ArtEconomics & Policy

The economies of cultural wealth

by Thomas Schellen
written by Thomas Schellen

The cultural concept of the museum is ancient. It is named after the muses, daughters of personified memory as mother and the allfather deity, Zeus. From those distant days when the arch-poet Homer opened his narration of Odysseus’ heroism and victory with a plea to “the muse” to tell him of the “andra polytropon”, or man of many skills, people have dedicated museums as places for history, the arts, crafts and sciences in private, academic and public ownership, with or without entry fees, but generally with considerable investments.

Museums are expensive. When the National Museum of China re-opened its doors in 2011, state media reported that the renovation of the 200,000 square meter space – “said to be the world’s largest national museum” according to china.org.cn – cost $379 million. The Louvre, with 9.3 million visitors in 2014, the top benchmark of all museum statistics, said in its most recent annual report that its budgetary resources for 2014 were 204 million euros, of which 50 percent originated from state subsidies.

But does that mean that museums are cost centers for a society? Actually, that debate is going the other way. In recent years, the presentation of museums has included a growing emphasis on their economic contributions, for example a 2013 special report by The Economist, “Temples of Delight,” highlighted growth statistics on museum visits and the economic value of culture. Evaluation of the real economic contributions of museums adds a new and productive element to most democratic countries’ recurrent debates over public spending on culture and purported wastes of tax money on allegedly unproductive investments in museums, opera houses and subsidized cultural spaces in general.

Pro-museum numbers aplenty are now adorning the debate with the American Alliance of Museums claiming for example that “Governments that support the arts find that for every $1 invested in museums and other cultural organizations, $7 is returned in tax revenues.” Graphs from numbers portal statista.com show a constant customer demand for art museums in the United States, displaying annual visitor counts of over 30 million for 14 out of 15 12-month periods prior to any quarter since spring 2008. The numbers are stable and solid, with 32.3 million people visiting art museums in the US between beginning of summer 2014 and end of spring 2015.

As for the Louvre, the museum’s annual report stated that it has over 2,000 permanent employees, of which about 60 percent are hall supervisors. In implying the size of its contributions to the French tourism sector, the Louvre reported that 71 percent of its visitors were foreigners – including almost a million US citizens and 474,000 Chinese. Both groups are unlikely to be minimum-spending day trippers, even though, also interestingly, half of the museum’s visitors were below 30 years of age. More analytically, an academic paper published in 2009 by a professor of economics at the Sorbonne calculated the Louvre’s annual economic impact on France as ranging between 721 million and 1.16 billion euros in direct and indirect contributions. 

The Louvre, Paris, has an annual operating budget of over 200 million euros.

The Louvre, Paris, has an annual operating budget of over 200 million euros.

Those are impressive numbers. But truth be told there are reports showing that the cost-benefit numbers of the economy of culture are not nearly fully measured anywhere and for once it seems that Lebanon’s notorious absence of meaningful sector data – like on real estate demand for example – is no embarrassment in light of the information paucity on the cultural economy in developed countries.

Measurability of the economy of culture in the European Union is still in its infancy, conceded weighty studies in 2006 and again in 2012. “In relation to direct impact, existing statistical tools are not appropriate and available statistics are scarce. Statistical tools do not enable the cultural & creative sector to be captured properly,” found an oft-cited 2006 study on the cultural economy of Europe. And a 2012 report by the European Statistical System chimes, “The importance of culture within the scope of economic and social development is today unanimously recognized by the European Union. This increased perception of the major role to be played by culture in the achievement of the objectives of key European strategies such as Europe 2020 makes the absence of comparable data at the European level more striking to European institutions and the member states.”

The contributions to national wealth by the economy of culture are understood today to entail value creation through jobs and various other measurables but are also massively important indirect values-added. With human capital and social capital racing to the forefront of economic productivity resources, the presence of cultural assets in an economic hub city is a high-impact factor in attracting human capital. In this context it is interesting to note that Luxembourg, top of the developed world in per capita GDP, in 2014 had the highest ratio of cultural employment in the EU according to Eurostat, at 5.1 percent of all employed persons. Other high scorers, all above 3.7 percent of cultural employment, are the four Nordic countries, Switzerland and the Netherlands. When one of the world’s richest, services-driven and natural resource poor economies affords itself more cultural employment than any industrial neighbor, it bears asking if this correlation is a mere coincidence and if not, if the causality is one-sided or rather mutual, meaning that individual wealth creation and cultural employment support one another.

The National Museum of China, Beijing, cost $379 million to renovate

The National Museum of China, Beijing, cost $379 million to renovate

But there can be no doubt that museums are not just interesting for citizens of countries where per capita GDP is in the top 10 or 20 in the world. As China reopened its refurbished national museum almost four years ago, the state media advised, “As the museum is designed to receive just 30,000 attendants per day, visitors need to make reservations through hotlines, mobile phone services or the museum’s website.” The warning was appropriate. By 2013, the National Museum of China reported 7.5 million annual visitors, second only to the Louvre in the attendance rankings of museums worldwide.

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Hospitality & Tourism

Adaptation skills

by Nabila Rahhal
written by Nabila Rahhal

Over the past few years, it has become common to hear many Lebanese retailers share their woes on dwindling sales as customers bypass the city’s luxury brand stores in a rush to the best sales or promotions.

While these retailers are not complaining without reason, it seems they have done well in adapting to the unstable situation, and have learned how to grow their businesses despite all the obstacles.

No tourists, no worries

In previous summers, tourists from the Gulf countries were seen strolling through the streets of Beirut with tens of shopping bags hanging from their arms. With their gradual decrease in number, starting from 2011, the retailers interviewed by Executive say they have gotten used to the loss of business caused by this, and are working to move past it.

Mher Atamian, managing director of Atamian, explains that while previously 10 to 15 percent of their sales in the luxury watches segment had come from Gulf tourists, they lost that market five years ago and no longer take it into account when calculating their profits annually, adapting instead to the local market and visiting expats.

Izzat Traboulsi, managing director of Fashion Trading Company, the wholesale agents of Hugo Boss in the Middle East, does not believe that Lebanon was a market heavily reliant on tourism, compared to Dubai, where Hugo Boss has outlets as well. He explained how the retail industry there suffered heavily when Russian and Chinese economies were not as solid as before and their nationals’ visits to Dubai dwindled. “Of course we can do much better, and we are losing the extra growth we could potentially [have] reached had [the situation] been normal. But what we are doing today is still good; the core business is doing well,” he says, placing Lebanon as their second best market in the region after the United Arab Emirates.

The local market and expats to the rescue

Tourists aside, retailers interviewed for this article say the biggest percentage of their clients were the Lebanese expats who came for summer vacation and the general Lebanese population. “We have always relied on our local Lebanese clients as the source of our continuing success; the Lebanese diaspora is a contributing element in our customer base as well,” says Jamil Rayess, general manager of Hamra Shopping & Trading Company (HST), which operates Grand Stores (GS) and several brand stores.

“We lost the tourists who used to shop in Lebanon and these constitute 20 percent of our sales, but this drop was between 2010 and 2011. Since then we have adapted to focus only on the local market and the Lebanese,” says Traboulsi. He goes on to explain that Lebanese expats generally have more disposable income due to the salaries they make abroad, which they often spend on shopping when they visit home.

The attack of the malls

Malls are highly popular among local Lebanese customers, and it is no surprise that all the retailers Executive spoke to have outlets in these large shopping centers.

Traboulsi says their Hugo Boss store in ABC Dbayeh – their first directly owned store in Lebanon which they took over from their franchise partner two years ago – is their number three performing store in the region in terms of turnover per square meter following their two outlets in Dubai Mall and Mall of the Emirates, Dubai, respectively. Atamian says their outlet in ABC Ashrafieh is their strongest point of sale for the high end market in Lebanon.

Atamian explains that the trend of malls started seven to eight years ago and has been on the rise ever since. “It seems that more and more people enjoy shopping experiences in the mall, where it is never hot or cold and you find entertainment for the kids and everything in one place,” he says.

purchases by tourists who reclamed VAT

Traboulsi sees this mix of medium and high end brands that exist in malls as a plus point for retailers like himself. “The trend of malls came to Lebanon and we should not underestimate their footfall. The mall has medium to high end brands, so the footfall gets created in the medium and extends to the luxury,” he explains, noting that people tend to buy low end luxury products, such as accessories, in a mall more than elsewhere.

Street Shopping

While the prevalence of malls has taken its toll on the more traditional retail areas such as shopping streets in Hamra or Ashrafieh, these conventional shops continue to survive. “Of course with the diversity existing in malls, their appeal is on the rise; nevertheless, some shopping streets have kept their status as [key retail] destinations and have flourished in parallel with the development of the ‘mall culture’,” says Rayess.

Atamian sees that those streets now appeal to a different nature of shoppers. “It doesn’t mean that the streets of Hamra or Zalka will die but the purchasing power of people who are going there dropped,” he explains, giving the example of the fact that international brand names in general are opening in malls rather than at street level.

Luxury in Downtown

The retailers that Executive spoke to are adamant that downtown Beirut as a shopping area is guaranteed to live on, despite their current struggles there, due to its concentration of high end and luxury brands. The overall business there, however, is still experiencing serious fluctuations in footfall and revenue.

Atamian says their luxury brand watches saw a drop of 15 percent in sales year-on-year when compared to 2014, and blames this on the global economic crisis and on scarce business in downtown Beirut.

“One of the major reasons [for that] would be because the downtown area, where all the luxury brands are centralized, saw a lot of closures and protests starting July [2015], which is our high season.” Atamian adds that the garbage crisis also caused the Lebanese expats in the country to cut their trips short.

Hugo Boss, which has seen a 12 percent growth from 2014, says the only hit they took in retail in Lebanon was in the downtown area, following the closures and protests. “The problem with Downtown is the footfall, although Lebanese generally love to go to Downtown. The area could have more footfall if they just leave it alone for a while and ensure it’s a safe place for Lebanese to come with no difficulty of access,” says Traboulsi. Such a statement may come across as somewhat hopeful, however, considering much of Downtown has been relatively empty in comparison to other commercial areas in recent years.

In fact, Atamian notes that even before August 2015, Downtown had not been performing as well as usual because of the decrease in tourists. Tourists indeed constituted the main clients in the downtown area, and with their decrease and the many empty shops they left in their wake, one wonders whether businesses there should start adopting the strategy of targeting the local population.    

However, a sign of retailers’ continuing faith in Downtown’s bounce back is their mentioning of new outlets opening in the area. Atamian plans to unveil a Baume & Mercier boutique in Downtown by December 2015; Traboulsi plans on opening a Hugo Boss flagship store on Allenby Street by March 2016; and HST has spoken of a 2,000 sqm GS flagship store to be launched in 2016.

A look back and a look ahead

Their luxury brands aside, Atamian says they were “quite successful” in maintaining their sales across their brands through their reliance on mid-market priced and fashion brand watches, which performed well in 2015.

According to Atamian, 2016 will be similar to 2015. “We do not foresee any major change up or down, and if we can continue to maintain our performance, then it’s okay for us,” he says.

Traboulsi says the process of shifting Boss’s business model from franchise to direct contact sales will be completed by 2016 and is meant to better control the brand and offer clients a “more premium” experience.

Traboulsi maintains a positive outlook, which he says is necessary for operating and growing in Lebanon. He advises retailers not to be discouraged by occasional poor sales and not to react by cutting down on qualified staff or product offerings, since that could cause loyal clients to shop elsewhere.

While the business climate remains generally tense for Lebanon’s retailers, it is a positive sign that they are still investing and expanding in the country, albeit conservatively, keeping faith that when the country bounces back, so will the profits.

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EntrepreneurshipEntrepreneurship in Lebanon

The heart of the matter

by Executive Editors
written by Executive Editors

This company is part of Executive’s Top 20 for 2015. Read more stories from our entrepreneurship in Lebanon section, for the latest analysis on the country’s ecosystem.

CardioDiagnostics

Industry: Health care and ICT

Product: Heart monitoring devices and analysis

Established: 2011

Employees: 10 fixed employees

Founder: Ziad Sankari

When Ziad Sankari lost his father to a heart attack at the age of 17, the tragic circumstances motivated him to develop tools to monitor cardiac signals from the heart in a bid to catch and prevent life threatening conditions. By 2010, at age 24, he was a biomedical engineer, and in 2012 he founded CardioDiagnostics, a startup which offers wearable hardware and a service package to analyze the data received from the cardiac devices. After two rounds of capital injection, the first in the form of prizes and grants totalling $250,000 and the second an equity investment from Berytech Fund I totalling $540,000, the startup has seen revenues increase and the team size increase every six months since its inception.

CardioDiagnostics offers a complete package of services to their main target market, which is based in the US because they saw it as a more sophisticated and technologically developed market, and also because they manufacture their products in the US. Their product, LifeSense, is a package composed of hardware connecting to the body (which monitors electrical signals from the heart), and feeds data to a device that analyzes it and sends it to a ‘cloud’, an internet-type space where data is stored and collected. Both the analytics and the hardware are an integral part of the product and further, more sophisticated analysis is conducted in the cloud. This affords patients the ability to move while remaining under virtual observation, which can be lifesaving in the event of an emergency when local medical personnel are alerted through notifications.

Their main target market in the US has seen CardioDiagnostics reach an undisclosed seven figure number in terms of sales. Sankari has outlined their expansion, eyeing the UK, Germany and the Netherlands as future places of interest, as competitors are thin on the ground outside of the US market. Their offerings within their market are unique, as they outsource manufacturing, which allows them time to focus only on key elements of the supply chain and licence out their hardware. Their products are also sold in Lebanon, Saudi Arabia and Kuwait, but currently 90 percent of their income comes from US clients. Their devices are purchased high in the supply chain, by Independent Diagnostic Testing Facilities (IDTFs) and are then relayed down to hospitals and cardiology clinics. The scalability of the technology is apparent, as wearable sensors become more and more integrated into daily lifestyles – prominent examples of which can be found as apps on every smartphone that monitor daily steps taken.

While production and manufacturing is done outside of Lebanon, their fixed employees are still based here, with a core team of ten, comprised of engineers, clinical staff and business developers. Sankari hopes that, as CardioDiagnostics moves into new markets, the team in Lebanon expands further to create more job opportunities for local talent, since he retains all his salaried staff in the country. Their previous track record has seen staff numbers nearly double every few months in Lebanon, a trend Sankari wishes to keep over the coming years.

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BusinessReal Estate

Data deficiency syndrome

by Matt Nash
written by Matt Nash

Incomplete as they are, the numbers look bad for Lebanon’s real estate sector in 2015.

Construction permits are down. The number of transactions is down. Cement deliveries are down. Full-year stats were not available at time of writing, but year-on-year comparisons of the most recent data point to a deepening slump after a boom phase that ended in 2010. That said, developers continue to insist that large, unsold apartments in Beirut do not accurately reflect the state of activity in the market as a whole. With help in the form of subsidized loans made possible through central bank stimulus packages since 2013, young Lebanese couples are still buying, and population growth guarantees local demand for both residential and commercial properties, developers say.

How bad? Tough to say

Available data on the sector, however, prohibits in-depth analysis. Construction permits are misleading. The recipient of a permit has several years to actually begin construction (which he or she can ultimately decide not to do at all), and permits include a developer’s multi-building gated community as well as a private resident’s plans to build a new car garage. Cement deliveries are equally all inclusive, meaning when the corner store goes belly up and the next tenants bring in cement to convert the space to a sandwich shop, deliveries tick up. The statistics on real estate transactions, meanwhile, are also too vague to be of much use.

[pullquote] 2015 looks like another bust year [/pullquote]

As Executive highlighted last year in our Facts and Forecasts edition, the sale of a new apartment is only captured in the statistics once the property deed is handed over to its new owner. The standard marketing strategy for any new development in Lebanon, however, focuses on ginning up a high volume of sales before and during excavation – in part to help finance the project. This means that a sales contract between developer and future owner can be signed years before the sale shows up in the numbers and that delivery of a large-scale project can misleadingly boost the data. On top of that, “real estate transactions” – as delivered by the Central Administration of Statistics (CAS) – include property sales, inheritances and property donations without a subdivision of the numbers by category. Sales breakdowns by new versus existing stock or residential versus commercial, therefore, are out of the question.

The source of transaction data is also mysterious. All real estate transactions in the country go through the Directorate of Land Registration and Cadastre (DLRC), part of the Ministry of Finance. The DLRC does send out monthly stats covering some of the more mundane of the sector’s goings on (such as how many people asked for new official copies of their property deeds because of damage to the original), but they do not include sales transactions. CAS also produces real estate data, which it says comes from the DLRC office in each district (caza). CAS has real estate data stretching back to 2000; however, data is missing for the years 2006 and 2008. And, as noted above, the CAS transaction numbers lump sales in with inheritances and donations.

What the CAS numbers do show, however, are general trends. Between 2000 and 2005, year-on-year growth in transactions was slow and steady – in the single digits. The period began with a yearly total of 48,847 transactions and ended with 60,507. There’s a gap in the data for 2006, but transactions in 2007 reached 77,090, 27 percent up from 2005. Again, there’s a gap in data for 2008, but transactions grew to 94,046 in 2009, up 22 percent in two years. The next year brought another 10.8 percent jump in transaction numbers followed by a nearly equal decline in transaction numbers in 2011, the first year for which data is available that witnessed a contraction. Since then, transaction numbers have been on a downward trajectory: another 10 percent contraction in 2012 and a 9.5 percent decrease in transactions in 2013. There was a slight uptick in 2014, with transactions posting 1.2 percent year-on-year growth, but 2015 looks like another bust year, posting a 36 percent decrease in transactions in the first 9 months compared to the same period last year. That said, transactions for the first three quarters of 2015 are still above the full year 2000 and the past few years have seen transaction numbers above where they were 10 years prior. The market has not crashed, despite what you may have read in the papers or seen on TV. However, all these fuzzy numbers mean that the inquisitive can observe broad trends, but that is about it.

Indexing disappointment

In early November 2015, Byblos Bank announced the launch of a real estate demand index. Entering the press conference, the most pressing question Executive had was, “Where does the data come from?” The answer, as anticipated given the aforementioned statistical insufficiencies for the sector, was disappointing. Numbers for the index come from an opinion survey that asked exactly two questions – “Do you plan to buy a house?” and “Do you plan to build a house?” The bank did not follow up with respondents to find out if they carried through with their plans. And the index – which includes data going back to mid-2007 – shows the same general trends revealed by the already available but incomplete numbers analysts have been using for years. In short, it adds volume, but not necessarily value, to the available data set on the sector.

[pullquote] Demand is strongest for apartments ranging in price between $200,000 and $350,000 [/pullquote]

Earlier in the year, news broke that the Order of Architects and Engineers planned a real estate price index to be launched in the first quarter of 2016. Developers Executive queried on the proposed project welcomed it, but were somewhat skeptical. Namir Cortas and Massaad Fares, heads of both development companies and the sector’s two syndicates, say neither syndicate is directly involved, but note the market needs this data. Aysar Abillama, CEO of Injaz Holding, says he doubts the project will actually be implemented. The price index would undoubtedly be useful for consumers. Take, for example, the issue of prices in 2015. Ramco Real Estate Advisors – the country’s largest intermediary – argues that in Beirut, prices have dropped by less than 5 percent (see Ramco contribution). Developers Executive spoke with said they are offering discounts of 10 to 20 percent. Ramco’s numbers come from its own internal research department, and both journalists and consumers have to take developers at their word. A reliable index would help buyers know where the truth lies and avoid getting ripped off.

number of new buildig permits per year

Developers, too, bemoan the dearth of data on the sector. Abillama specifically blamed the media for distorting the state of the market, leading the public to believe the sector is either crashing or about to collapse. “Ask any buyer today, and he’ll tell you, ‘I’m waiting.’ Waiting for what, he doesn’t know. He’s waiting. Everybody’s waiting,” he says. Developers – who obviously have an interest in pushing the narrative that prices will never significantly drop – repeat the same mantra about the never decreasing prices of apartments in Lebanon: Land is scarce, owners generally do not have an urgent economic need to sell and there is an organic demand from population growth that will drive the sector forward with boom years as periods of stability (or relative stability) bring expatriates and foreigners from the Gulf. While developers readily admit that sales of apartments over $2 million in Beirut have been dead for years, George Chewane, CEO of Plus Properties, argues that, with a presidential election and stability, they will go in no time.

Reforms needed

In addition to more clarity on the sector in the form of better statistics, developers said the market would benefit from a dedicated ministry of housing. For one thing, it could help equitably solve the old rent issue that has been a problem for landlords and tenants since the end of the civil war. Developers also argue that the borrowing limit from the Public Corporation for Housing (or Iskan, as it is locally known) – which offers Lebanese citizens subsidized home loans – should increase from today’s $180,000. Everyone interviewed for this report agreed that demand is strongest for apartments ranging in price between $200,000 and $350,000. While land plays a part in making that price high and will arguably only push it up, Abillama admits that developers have played their role, too. “In the past 10 years, prices have gone up 400 percent. If you want to be realistic, construction hasn’t moved. What happened is two things: Cost of land went up, and our profits went up.” Asked how much profit margins have risen, he laughs. “Maybe more than the price of apartments. Yes, we are earning much more money.”

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Economics & Policy

Industry hunger

by Jeremy Arbid
written by Jeremy Arbid

If last holiday season Lebanon asked Santa Claus for better conditions in the manufacturing and agriculture sectors, then recipients were surely disappointed by what was placed in their stockings – a mix of promises and future hopes.

The year started off under duress for the food industry and agriculture producers with a food safety campaign by the Ministry of Public Health targeting establishments across the value chain. Producers of dairy were singled out, as were meat processors and butchers – at the level of consumption, restaurants and supermarkets were also subject to violations and, in certain cases, abrupt closures. By all accounts it was a necessary campaign to raise awareness of what the Lebanese are eating and had certain, if only anecdotal, impacts on public health. Consumer confidence plunged, according to both industry leaders and government officials, with the perception of Lebanese consumables in foreign markets also taking a hit (see Q&A Mounir Bissat SLFI). On a positive note, in a rare legislative session in November 2015, Parliament passed a food safety law that will, amongst other items, create an agency responsible for coordinating policy and overseeing inspection of establishments across the food value chain. But, because in Lebanon there is always a but, this agency could take years to reach operational status – implementation decrees will need to be passed and a source of funding for the agency located (see Q&A Maurice Saade FAO).

What has become commonplace in the industrial sector since the start of the war in Syria is a disruption of land export routes to the Gulf markets. The disruption has affected all types of sub-sector manufacturers, though gains in efficiency along the various sea routes have reduced transit times while mitigating losses to profit margins and maintaining market access. For the agriculture producers, closure of land borders earlier in the year wrought confusion as to where farmers would sell raw produce. In stepped the government with a $14 million temporary solution – place trucks that previously rode through Syria to Saudi Arabia on ships and continue by road to Gulf Cooperation Council markets – a necessary, if inefficient method to help producers continue selling to clients in those markets.

New markets

The potential opening of new markets is also on the government’s to-do list. Hussein Hajj Hassan, Minister of Industry, tells Executive that Lebanon will continue to negotiate new trade pacts with Latin American markets – Mercosur – pointing to talks with Brazil’s ambassador to Lebanon as a positive step forward. The Russian market remains on hold due to American and European-led sanctions following Russian aggression in Ukraine and the subsequent annexation of Crimea. The European market, particularly for Lebanon’s niche agricultural products, holds untapped potential. According to the Food and Agriculture Organization’s Saade, over the medium to long term, producers across Lebanon’s food value chain should transition to serving this market since the Gulf market is increasingly congested and the lifting of sanctions on Iran foreshadow further competition for fruits and vegetables.

Investments

One positive indicator for the agro-industry sub-sector is an uptick of $70 million in investments in 2015, according to the Investment Development Authority of Lebanon. Head of Lebanon’s food industrialist syndicate Mounir Bissat tells Executive that the sub-sector is attracting new capital while much of the economy is in decline due in part to the low cost of productivity – sourcing raw produce locally and the availability of cheap labor. Looking forward, Bissat says to expect exports of the sub-sector to grow, particularly if a trade pact is inked with Mercosur, and points to talks with representatives of Alimentaria – a large food trade show in Mexico with a subsidiary show in Barcelona – as a potentially large opportunity to source new clients.

container traffic port of beirut

Industry-wide the challenges remain the same. For energy-intensive paper manufacturers the lack of cost-effective access to electricity adds some 30 percent to operating costs, according to Fadi Gemayel, head of the Association of Lebanese Industrialists. Along these lines, costs are mitigated for certain industrialists qualifying for a central bank subsidy to install solar panels on factory rooftops. But Lebanon’s deteriorated infrastructure and the cost of transferring containers destined for export from factories to the Port of Beirut remain long term obstacles with no immediate solution.

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CommentOpinion

Surviving the slump

by Karim Makarem
written by Karim Makarem

The real estate market is the subject of much speculation, usually the negative kind. There are very few optimists who still see it as a lucrative sector. Yet the reality is not so bleak. Demand exists but only for the right product at the fair market price. Prices have started to adjust but effective drops are minor. Developers continue to look for new land to develop. Buyers, both local and expatriate, constitute a steady, end-user demand. The market rests on solid foundations. The only unknown that could either unhinge or improve this delicate balance is the political and security environment – something economic players have no control over.

Slight price drops

Real estate prices are the latest obsession of Beirutis. There is a consensus that apartment prices in Beirut have dropped. Opinions diverge about the exact magnitude of the drop. “Experts” flaunt percentages – anywhere between 10 and 30 percent. These opinions are never based on any accurate and reliable market information.

Actual market data confirms a drop in prices. The research department at Ramco sarl has been compiling price information on buildings under construction in Municipal Beirut since 2005. What our data shows is that the average price of new apartments has dropped by less than 5 percent in 2015, depending on the area. The study covered a panel of around 250 buildings that were in construction in both 2014 and 2015 in 67 neighborhoods across Beirut.

[pullquote] Buyers, both local and expatriate, constitute a steady end-user demand [/pullquote]

These are asking sale prices that do not take into account the discounts offered by developers during negotiations to finalize a sales deal, which has been current market practice for the past several years.

Wide price discrepancies in Beirut

Apartment prices vary widely from one neighborhood to another across Municipal Beirut. Logically, the most expensive apartments are located on the seafront stretch between Beirut Central District (BCD) and Ramlet El Baida, where prices vary between $7,000 and $10,000 sqm on the first floor.

Some projects with direct access to the seashore, such as Summerland Residence and Beirut Waterfront, post even higher prices. These remain a minority and cater to a very narrow niche clientele.

Overall, however, nothing in the capital can still be purchased at less than the symbolic bar of $2,000 sqm on the first floor. The most affordable neighborhoods are clustered at the center of Beirut, just south of BCD, from Bachoura to Tarik El Jdideh further south. Prices lie between $2,088 and $2,400 sqm on the first floor.  The north and easternmost neighborhoods of Ashrafieh are the next most affordable in the capital. Areas like Beddawi have an average sales price of $2,600 sqm on the first floor.  A Ramco study concluded in Spring 2015 for 345 buildings under construction in different areas of Beirut revealed the following averages: the average asking sales price of apartments stood at $885,360 on the first floor; the average apartment size was of 238 sqm; the average unit price stood at $3,720 sqm on the first floor, before negotiation.

Large new stock

Around 10,100 new apartments are currently under construction across Municipal Beirut. This is a drop of about 3.8 percent over 2014, but remains an important stock.

The majority of the projects under construction are located in Ras Beirut, which accounts for half of the stock under construction, with around 5,050 apartments. Ashrafieh comes next with about 3,900 apartments.

BCD, however, holds the lead as the individual neighborhood with the largest upcoming residential stock. The neighborhood’s 1.91 square kilometers count about 1,100 apartments under construction spread across 19 residential projects. Two mega-projects with more than 140 apartments each boost BCD’s figures.

Smaller apartments

The main change on the market is in the size of apartments. Developers have responded to the slowdown in sales by putting smaller apartments on the market – targeting more accessible budgets.

During the past 12 months, apartments across Municipal Beirut have lost about 14 sqm, dropping from 252 sqm to 238 sqm. Obviously, apartment sizes differ from one neighborhood to another.

BCD, for instance, the prime residential address of the country, still offers the largest apartments. They average 333 sqm. Traditionally, BCD has been the leader of the luxury residential market, topping the charts in terms of size of apartments, prices, quality of construction and design. The average apartment size in BCD is about 40 percent larger than the average size of apartments across Municipal Beirut, which stands at 238 sqm.

[pullquote] Current market conditions are not conducive to profitable speculative investments [/pullquote]

The average size of apartments in Ashrafieh and Ras Beirut are almost similar at 227 sqm and 226 sqm, respectively. They are slightly below the Beirut overall average, which is inflated by apartment sizes in BCD.

Even the high-end residential market has seen the apartment sizes shrinking. A few years ago, 450 to 600 sqm were common in the most prime neighborhoods of the capital. Today, no developer would venture down that lane. Even the most luxurious towers currently being built offer apartments between 325 and 400 sqm at most.

Limited speculation

Beirut remains an end-user market. Speculative investments remain very limited, shielding the market from the sudden and often random fluctuations of other money and investment markets. The slowdown that has characterized the market for the past two or three years also deters speculators, as prices have remained almost stable and are now starting to drop slightly. Speculators feed on an ebullient market, in which they can turn their property over quickly at a sizable profit.

Current market conditions are not conducive to profitable speculative investments. This seeming paradox helps protect the market from overheating and keeps prices closer to their fair market values by removing the “fake” demand that speculators represent.

There are some investors still interested in purchasing small apartments in certain neighborhoods of Beirut which are easy to then place on the rental market. This is still a lucrative investment, provided it is the right product. Apartments can be easily rented when they are small and located in a clean building. The building could be new or old, provided it is well kept and offers good basic amenities, such as parking facilities, elevator, generator, janitor, etc.

Mostly local demand

The vast majority of transactions are concluded by local residents buying a primary or secondary residence, for themselves or for their children. Local demand represents the majority of the local market. Its appetite fluctuates at the rhythm of the security and political crises, but returns at the first signs of a security lull.

Lebanese expats constitute the second largest source of demand for end-user homes. Their higher average levels of income than the local population makes them a choice target clientele.

Expats living in the Gulf countries and Africa tend to buy large apartments to use as primary residences. Expats living in Europe and, to a lesser extent, North America constitute the main demand for small apartments to be used as a pied-à-terre during their stays in Lebanon.

High-performing commercial markets

The commercial landscape has developed tremendously during the past several years. With a sluggish residential market, developers have turned to a much undersupplied commercial market – with some very successful results.

At the beginning of 2015, the capital counted 37 office projects within its municipal limits. These will offer around 195,000 sqm of office space.

Projects tend to be located in the peripheral zones of Beirut, avoiding the heaviest of the traffic congestions. Areas such as Corniche El Nahr, Rmeil, Badaro, the National Museum and Adlieh have seen a surge in office developments over the past few years.

The new stock is clean, modern and modular, offering flexible internal partitioning and plenty of parking spaces. Sales prices start at a minimum of $3,500 sqm, regardless of the exact location.

[pullquote] Projects tend to be located in the peripheral zones of Beirut, avoiding the heaviest of the traffic congestions [/pullquote]

BCD and the eastern and central segments of Charles Malek Avenue of course remain the main hub for prime office developments. They offer the best supply in terms of architecture, construction quality and common amenities and services.

The capital has historically been in dire undersupply of good quality office stock. The newest office buildings dated back to the early 1990s and, with a few exceptions, the majority was of middle-market quality and had been aging poorly. The new arrival of modern office buildings was thus much-awaited and most projects sold well.

Lands stand firm

The land market has been standing its ground. Land prices have remained predominantly unchanged across Municipal Beirut. Virgin land is rare in and immediately around the capital. Demand pressure is high, so landowners feel confident enough to stand firm on their asking prices.

Land prices, however, are often incongruent with the state of the market. With dropping sales prices of completed apartments, developers’ replacement cost for land is becoming too high. There is sustained interest by developers and an appetite for new plots of land, but only at a price that can ensure the project’s financial success.

A few landowners have understood that market realities have changed and are willing – more or less reticently – to drop their asking prices. For now, they remain a very thin minority, however. Most landowners refuse to reduce their prices sufficiently to entice developers into making a serious purchasing offer.

No crisis

The boom years are certainly well behind us. The market is in a phase of slowdown, but it is not in crisis. Developers are eager to agree to a 10-15 percent discount and the prices of built developments have dropped very slightly. Under the very difficult security, political and economic environments, stagnation is a sign of solidity.

The underlying fundamentals of the real estate market are solid: developers are highly solvent, demand is vigilant but sustained, speculation is close to nil and lending to individual homebuyers is very carefully regulated by the central bank.

Provided there are no major changes in the broad political and security scenes, the market should continue to stagnate, slowly absorbing existing stock and adjusting to new market realities: smaller budgets and more careful buyers.

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CommentOpinion

Plan of (in)action

by Matt Nash
written by Matt Nash

If a five-year plan to modernize Lebanon’s telecommunications infrastructure announced in July is being implemented, the Ministry of Telecommunications (MoT) isn’t talking about it. There’s no progress report on the website. The MoT hasn’t publicly announced tenders for the various projects needed for an upgrade. And the ministry’s reply to repeated interview requests on the subject? Silence.

After launching the plan, the MoT did try to tender new management contracts for the two state-owned mobile phone networks. The first try flopped. Bids for the three-year contract were due at the end of July 2015 with the announcement expected in October. Egypt’s Orascom Telecom Media and Technology Holding – which currently manages the network branded as Alfa – allegedly submitted its bid one hour late. Telecom Minister Boutros Harb disqualified the company. With that action, there were only two remaining bidders, and the tender was postponed. New bids were due in September, but the MoT has made no announcement about participation. A declaration of winners of the new management contracts is slated for December 2015.

The five-year plan, of course, included much more than new management contracts for the mobile phone networks. Indeed, the presentation delivered in an ornate hall in the Grand Serail was full of promises that – by 2020 – Lebanon’s notoriously slow internet speeds would be a thing of the past. The centerpiece of the plan focuses on replacing Lebanon’s current internet infrastructure – which today consists mostly of copper wires – with fiber optic cables. Fiber can handle more data traffic than copper and can deliver faster up- and download speeds, especially over long distances. At a short distance, copper wires can be used for fast downloading. In an interview several years ago, Toufic Chebaro – the chief ICT officer with Ogero, the state-owned telecom company that has a monopoly on internet access – told Executive that in Solidere, where buildings are connected to the national backbone by fiber and internet speeds are the fastest in the nation, internal building wiring is still done with copper. While Executive does not have exact figures, chief executive officers of local internet service providers have explained that in many locations, users are connected to the national backbone by several kilometers of copper wire, meaning download speeds are reminiscent of the 1990s, not the digital age.

The best-laid plans…

During the five-year plan presentation, the ministry confirmed that Lebanon has a fiber optic backbone that is not being fully utilized (some heavy users are connected but it was still not carrying traffic between the hundreds of “centrale” offices around the country that link users to the backbone, which is the cable’s primary purpose). Minister Harb promised the backbone would soom be fully put to use and that by 2020 fiber would replace copper in connecting users to the backbone. Such an undertaking – known as fiber to the home – is both expensive and labor intensive. The plan is to unfold in stages by using what are known as active cabinets during an interim stage. For users several kilometers from a centrale, cabinets would be connected to the centrale by fiber and placed closer to end users who would connect to the cabinet by copper but enjoy faster speeds because of the reduction in distance. To date, no new infrastructure works have been announced.

Early in his term as minister – which began in February 2014 – Harb said in an interview with Executive that he also planned to fully implement a 2002 telecom law that called for privatizing the mobile phone networks and Ogero. The company controls access to the international internet gateways (in the form of subsea cables) that connect Lebanon to the rest of the world. Private internet service providers lease bandwidth from Ogero and then resell that bandwidth to consumers. They’ve long complained that Ogero does not provide enough bandwidth. The 2002 telecom law calls for ending Ogero’s monopoly on access and privatizing the enterprise. Again, however, Harb made no public announcements in the first 11 months of 2015 to reach this goal.

Upgrading Lebanon’s internet infrastructure is key for the country to become the technology hub several policy makers insist they want it to be. The first thing tech-savvy entrepreneurs complain about is the poor state of internet infrastructure. And they are not the only ones who stand to benefit. In 2009, the World Bank found that for every 10 percent increase in high-speed internet penetration, a country’s economy gets a recurring 1.3 percent growth boost. Harb’s plan looked great, but Lebanon has a tradition of writing up excellent roadmaps and then never leaving the couch.

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Economics & Policy

Seeking integration at home and abroad

by Jeremy Arbid
written by Jeremy Arbid

 

In 2015 Lebanon’s agriculture sector witnessed several setbacks. Prior to the Syrian crisis, the sector had been picking up steam – exports of raw produce and agro-industrial products were increasing quite rapidly. The disruption of transit routes raised the cost of land transport – a change of route and the paying off of militias – until March 2015 when all borders connecting Lebanon to the Gulf market were closed. The food safety campaign also affected consumer confidence – particularly in dairies. But potential new markets present an opportunity to diversify exports away from an increasingly competitive Gulf market. Executive sat down with Maurice Saade, Lebanon’s country representative to the Food and Agriculture Organization (FAO) of the United Nations, to find out more.

E   What is the thinking behind subsidizing agriculture exports by sea – putting trucks on ships rather than packing produce in containers?

Well, the thinking is that the way the chain is organized now is by trucks so it is simply using the same chain. In the future this should be improved; it’s a temporary solution. We don’t know if it’s one or two years – [it] depends on the funding available – but essentially the government will subsidize the exporters [by covering] the cost of shipment. We’re not sure what has been the impact – the data is very difficult to get or is not available. The cabinet approved [the subsidization program] back in May or June 2015 but it took longer to put things into place; the season for exports – especially for fruits – peaks in July, August and September. At least they will have less [profit] losses and will not lose their clients in the Gulf; if you don’t deliver the client will move on to somebody else. That was the main concern, to at least ensure that the Gulf and Iraqi markets were not lost.

E   Has the influx of Syrian labor had an impact on host communities?

Not at all, quite the contrary. There is a large number of Syrian workers who traditionally accounted for 90-95 percent of agricultural workers in any case so prices have remained low and the abundance of labor also reduced production costs [for] farmers. Of course there are a few unskilled Lebanese workers displaced, but the net effect is primarily [positive because of] the availability of the Syrian workers who are more skilled, and also the vegetable and fruit shacks that emerged everywhere are run by Syrians, making consumers very happy because they are open 24 hours a day.

E   For FAO, is marketing raw produce a focus and is it more for local access to the market or for exports?

Local access is there. Lebanon is a free market; there are issues of ensuring wholesale markets but the potential for exports to the European Union is there. That’s where the Lebanese should focus because the Gulf market is there but it is very open for competition – [especially] if Iran opens up. In the EU market, the standards are much higher; quality, shape and also the sanitary and phytosanitary requirements are very strict. I’ll give you the example of potatoes. The EU provided Lebanon with an export quota of 50,000 tons and so far Lebanon has not used that quota for several reasons. The production in Akkar is very good because of the early season and producers [would be] able to export to the EU without much competition – [except] maybe from the Egyptians – but the Europeans want their potatoes nice and round and here they produce potatoes that are huge with lots of mud stuck in between. Europeans don’t like that so the Lebanese have to respond to the market’s needs and have not yet done so because they have been relying comfortably on the Gulf market. If they seriously want to plan ahead, especially if the export subsidy to the Gulf is not permanent, they need to think about improving the production chain, using less pesticides and fertilizers [and revising] post-harvesting methods [such as] crating and packing; that will give them access to the European market. [A quota of] 50,000 tons in the European market gives very good price margins.

E   Is there an effort to help smaller farmers scale up to join the value chain and meet these standards?

The most common, in other countries, is contract farming – essentially someone who has access to the European market making the deals. That company would usually have their own production, but if the demand increases, they start contracting with the farmers around them, imposing very strict requirements guaranteeing a price on condition that standards are satisfied. This has happened in Egypt and it’s working very well. This could happen in Lebanon, [but] not yet; we have in Akkar big companies [growing] potatoes but they are not yet at the contracting level with the other farmers. We think that should be a model that would work quite well. FAO, with the Ministry of Agriculture, could help the small farmers to upgrade, but if you don’t have a market, small farmers will not be able to make deals with the supermarket chains in Europe. They have to have some sort of integration with the agro-industry upward in the supply chain.

E   On food safety, FAO visited the slaughterhouses when the Ministry of Public Health shut them down for health violations. What’s the mindset and coordination when it comes to food safety in the agriculture sector?

FAO was the first one requested to help in the formulation of the food safety law back in 1998. We provided draft laws, legal and technical [advice] and we gave several scenarios. At that time our recommendation was that because Lebanon’s legal system is based on the French legal system, essentially each ministry has its own food safety and then you coordinate between ministries. The Anglo-Saxon system has a food safety administration: the [Food and Drug Administration in the United States]. So FAO was recommending that we follow with the existing French system for the [ministries] of agriculture, economy, health, tourism and whoever else is involved in food safety simply to coordinate and to make sure there is no overlap and no gray area.

E   That’s the problem and this is what the food safety law might address because it is so decentralized that nobody wanted to take responsibility until the minister of health stepped in.

Yes and no. In 2003 the United Nations Industrial Development Organization came up with a new proposal, the Basil Fuleihan plan, shifting the idea to having one agency responsible for food safety and nobody else, creating a new agency with inspectors responsible for everything. [This is important] especially when you are talking from farm to fork and you have lots of the food safety issues at the farm level, [such as] the use of pesticides. At the time then Minister of Agriculture Hussein Hajj Hassan said if you take away all this you have to close down the Ministry of Agriculture because [its mandate] is to work with the farmers. The new law is a typical Lebanese agreement – creating this new agency but keeping the others.

The good thing is we have a law because before we didn’t have a legal framework. The new agency has a dual purpose: the first is to coordinate and set the standards, and the other is to be an operational agency with inspectors. If it turns into an operational agency, it will be a layer in addition to the other ministries. The next step is to [issue] the implementation decrees and allocate the budget. This will take quite a while; to allocate the budget and recruit the staff might take years.

E   The food industrialists say even though the food safety campaign had very positive benefits for public health, it had repercussions on Lebanese products in foreign markets. What was the impact for the producers in the agriculture sector?

There was an effect primarily on the dairy sector; several factories in the Bekaa were closed. That had a major impact because consumers got scared and reduced [consumption] and this affected the price of milk sharply. The food safety campaign was very good because it raised awareness, but once you have a food safety strategy you adopt international standards. There are ways of closing shops; you audit and you don’t close a factory or restaurant based on one report. If there was a system adopted, it would be much smoother and more sustainable, not just based on political will.

E   What are the biggest risks in the food value chain and beside the food safety law and inspections what can be done to mitigate risks?

Awareness is very important and we already have good awareness. You need to work with other parts of the chain: transport, storage and cold storage. A lot needs to be done and that’s where you need the coordination among ministries. Who is responsible for controlling transport? Nobody. It falls between the cracks; that’s where the new agency should identify those gaps and suggest ways to control that.

Also a key part is what is happening at the farm level; the pesticide residue is a critical issue. [Concerning] food safety, if you have salmonella poisoning, you might end up in the emergency room, [but with] pesticide residues you don’t see them [or feel their effect] and 20 years later you have cancer. It is really the hidden danger of the food safety chain and this takes a long time to address because it is very complex.

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Hospitality & Tourism

Regional expansion

by Sophie Rimingtonpounder
written by Sophie Rimingtonpounder

The Hilton Group has been busy, particularly in the Middle East, which according to Rudi Jagersbacher, area president for Hilton Worldwide, Middle East and Africa, is the “fastest growing region” for the corporation. He explains how, thanks to this formidable growth, there will be a new Hilton property opening in the region every month for the next five years.

Indeed, Jagersbacher recounts how in 2011, Hilton Worldwide operated 40 hotels in the Middle East and in just four years, by the end of 2015, they now operate 90 hotels with approximately 100 deals signed for the next few years.

Executive sat with Jagersbacher to learn more about what drives the Hilton Group and how Lebanon is positioned in the company’s strategy for the region, especially with the long-awaited opening of their downtown property, set for 2016.

E   Will you be bringing more of your mid-market-focused service hotel brands or your luxury brands to the region?

From a global perspective, there’s a similar type of scenario. It is to do with the economy of the various places, and if you look at the Middle East, for instance, a lot of hotels had their full service luxury brands already rolled out and this inevitably leads to mid-market-focused service hotels being available.

You can only have so many luxury hotels within an area, so we are bringing Waldorf Astorias and Conrads wherever there is a market with sustainable income and a return on investment which are the thresholds.

Clearly, there are opportunities for business people or people who travel for leisure. When you have two or three rooms, [people] want to be in the secure environment of a big brand but with the safety, security and brand standards all reflected in the lowest denominator.

We have 2,000 Hamptons [our three- to four-star brand] globally, and it is highly successful because there are a lot of people who stay overnight for business and all they need is a clean bed and a great shower…they don’t need three restaurants; they just need to go in and do their business and have good value for money.

So bringing that kind of thing to the Middle East was actually a strategy in terms of asking, “What is the next wave? Which countries are able to take these brands into their portfolio? And who are the investors we can attract to these brands?”

E   What are the main markets you are considering for your growth in the region?

We have two or three markets where we know we have a sustainable economic formula where we can roll out 20 or 30 brands across the country or region.

Saudi Arabia and the United Arab Emirates (UAE) traditionally only went for luxury and the big brands. We opened two hotels, Hilton Gardens, the first in the UAE of this type, and we have many more lined up. The same goes for Qatar. 

We also look to Egypt and the Levant which brings us to your area. Egypt has a similar kind of strait although they are still focusing on the full service, which means the Hilton brand, and the same goes for Lebanon.

We also believe that, particularly in the Levant, there is a lot of opportunity in the mid-market-focused service.

E   How about Lebanon?

For Lebanon, obviously the market is a lot smaller. We have been working on a project in Downtown for many years and for lots of different reasons it never went through, but the good news is that we are definitely going to open by 2016.

A lot of work has been done over the last seven years but there have been issues that are out of our hands, mainly owners’ issues.

E   So you still see downtown Beirut as a viable location for a Hilton property, despite the instabilities that are manifest in the area?

Our location is superb; everybody is building around it. I don’t think there is any better location; even if the port develops or the buildings come up, this will be in 10 to 15 years. And even then, the heart of the city is not changing; that will always stay the same. So inevitably, those types of boutique hotels or special destination projects with great restaurants and bars will always remain in that center. 

E   What made Hilton Group decide to take over the management of the two Habtoor properties?

When we looked at this property, Habtoor, we already had Downtown available and we needed to decide what we were going to do. Since the downtown hotel is rather small, particularly from a banqueting point of view, and because we loved the location here, we went with it.

HILTON-9 Photo

E   So it was part of your strategic vision for the Group in Lebanon?

Yes we wanted to be here (Habtoor) because it has the biggest conference and meeting rooms. It’s also in a great location and I don’t have to fight with everybody in Downtown over rates and occupancy. Here, the people who stay have different types of needs, such as big conferences and meetings, so we have a lot of business travellers.  Also, the location which we have here (Habtoor) is going to grow from a corporate point of view with a lot of new businesses moving to the area.

People who want leisure go to Downtown, which is fine, but there are so many hotels there and I think that, in terms of fair share, we at Habtoor are not in the same ballpark. We have our own business model.

The second thing is that it’s a strong residential area with a lot of mid- and upper-class residential units being developed, and then of course you are in the middle between here and the mountains so it also brings a lot of things down here. So strategically, this location is superb.

I think from that point of view, we are settled.

E   Is that it for your growth in Lebanon?

You can never say that. There may be mid-market or focus-service opportunities. We always look at possible opportunities going forward and the criteria for this are really simple: We’re a management company which means we bring in investors to invest. We need to ensure that the financial thresholds have a return on investment and also [establish] the stability of the business environment to ensure we have sustainable profitability and interest payments.

This is really important because once we start employing people, we need to make sure we can grow, develop and train them further so we are not going up and down in the cycles of business which many in the country are experiencing right now.

E   How would you place Lebanon in the overall strategic vision for Hilton Group in the region?

Like we’ve said, we have 600 rooms in three properties in the country which is already a lot. At this stage, we want to make sure that we open our new property in Downtown; that’s our focus for today and for the next couple of years before we look at anything else.

That’s because of the business trends in Lebanon. Five years ago it was booming and look where we are today. But that means the potential is really great and the future is very bright. I think if everybody can get their ducks in a row and the right priorities are taken from all levels of the industries then the investments and developments in Lebanon will be really strong. It’s got a great following and it’s a big brand, not just regionally but globally as well.

E   What is driving your growth in the Middle East?

Investors and demand. Let’s talk about Dubai, the biggest model because, in 15 years, the whole environment there has changed totally.

One of the most important things they did is they were able to create an airline which was bringing customers. Today, they have 55 to 57 million people coming through Dubai, which is huge. Although most of them are in transit, obviously many are staying over in Dubai; this is a huge growth with new builds and destinations.

Creating a safe and secure environment was their key. We always say democracy is a very important feature in our lives but it doesn’t work everywhere as well and hence, in terms of the decision-making process, they have an invigorated leadership with a great strategy which they have followed regardless of comments around the world and I think they are very dedicated. When you look at the growth with Emirates Airlines and at the financial institutions moving in, it’s a great recipe for moving forward.

Now Dubai is only one spearhead, with other areas like Ras Al Khaymah [and] Fujairah.  Abu Dhabi has also developed its own airline, and the same with Qatar.

E   How does outbound tourism from the Middle East and North Africa (MENA) region to other areas affect your business?

The strategic outlook in terms of the outbound strategy from the MENA region is also very important. A lot of people who live in MENA are outbound during holidays and it’s a big piece of business. This is why you have to have good representation in each country in MENA. It all goes back to flight connections; today it is easy to take flights anywhere from the Gulf. Therefore we as a hotel group need to think from a strategic development point of view to help us ensure we can move our customers in a global landscape. We have 42 million Hilton Honors customers across the globe who visit us internationally and therefore new destinations and offers are very important for us to roll out.

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Hospitality & Tourism

Waiting for (President) Godot

by Nabila Rahhal
written by Nabila Rahhal

Executive met with Pierre Ashkar, head of the Hotel Owners Association in Lebanon, to discuss the hotels’ performance this year as well as the main issues and concerns affecting hotel owners.

E   According to tourist numbers and hotel occupancy rates, it appears that the year 2015 started off well for hotels in Lebanon, correct?

Usually, 60 to 70 percent of tourists in Lebanon are either individuals or corporate travelers. The individual traveler can get corporate rates if they are loyal customers who come frequently. Individuals get rack rates while corporate rates goes down by 15 to 20 percent. Tours and bulks get a completely different deal with lower prices.

The problem started in Lebanon in 2011 when the hotels began to lose guests, and so automatically hotels started lowering their room rates: the rack rate which was $200 went down to $150, a 25 percent decrease. So when my rack rate goes down 25 percent, I have to decrease the price as well for my corporate customers, so that’s another 15 to 20 percent decrease.

So when you hear that the increase in the number of tourists is 16 percent from last year, you have to ask yourself first how many days they stayed in Lebanon because nobody knows. Also, a bigger [number] than before are coming within tour groups, especially Iraqis, and they are getting group rates. So whereas before you would have said no to that, today you take them at group rates because you are hungry. Hotel owners are giving rooms at $60 and $80 just to have liquid money in their hands and make their payments.

I will show you some numbers related to Christmas and New Year’s in 2010. A 100-room hotel had rates of $200, which makes $20,000 per day, and most guests used to stay for 10 days, so the hotel could make $200,000. That same hotel, today, has lowered prices down 40 percent which makes a room $120, totalling $12,000 per day. Since the average stay is down to three days, the total today is only $36,000. Look at the difference, less than a quarter of revenues. Now you see the reality.

E   Were all the areas equally affected by this situation?

No, because some areas rely on local Lebanese as their base clients, and mainly those who are used to spending their summer in the mountains. So these hotels are already seasonal and only work for two months.

E   What about the guesthouses and boutique hotels that were popular this summer and appear to be on the rise?

It’s a different segment and market. They work on weekends and in the summer. These represent a maximum of 10 percent of hotels in Lebanon. Some hotels have the financial means to survive this period because they only have 30 rooms and the whole family runs the hotel but the hotel institutions which employ many people, such as the hotels in Beirut, have to comply with international standards and expectations which are different than those required for guesthouses or hotels in rural areas.

E   You paint a rather bleak picture. From the Association’s perspective, is there a solution to this crisis?

Let us speak honestly. No one can solve the problem entirely. But what could happen that would help many stay on their feet while waiting for better days is financial engineering.

Financial engineering has allowed the Lebanese government, with all its debts, to remain on its feet. Who is behind this financial engineering? The minister of finance, the central bank governor and experts in this field. Just like they found a way to keep the government on its feet, even though it is still accumulating debt, they need to find a solution for hospitality institutions, because each hotel that closes down is letting its employees go, therefore increasing unemployment and making these youths desperate to make some money and [support] their families.

This is my opinion. The day they elect a president, there is an agreement to stabilize Lebanon on a local, regional and international level. Automatically you will see the country prosper. This is what happened after the 2006 war and the same scenario after the Doha Agreement in 2008.

E   So there is still some hope for prosperity in this sector?

The country has not lost its components or the capabilities of its citizens. It did lose the quality of youth who have left the country already but I assure you those will return as soon as they feel the country is stable.

Look at the concepts developed by Lebanese in Africa or the Gulf; why are they so successful? Because those countries offered them stability. This is all we need, stability, and I tell you Lebanon will be full and at a room rate of $200. I repeat, give us stability and take all you want.

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