Undervalued real estate
According to a Bank Audi real estate report published in July, property prices in Lebanon posted a moderate decline of 10 to 15 percent since the global recession hit the region. In the first five months of this year, sales transactions posted a mild drop of 6.7 percent year-on-year. In the same period, construction permits rose 4.3 percent.
The report says the resilience of the Lebanese real estate market compared to the region goes back to the strong demand drivers and ‘stringent’ regulations related to lending in the banking sector — both eliminated the possibility of a real estate bubble.
The report says despite the high prices of residential properties, especially in Beirut, the market remains undervalued on the regional and global levels. Beirut’s residential market is still cheaper than its MENA counterparts. The price of a 120 square meter high-end apartment is, on average, $2,229 per square meter, while the regional average is $2,682, according to the report.
The office market is also undervalued, says the report, noting Beirut’s central district ranks 33rd out of 57 office hubs in the world in terms of occupancy. In 2008, office prices in Beirut averaged $585 per square meter; the MENA average was $874, and the world average $793.
Economic growth up
In June, the International Monetary Fund published its periodic report on Lebanon’s economic outlook, upgrading its previous 2009 forecast for gross domestic product growth from 3 percent to 4 percent, with the potential to increase as long as domestic, political and security conditions remain positive.
The report said the global financial crisis’ impact on Lebanon has been “muted,” for various reasons. Inflows of commercial bank deposits, “which are the main financing source for the large government deficit, have remained strong,” the report said. US dollar deposits have decreased, aided by stable security conditions and the significant interest rate disparity between deposits in Lebanese lira and the US dollar. The IMF also said there has been no pressure on the lira-dollar peg, and that the Lebanese Central Bank has quickly accumulated international reserves.
Lebanon’s banks have “had virtually no direct impact from the global financial crisis, given [their] limited exposure to failed foreign financial institutions or wholesale funding markets.” Lebanese banks continue to be highly liquid and capitalized. Unlike their regional brethren, the country’s domestic banks have not needed emergency liquidity injections or any form of public bailouts.
“Cyclical indicators point to a soft landing of the Lebanese economy in spite of the global financial crisis and recession. Economic activity has continued to expand robustly through the first quarter of 2009,” the report said. The IMF says that although merchandise exports have declined due to lower external demand, they only account for a small amount of the economy, and therefore have not significantly impacted the overall GDP. On the upside, construction activity is performing well, as are the tourism and financial services sectors.
After the Lebanese elections, the performance of Lebanon’s seven listed stocks slightly improved. But in the beginning of July, the Beirut Stock Exchange (BSE) dropped 6.1 percent, the market’s largest drop since its $5 billion crash in November 2008. The week of July 6 to 10 witnessed a weekly decrease of the entire BSE by 6.1 percent, which brought the market back to levels prior to the re-election of Parliamentary Speaker Nabih Berri. Real estate giant Solidere, largest stock by market capitalization, led the drop.
Due to a massive sell-off by an unknown shareholder on July 9 and 10, Solidere’s market value was slashed by 15 percent overnight. Some economists attributed the drop to the lack of progress on the formation of a government. Moreover, a downturn in global stock markets and the dividend distribution of Solidere could also have played a role in the company’s share-price drop.
On July 9, buyers and sellers took advantage of the $3 gap between Solidere’s global depositary receipt (GDR) and its domestically-listed shares. The decline of around 8 percent in the company’s GDR value in London was most likely due to hedge fund selling, analysts said.
Nassib Ghobril, head of the economic research and analysis department at Byblos Bank, says politics are the main driver behind BSE volatility. “Solidere has always been a representative of political sentiment in the country,” he said. “After [Saad] Hariri became the [prime minister-designate], it jumped. The movement in the stock market does not represent the underlying performance of the listed companies on the BSE, unfortunately.”