The Sannine Zenith project was unveiled at a Jeddah conference on January 17th, when the audience was told that the project would cover almost 100 million square meters (the size of Beirut) and be home to a population of 30,000. It will also accomodate a 3 million square meter man-made lake, 18 million square meters of ski slopes, an 18-hole golf course and five-star hotels, all financed by $1.4 billion worth of GDR. Although the project is currently 99% owned by the Lebanese Jean Abi Rached’s Al Salam Group, 18% ($252 million) of options have been subscribed to by Saudi Arabian investors. The Kingdom of Saudi Arabia remains the largest Arab investor in Lebanon, (even though the UAE appears to contribute the most to overall Arab investments) with total documented investments for the year 2002 (the most recent figures) reaching $350 million, following a staggering 290% growth over 2001. Saudi investment in the Sannine Zenith project, is further evidence that the kingdom is pulling away from the rest of the field in terms of investing Lebanon.
For the record, UAE Investments come a distant second to those of Saudi Arabia, peaking at $191 million in 2002, compared to just under $70 million in 2001. Kuwait is the only other major Arab presence in Lebanon, contributing around $100 million in investments in the year 2002, a figure up from around $47 million in the previous year. Saudi Arabia’s investments in Lebanon accounted for 16.5% of the Kingdom’s total foreign investments in the year 2002, a significant rise from only 4% in the previous year. This indicates a growth in the allocation of Saudi funds to investments in Lebanon and compares favorably with Kuwait and the UAE, whose investments in Lebanon accounted for only 6% of their foreign investments over the same period.
Lebanon’s close relations with Saudi Arabia are not a recent development, nor are they limited to one aspect of cooperation or level of involvement. In fact, Saudi Arabia represents Lebanon’s second largest trading partner, accounting for 9% of exports in 2002, behind Switzerland at 13%. Saudi Arabia was the single largest contributor to the Paris II donor conference held in late 2002, although Lebanon has only drawn on part of $700 million pledged, because many of the conditions underpinning the loan have not been met. Helping to push through this investment are the close ties between Prime Minister Rafik Hairi and the royal family of Saudi Arabia, which play a significant role in promoting Lebanon in the Kingdom, while the majority shareholders on most of the Prime Minister’s large corporations operating in Lebanon (including Solidere) are Saudi Arabian.
Saudi Prince Al Walid bin Talal is another major player. Born of a Lebanese mother, Bin Talal is seemingly seeking more significant involvement in Lebanon, and has even been rumored to harbor political ambitions. This is clearly illustrated by the $98 million investment undertaken by Prince Walid bin Talal for a 49% stake in Lebanese TV satellite giant LBC SAT. Bin Talal also inaugurated his $140 million Movenpick hotel in Beirut in the year 2002, and has already begun the construction of the $100 million Four Seasons Hotel in the Beirut Central District.
Hariri and bin Talal are not the sole driving force behind Saudi investments in Lebanon, which is attracting other funds by offering an attractive risk/return environment for investments. A high consumption market, and a tourism infrastructure that has attracted more than 1 million tourists in the year 2003 alone, and is set to attract an even greater number in the year 2004 – should drive returns higher. With such a structure, investments in Lebanon offer concrete economic benefits to Saudi investors, who can capitalize on the dual benefits of higher returns on investments and a significantly low cost of capital enjoyed by such investors. With a consumption-driven market, a prosperous real-estate sector, and a strong tourism industry, projects yield annual returns of anywhere between 10% and 15%. Such results emerge as attractive to Saudi investors, whose cost of capital does not exceed 5%, and thus earning them net returns of between 5% and 10%.
The risks are relatively well quantifiable, and can be mitigated, capitalizing on the country’s well-established and sophisticated financial services industry. Regional political risks, while unavoidable, are also relatively limited in Lebanon, compared to countries with a close proximity to Iraq, Iran, Israel, and other high-tension areas. Furthermore, the Lebanese economy appears to have a sizeable potential for growth in various sectors, especially tourism, real estate and financial services. In such a sense, the growth in the Lebanese economy is not oil-dependent, unlike other regional attractive markets such as the UAE and Kuwait.
Statistics released by the Inter-Arab Investment Guarantee Corporation have indicated that the services sector in Lebanon attracts the vast majority of Arab investments at 85% in 2002, while industry and agriculture share the remaining 15%. Such a breakdown is not surprising, given that Lebanon’s tourism and hospitality industry presents the greatest investment opportunities in the country. A rapidly growing inflow of tourists, illustrated by the massive numbers seen in the summer of 2003, is quickly overwhelming the existing facilities in terms of hotels, resorts, and other leisure and tourism services. Considering that Beirut attracts the majority of wealthy Arab tourists seeking premium services and hotels, the capital’s accommodation capabilities for such services is limited. Until three years ago, the Phoenicia Intercontinental was the sole non-boutique 5-star international hotel operating in Beirut, and benefited from a virtual monopoly on the market.
Such opportunities did not pass unnoticed. Apart from bin Talal’s spending, other developments include joint Saudi-Lebanese investments in the Summerland resort ($70 million), in addition to the on-going efforts to rebuild the Hilton Hotel ($128 million). Such a market condition prompted Arab investors to rapidly establish a presence in the country’s hotel industry, illustrated by the substantial investments undertaken by the likes of the Dubai-based Habtoor Group in the Metropolitan Palace Hotel.
Arguably Lebanon’s second biggest draw is the real estate sector, which is also attracting a large number of investors, seeking to establish in Lebanon a second home, one capable of providing them with the optimal mix of business and pleasure. Among such individuals is the personal aide to Saudi Arabia’s King Fahd, who recently acquired a multimillion-dollar penthouse apartment in the Beirut Central District. In addition, a recent report by real-estate consultants RAMCO indicates that 80 Arab investors have purchased up to 1.8 million square meters of real estate in Lebanon between 2001 and 2003.
Furthermore, Lebanon’s increasing role as the regional venue for conferences and conventions is creating a need for a more permanent residential presence for high profile Arabs. Such political events as the Arab Summit, and economic and financial conferences as the Arab Capital Markets, are attracting increasing numbers of Arab businessmen and investors. These developments are substantially increasing the need for accommodation facilities, including hotels and residential buildings. On the one hand, this creates substantial investment opportunities to Saudi investors, enabling them to capitalize on the sustained growth in the market. On the other, such developments are encouraging Lebanese investors and developers to regain faith in the country, making them more willing to undertake new projects.
The benefits of Saudi investments to Lebanon are not limited to such direct financial benefits, however, as the growth in Saudi investments has a large number of positive implications on the country’s economy and overall well-being. On the social and economic fronts, large-scale investments are providing substantial employment opportunities. Upon completion, the Four Seasons Hotel will require almost 300 employees, while the Summerland Resort currently employs more than 250 individuals. Moreover, the flow of Saudi funds to Lebanon has significant secondary effects as well, in the sense that it inspires confidence in the country’s abilities, a confidence that has been wilting away over the past five years, mainly due to the economic hardships and internal politics.
Shrewd by reputation, Saudi investors do not undertake large-scale investments unless based on certain risk and return assessments. Such investors can seemingly see sizeable potential in investments in Lebanon, as illustrated previously. This is having a significant impact on Lebanon as a whole, as it is inviting both Lebanese and other foreign investors to join the growing trend. Numerous ventures are already being undertaken by Lebanese companies and individual investors to capitalize on the trend. Three massive residential towers, worth more than $100 million each, are being developed on the sea front of the Beirut Central District. According to sources at Marina Towers – one such development – almost 80% of apartments have already been sold, with the majority to Gulf-based individuals. Moreover, the Park View high luxury residential building developed by Beirut-based investment bank, the Middle East Capital Group, has been almost entirely sold, with more than 70% of apartments purchased by Saudi individuals, at a price approaching $4,000 per square meter.
From such a viewpoint, Lebanon would appear to have regained to a great extent, its historical prosperity, and may be on the verge of regaining its role as the regional hub for investments. Nevertheless, a large shadow remains cast over the whole country, suffering from large budget deficits, an ever-growing public debt, and political squabble hindering any possible advances on the privatization front. That is to say that just attracting foreign investments is by no means enough to support a nation of 4 million people, and secure jobs and income to improve living conditions. It is certainly surprising to observe how Arab investors are pouring money into investments in Lebanon, while the Lebanese government’s credibility leaves something to be desired. Such an ironic set-up raises questions as to the long-term prospects of investment flows into Lebanon. While the country may, in the short term, capitalize on regional and international conditions to attract Arab investors, significant advances in economic reforms are indispensable if Lebanon is to be able to improve, or even retain, its appeal.
Nonetheless, Lebanon’s sovereign risk, although relatively significant, benefits from a more stable socio-political environment, when compared to Saudi Arabia or Kuwait. While the Saudi economy benefits from substantial levels of liquidity, the investment environment is often plagued by internal discontent, unease, and threats of terror and retaliation. The political environment in Lebanon, while also suffering from some internal political unease, is relatively calmer and more resilient, thus better suited for longer term investments. According to comments by some large Saudi investors, they view Lebanon as a safe haven, enjoying banking secrecy and an attractive investment environment, at a relative distance from regional political tensions.
Tony Hchaime is an investment banker at the Middle-East Capital group (MECG)
The attacks of September 11, 2001, which caused a flight of Arab capital away from Western markets – have seen liquidity levels in the Gulf rise to unseen levels
Triggered by the events of September 11th, 2001, and the ensuing long-lasting and global response by the US government, wealthy Arab investors have radically changed their strategies regarding their global investments. The sudden policy changes by the US government regarding Arab financial resources in the US, and the crack-down on Islamic charity organizations, accelerated the exodus of Arab funds from investments in the US and Europe, which had already begun to shrink due to a number of other factors, including a low interest rate environment globally, and growing investment opportunities in some markets in the Middle East region. As a result, liquidity levels in the Gulf have risen to levels unseen in years, providing the whole region with a rare opportunity to accelerate developments on all fronts.
The wealthiest Arab countries, and those that are likely to contribute the most to inter-Arab investments, are the United Arab Emirates, Saudi Arabia, and Kuwait. Of the three, the UAE has the largest amount of funds invested outside the country, or dedicated for foreign investment. Saudi Arabia follows closely behind, ahead of Kuwait. The UAE’s investments abroad totaled $3.14 billion in 2002, compared to $2.13 billion for Saudi Arabia, and $1.64 billion for Kuwait. Moreover, the UAE’s new investments abroad reached almost $450 million in each of the years 2001 and 2002, compared to less than $50 million for Saudi Arabia.