is sleeping. When you sleep you wake up and just continue.”
Over at Ramco, one of the oldest intermediaries and consultancies in the Lebanese real estate sector, Director Karim Makarem agreed that both demand and prices are in a trough since the end of 2010, but he too would not talk of a crisis. “The word crisis entails too many negativities. I don’t believe the market is anywhere near that,” he told Executive.
Any analyst probing the market’s numbers without being very familiar with the peculiarities of Lebanese property might be excused for asking if that “sleep” is restful and if the denial of a crisis is just that — desperate denial. By the numbers, business in the primary brokerage activity of property sales is down again in 2012 to date, regressing for the second year in a row.
“According to the latest numbers, we are down 10, 12 percent on 2011, but 2011 was not such a good year either, it was about 12 percent behind on 2010,” said Elie Harb, president of Coldwell Banker real estate brokerage in Lebanon. That doesn’t sound too healthy, he acknowledged: “Two continuous cycles in the negative are not a good sign.”
A “staircase” market
Most brokers and research analysts at large local banks Executive queried said they see no crisis lurking in the lull of the local real estate market because they view market functions like a staircase, where prices go up and stabilize or freeze but not retreat. Phrasing it in a hands-on way, Christian Baz, owner and general manager of brokerage and facilities management company Baz Real Estate, said, “The price for properties in Lebanon will never go down. It always is stable or goes up.”
The staircase scenario is based on a threefold specificity which Moussa described as “the small size of the Lebanese market, non-debt financing of projects and high demand by expats and foreigners from the region.” According to Makarem, normal population dynamics of marriages and divorces and demand from regional buyers make local real estate an obligingly safe bet.
“There are still people who are getting married or move into their home and this demand will always exist regardless of external factors. Lebanese expatriates are still a market for buying at home; Arabs still believe in Lebanon and provide demand,” he said.
This is despite the fact that increased land prices and construction costs are making newly built apartments in Beirut less and less affordable, a trend that is not only hard to bear for newlyweds and new labor market entrants but also has led brokers to focus their efforts on marketing smaller units, just as it put developers of the traditional large units into a squeeze.
For Moussa, the disparity between growing real estate prices and local incomes is explained easily enough by the origin of demand: well-salaried Lebanese working abroad. “It is a supply and demand market and prices for real estate in the Lebanese market are related to the purchasing power of Lebanese expatriates. Many Lebanese expats are holding out on buying now but the minute things change, the Lebanese market will be alright.”
Adding in cultural factors such as attachment to neighborhood and community — which narrow the desirable locations that Lebanese buyers seek and thus supposedly increase the scarcity factor and resultant value retention of properties — the ruling perception is that the Lebanese real estate sector is not in, and is not going to enter, a crisis of property values or ever experience a real estate bubble. This is precious news for a country whose real estate sector, according to Coldwell Banker’s Harb, is worth about $12 billion in transactions annually. The huge caveat is that the reported real estate transaction figures can be both understated and late. Relative to gross domestic product, there is significant turnover in the real estate market, but that doesn’t mean there are no pockets of inefficiency and downside risks. Take the case of Mark Sleiman, an entrepreneur [interviewed by Executive in summer 2010] who started the company Creative Solution For Housing (CSH) in 2009, with the idea to provide a progressive home financing scheme for young career starters with good credit profiles but still low incomes.
The concept was to create “demand loyalty of young Lebanese to their country” by facilitating home loans with increasing payments. “I want the expatriates who work outside to buy at home, and I don’t want the young professionals to leave, by giving them a way how they can afford a home,” Sleiman said, but admitted that the company had done very badly over the past two years because of depressed demand for real estate and some creative differences with banks. In short, CSH is today in a state of dormancy with Sleiman voicing some — but by no means exuberant — hope that a pickup in demand from young Lebanese expatriates will give the company a second wind.
Syrian neighbors
When asked if the influx of Syrians driven from their country by the civil war there has brought new vigor to the Lebanese real estate market, brokers did not widely agree. “There is a lot of talk about Syrian families moving to Lebanon,” Makarem said. “This perhaps had a slight impact on the rental market. We have seen a little bit of it at Ramco, other people claim to see a lot of it. Some people claim to see none of it. It is open to debate.”
According to Moussa, the Lebanese who want to rent out apartments seek long-term tenants who will sign a contract for a minimum of one year. The Syrians who can afford apartments in Lebanon have so far largely asked for shorter-term solutions, one-month, three-month or six-month contracts. In this segment of short-term rentals, the market is delineated by vacation homes or ‘chalets’ and renters might have taken spaces that were not filled by Gulf Arab vacationers this summer. “There is high demand on short rentals but very weak supply,” he said.
Coldwell Banker, which has one of the largest networks of real estate operators in Lebanon, records the strongest rental demand in Ashrafieh, where broking of rental contracts accounts for 50 percent of the office’s revenue. “Other offices do not experience so much rental business. However, in the past month there were more rental activities due to the Syrian influx,” Harb said.
Schooling, safety and affordability are decisive for Syrian clients that have been looking for furnished apartments, said Baz, whose business is concentrated in Beirut’s Ashrafieh district. He explained that he observed an increase in demand for rentals as soon as the Syrian conflict engulfed the city of Aleppo with its large Christian population. “The war on Aleppo created a boom in demand for furnished apartments.”
According to Baz both rich and not-so-rich Syrians have been knocking on his door in search for apartments but the latter group mainly seeking to find places in Beirut’s northern hinterland where the rents are lower. In his view, the main difference why he saw demand grow substantially in 2012, from a very bad 2011, was that visibility has improved, in the sense that the Syrian conflict is not abating but also not spreading to Lebanon. “I think the situation in Syria is clear now,” he said. “Clients have visibility today — they rent and while they don’t buy like they used to, they buy small-size [apartments] and they invest.” The greater clarity about the Syrian civil war and its likely persistence meant for Baz that 2012 was his best year in rental brokering, and enabled his company to generate as much income in the first seven months of 2012 as he did in all of 2011. For Moussa, demand indications from Syrian customers could be realigned in September and point to where trends might be going into this winter and next year. “September in my opinion is a very important period to test the market for rentals, because the schools will start and people will have to take a decision. If people put their children to school, they will rent on yearly basis.”
Fundamentally, however, the limited impact of the Syrian demand correlates with the realities that most refugees cannot afford to rent in areas and price segments that the professional real estate intermediaries cover. According to Makarem, the situation in the low end of the real estate sector — also affecting the majority of Syrian refugees — is a mixture of consistent under supply and total deficiency of building quality. “The problem is that the lower end is particularly low-end,” he said.
Brokers do not dabble in this part of the Lebanese landscape, except perhaps in carrying out property valuation studies for projects that involve buying up decrepit properties for later demolition and development of the lands. In this context, the increased need for homes, or at least decent shelter, by Syrian refugees ties in with the permanent Lebanese housing crisis and its components of insufficient infrastructure, insufficient supply of socially adequate building stock and insufficient public and private sector management of mass housing needs.
The fuse of future crisis
This crisis, known and lamented but ignored in all practical terms, could come back to haunt the Lebanese real estate sector even in those housing segments where developers, brokers and buyers have a common market. This is because the housing crisis has a large infrastructure component that spans physical, social and administrative infrastructure, from roads and utilities to public transport and inefficient permit, registration and taxation processes for real estate.
In Harb’s assessment, a continuation of the Syrian conflict over several years could move demand by Syrian expatriates in Lebanon from rentals to apartment purchases, and he said it would be very conceivable that 20,000 requests for property purchases in Lebanon could originate annually from migrants — equal to the annual demand of Lebanese in a country where approximately 20,000 to 25,000 new units can be delivered per year.
Under the capacity restraints caused by insufficiency of hard and soft infrastructures, it would not be possible to drastically expand the supply of new units, Harb said, with overall negative effects. “This will put the Lebanese buyers into direct competition with these requests. The developer has no loyalty anywhere. These [Syrian people] will be paying in hard-core cash more often and make higher down payments,” Harb cautioned. “It could lead to an explosion in demand for real estate in Lebanon.”
