Executive Magazine

‘We have tried to attract Syrian industrialists’

by Joe Dyke December 17, 2013

written by Joe Dyke

Vrej Sabounjian is perhaps the most positive person in Lebanon. Despite worsening security conditions, a refugee influx and a stagnant economy the country’s caretaker minister of industry is convinced that there are plenty of opportunities — companies just need to find them. Executive met with him to discuss his record in 2013.

When this government was formed, you promised to be the most pro-industry government in Lebanon’s history. Have you failed?

I have succeeded. The government was not saying that we were going to be 100 percent pro-industry. I think governments should have balanced policies with all the sectors — industry, services, tourism, etc.

As far as industrial policy, I think we have done well and I would thank all my [ministerial] colleagues and the prime minister and president. We can say that after two and a half years the Lebanese industrialist has achieved a lot of things, but of course there are some things we could not do yet — especially because in the last six or seven months we have not had all the powers of execution. So that is a minus, not a plus. But we have done a lot of things.

What specific successes are you proud of?

I don’t want to specify what I am proud of and what I am not proud of. For me as long as it is a service for the Lebanese, it is my priority. Some services help big industries, some help smaller industries — neither is necessarily more important for me.

Secondly I don’t like to brag and say, “I did this,” and “I did that.” There is a very long list of what we did — maybe one day we will publish it. But I don’t want to brag while I am in the post that “this is what I did.”

You still have not been able to implement the cut in export VAT from 15 to 7.5 percent?

It has been in the parliament for seven or eight months. I hope one day they meet again and finalize this law. But other than that there are many, many things we have done — for example the [establishment of the National] Wine Institute and the obligation of manufacturers to have three kinds of insurance. This allows safety for the employees and for all the neighbors.

What about plans to encourage the United Nations to only buy Lebanese goods when supporting refugees?

We are working on that plan with the UN. We have been meeting with them to urge them to spend their money in our country. We have opened our doors to our Syrian neighbors who are temporarily here. I want them [donors] to spend their money here by first giving priority to whatever we manufacture in this country and, secondly, if it is not available in this country, the Lebanese merchants can import for them. But it has to go through Lebanese businesspeople.

Have the UN accepted this yet?

This policy is not implemented. There is no policy.

Could Lebanese industrialists cope with the scale of the demands?

Of course. We are capable and we are willing to be capable. Once we finalize the plan we will have an office so that small companies can go and register so that when there is a tender they can participate and we can support them with the paper work. We are able to give [the UN] whatever they need — supplies, food, water, clothing. Whatever they need.

You would be in favor of making this legal so that they would only be able to get resources from Lebanese companies?

Not only in favor. I am convinced this is our right. We have one and a half million refugees in our country and I hope all the donor countries think this way.

The industrial zones were in the government’s mission statement. They are no longer realistic and private sector leaders are planning to establish them without government support.

This industrial zone is an idea and I don’t say I don’t like it, it is fine…

…but you are not fully in favor of it?

I am in favor but this should not be a reason for us to say, “Well we don’t have an industrial zone we are not doing good business.” I want to say, “If you want to do industry, do it wherever you want and I am with you. Wherever you have a piece of property, do it, invest in it and the minister will help you.”

So you will support a privately run industrial zone?

If they have land they want to [develop] I am willing to help them as well. But I am not going to ask the people that have their factories somewhere for the last twenty years to close their places and go there — this is not going to happen. I don’t favor this at all.

That is not what they are arguing for, they are arguing for government support for these zones similar to tax breaks you see in other countries…

I don’t think the Lebanese people need more tax breaks. We are one of the lowest countries, we are paying 15 percent tax — that is all. The lowest advanced capitalist countries are 35 percent, France is 75 percent [at the top rate of tax]. We are 15 percent and they are still saying they don’t want to be taxed? This is one of the lowest taxes. Let them think about how we can produce better, faster and in alternative ways.

Is it fair to say accession to the World Trade Organization is not realistically going to happen in 2014?

I don’t know about that. Maybe we should ask about the World Trade Organization — I am with open markets and equal opportunities for all. But the same rules apply for a country with a population of 90 million and a country of 4 million? If we are a small country we are always under regulation from larger countries. I disapprove of that. I think there should be exemptions. The WTO is a good thing but I think there should be some precautions and protections [based on] understanding the real situation of every country.

Why has Lebanon not been able to attract more Syrian industrialists fleeing their country?

I don’t think we did not attract. We have said many times we are ready to help if anybody wants to invest. It is a matter of choice where they go — it doesn’t mean we are against their investments. On the contrary we are with their investments. But if they don’t want, they are welcome. Many industrialists visited me, I showed them ways they can invest and they were very happy. But it is their choice — we cannot say, “No, you have to invest here.”

Were you disappointed not to attract more?

Not at all. Why should we be disappointed?

Industrialists complain that the minister of agriculture is able to attract more support for his policies than you are as he comes from Hezbollah. Have you had the full backing of the rest of the government?

As I said, I thank all the ministers. Whenever I need it I have the support. If not 100 percent — that is not possible with any minister. Not every minister can get the support for everything he wants, but mostly whatever I needed, I got the support. It had nothing to do with my background or who was supporting me.

How confident are you for Lebanese industry in 2014?

I would say that there will be great opportunities in Lebanon in 2014. There will be a lot of things for sale. Some businesses will close down, some will open up — but there will be opportunities. I think they should look at opportunities in 2014 and beyond.

December 17, 2013 0 comments

The Buzz

Business briefing: 17 Dec 2013

by Executive Staff December 17, 2013

written by Executive Staff

Economics and Policy

The United Nations appealed for a record $6.5bn for Syria and its neighbours on Monday to help 16 million people, many of them hungry or homeless victims of a conflict that has lasted 33 months with no end in sight.

Out of spirits

by Nabila Rahhal December 16, 2013

written by Nabila Rahhal

Given Lebanon’s reputation as the liberal party capital of the Middle East, it is no wonder that alcohol consumption in the country increased by 6.3 percent from 2007 to 2012 and that around 942,000 liters of alcohol were consumed last year, according to figures from the International Wine and Spirits Research (IWSR).

Yet even this lucrative business is starting to feel the heat this year, and some distributors Executive spoke to are finding it hard to maintain their positivity in the face of dwindling tourist numbers and a tightening local market. Since spirits are not basic needs, they are among the first products people spend less on during difficult times.

Although the last three months of the year, and all the festivities associated with them, account for a significant chunk of annual spirits sales, distributors are nonetheless expecting a notable decrease in consumption from 2012.

“We are not having a very good year, meaning I doubt we are going to see any growth. Still, despite the difficult times we are being more aggressive and grabbing market share though this costs us more money and is impacting our net revenues,” says Naji Hmouda, business manager at Neo Comet, the spirits distribution company which is part of Fattal Holding and distributes Grey Goose and Martini among others. These tactics led to a 15 percent rise in their on-trade sales (spirits sold in hospitality venues), says Hmouda. However, the overall drop in tourism is having its own impact on this kind of distribution.

One of the early signs of trouble in the spirits industry, often described as having a high loyalty factor, is when consumers downgrade from their favorite brand to a cheaper one, something spirit distributors in Lebanon have noticed. “The premium or the mid-level range, usually the most consumed, is where we are having a tough time. This shift to the slightly lower cost ranges started last year and is worsening this year,” says Hmouda, adding that conversely in a typical “the rich get richer scenario” their $3,000 per bottle Louis XIII cognac is having a record year.

Free measures

Other overall challenges faced by the industry this year include the parallel economy in which brands are smuggled in tax free and sold at prices that undercut distributors who hold exclusivity.

Distribution company Nexti, owned by Fawaz Holding, was only able to maintain its on-trade numbers in 2013 because of the many bars frequented by Lebanese that were “mushrooming” in Mar Mkhayel neighborhood, Uruguay Street, and Jounieh.

The anti-smoking law which took effect in late 2012 also had a negative impact on the on-trade sector during the first quarter of 2013, as some smokers preferred to take their drinks at home where they could light a cigarette instead of having to smoke out in the cold. Ramzi Nohra, brand manager at Etablissements Antoine Massoud also adds that the closure of many food and beverage venues this year added to the drop in figures for the on-trade division.

This general decline in on-trade sales was offset somewhat by a shift toward off-trade sales as more consumers bought their liquor from wholesalers such as supermarkets or neighborhood grocery stores. Nohra explains this shift by saying that 2013 saw new chains enter the market — notably Carrefour — as well as expansions by the established supermarket chains into either more branches or different retail concepts.

Within the off-trade sector itself there was a shift in sales from the upper trade section of hypermarkets to the lower trade section of neighborhood grocery stores, according to distributors Executive spoke to. Carlo Vincenti, owner of G. Vincenti & Sons, believes this shift is due to people avoiding impulse buying and promotions common in hypermarkets. Hmouda points out that neighborhood grocery stores usually extend a credit line to their regular customers who can therefore pay for their shopping at the end of the month, a much needed perk that is not available in supermarkets where average purchases can reach up to $100 or more.

New contenders

Whiskey remains the most consumed spirit in Lebanon, representing more than 50 percent of the market. Since a lot of whiskey consumption happens at home, it is a major fuel for the off-trade sector, says Vincenti.

“A long time ago, before the civil war, there was a high tax on whiskey to encourage consumption of the locally made arak. When this was dropped, whiskey became affordable and people were eager to try it,” explains Nohra.

“Scottish whisky still dominates the market in terms of volume but there is heightened demand for both premium whiskeys — as mature drinkers develop an appreciation for quality — and for Irish whiskey [especially] among the younger generation who are embracing its smooth taste,” says Tarek Fawaz, CEO of Fawaz Holding.

Vodka is the fastest growing spirit in Lebanon and its consumption has doubled in the past seven years, though it still only accounts for half of whiskey’s numbers, according to the distributors Executive spoke to.

Early in its rise, says Vincenti, vodka growth was fueled by the development of the hospitality sector in the country and was adopted by the younger generation of partygoers who appreciated its neutrality and mixability.

“Vodka was perceived as an ingredient and did not have an independent image until recently when it developed the premium and super premium category and better production process in general. Today, vodka has evolved and is considered a pure spirit which can be consumed straight on ice,” says Vincenti giving the example of Chopin Vodka, which they distribute.

Nohra believes vodka’s growth in Lebanon is part of a global trend and says standard or regular vodka make up 70 percent of the market with the premium and super premium brands having a smaller share due to the low purchasing power of the Lebanese.

The ready to drink category (RTDs) is a surprisingly strong emerging contender in the spirits industry mainly due to its low price and its practicality factor — with spirit and mixer pre-mixed in the can. RTDs are popular among consumers between the ages of 18 and 25.

Nayef Kassatly, whose company Kassatly Chtaura produces the popular RTD Buzz, says quality and strong communication are important factors in the RTD business. “Buzz has been face-lifted four times so far because it is a trendy product in a category that is very new and fickle and so might have a short life span; it grew very rapidly but it might drop as fast as it grew,” he says.

The overall outlook of Lebanon’s spirits distributors for 2014 is one of survival in tough times. “In Lebanon we learn to survive despite everything; we have to go on no matter what as it’s been like this for more than 25 years,” says Vincenti.

“I don’t see any growth in this industry next year. The market is saturated and there is a lot of competition among the distributors for the narrow local market we have. If we can remain stable, that is positive enough to survive until better times,” concludes Fawaz.

December 16, 2013 0 comments

Business

In need of nurture

by Livia Murray December 16, 2013

written by Livia Murray

“The best thing a government can do when things are going well is not to do anything,” says Salam Yamout, national information and communication technology strategy coordinator at the Council of Ministers. “Governments move when markets fail,” she says. Yamout’s attitude reflects Lebanon’s laissez-faire economic style when it comes to matters of government intervention in the private sector.

But with an economy ravaged by domestic and regional tensions, paired with a growing unemployment rate, the country could use some government intrusion. Nowhere is this more true than in the budding entrepreneurial ecosystem, which has seen the creation of several successful startups but is still facing many barriers. Lebanon’s score on the World Bank’s “Doing Business” report for 2014 underlines the need for some government action to bolster the business environment for entrepreneurship. Out of 189 economies, Lebanon ranked 120th for starting a business, 109th for getting credit, 98th for protecting investors, and 126th for enforcing contracts.

Waiting on parliament

This need is not completely lost on the various branches of government. A United Nations Development Program (UNDP) project at the presidency of the Council of Ministers is working on removing various barriers to setting up a business in Lebanon. According to economic officer Yasmina el- Khoury Raphael, they currently have recommendations for the code of commerce sitting at parliament awaiting approval. They also recently completed a draft law on secure lending, which would help entrepreneurs take out loans on moveable assets — as many small and medium enterprises (SMEs) don’t have fixed assets. Both initiatives need to be passed by parliament before becoming law. However Lebanon’s parliament has not met since the resignation of Prime Minister Najib Mikati in March.

“There has been a problem in legislating quickly in Lebanon. Some laws have been waiting many years,” says Salam Yamout. “We have very low grades when it comes to governments passing policies and regulations.”

Shallow respite

A proposal from the Ministry of Economy and Trade facilitating early-stage financing to entrepreneurs is also waiting for the parliament to convene to be passed. The Innovation in Small and Medium Enterprises (iSME) project hinges on a $30 million loan from the World Bank. Though the World Bank has approved the loan, the Lebanese government requires the approval of parliament to borrow money.

The project could address a salient issue in the entrepreneurial ecosystem. “Access to finance for smaller firms is still a problem,” says Zeina el-Khoury, head of the enterprise team for the UNDP project at the Ministry of Economy and Trade. Despite programs geared toward entrepreneurship, such as the guaranteed loan service Kafalat, only 16 percent of small and medium enterprises in Lebanon have access to loans, compared to a global average of 26, says Khoury.

The money from the World Bank would be deployed through two channels to boost the development of early stage companies. First, it would be awarded to entrepreneurs for concept development grants, in which they can receive up to $10,000 to develop an idea. Second, the bulk of the program’s spending would be a fund that would match investments from venture capital firms. This program would be implemented through Kafalat.

Meanwhile, over at the Investment Development Authority of Lebanon (IDAL), attempts to improve the business climate are similarly pending parliamentary approval, though no one is holding their breath. IDAL submitted a proposal to the council of ministers to amend Investment Law No. 360 which would lower the eligibility criteria for enterprises to benefit from financial exemptions offered through the program to make the business environment more conducive to the development of startups.

Currently the criteria to access such programs are too high for fresh entrepreneurs starting a business. The criteria to benefit from its programs varies by sector, but, for example, the information technology (IT) sector requires a minimum investment of $400,000 and the creation of 25 jobs, and a project in the tourism sector requires a minimum $15 million investment and 200 jobs. The current proposal suggests lowering some of these barriers to eligibility. In the IT sector, for instance, it proposes lowering the job creation minimum to receive incentives. If IT companies can create five jobs in two years, they could benefit from some of the incentives offered through IDAL such as exemption from corporate taxes for five years.

Circular 331

Not all policies regarding entrepreneurs need parliamentary approval to be passed. In a bold move for action in August, the central bank passed Circular 331, intended to stimulate the economy and create jobs, which created a lot of buzz in the startup ecosystem.

The circular takes advantage of Lebanon’s loan-to-deposit ratio of 34 percent — low compared to the global average — meaning Lebanese banks are sitting on a lot of money that could be invested in the startup ecosystem.

It creates incentives for commercial banks to make investments in startups or bodies in the startup ecosystem such as incubators or venture capital firms by guaranteeing 75 percent of their investments. With only 25 percent of the risk, commercial banks are incentivized to make investments in startups, otherwise seen as notoriously risky. In lieu of a functioning government to implement policies that would create a favorable environment for budding businesses to operate in, some members of the ecosystem have hailed the central bank initiative. Others have questioned the ability of banks, who have little experience in investing in startups, to be able to invest in them in a smart way.

Yet initiatives such as Circular 331 cannot replace the government’s role. After all, many of the structures from which entrepreneurs benefit today have been the government’s doing. It was a government initiative that established Kafalat, currently one of the greatest financial resources for entrepreneurs operating startup companies or SMEs. Similarly, Lebanon’s three incubators — Berytech, BIAT, and SouthBIC — came out of a joint project between the Ministry of Economy and Trade’s SME unit and the European Union.

Lack of coordination

The plethora of initiatives coming from all sides shows the awareness shared by members of Lebanon’s political and economic institutions of the importance of encouraging the sector, but it also highlights the discontinuity and lack of coordination between different bodies. The Central Bank’s initiative and the iSME project bear many similarities, which make some members of the different branches question the need for two separate initiatives. “There are a lot of initiatives in Lebanon but they need to be packed in one thing,” says Khoury, “The government can help by playing a connecting role.”

While a coherent policy vis-a-vis entrepreneurship would greatly benefit the business ecosystem, the responsibility cannot fall on the government alone. Members behind the government’s policy making have called for more involvement on the part of the private sector. “The government doesn’t always have to generate policies,” says Yamout. Private sector actors are better placed to propose initiatives that target their direct needs. “But the private sector in Lebanon rarely comes up with a plan,” says Khoury. With a deadlocked government that moves slowly in the best of times, it is certainly difficult to have faith in the system.

December 16, 2013 0 comments

The Buzz

Business briefing: 16 Dec 2013

by Executive Staff December 16, 2013

written by Executive Staff

Economics and Policy

An Israeli soldier has been killed by a Lebanese army sniper from across the border, the Israeli military has said.

Throw me a loan

by Livia Murray December 16, 2013

written by Livia Murray

The steady decrease in Kafalat loans, which dropped by 17.2 percent in the first 10 months of the year compared to the same period of time in 2012 is likely to increase even further by the end of year due to the instable security situation in Lebanon, according to Kafalat chairman Dr. Khater Abi Habib. This comes off the back of a 16.4 percent drop between 2011 and 2012.

However, the decrease in Kafalat loans is one of the country’s few maladies that cannot be dismissed as just another instance of Lebanon’s dire economic circumstances. While most sectors have experienced a slight or significant decrease in extended loans, many have remained constant, while the high technology sector actually saw a fair increase.

Kafalat has presented an extraordinary resource for entrepreneurs since its inception in 1999 at the initiative of the government, the Association of Banks, the central bank, and the National Institute for the Guarantee of Deposits. Through Kafalat’s program, entrepreneurs of small- and medium-enterprises including startups can take out a collateral-free loan from commercial banks based on the feasibility of their business plans. The program has created an incentive for banks to lend by guaranteeing 90 percent of the bank’s loan for amounts of up to $200,000 and has broadened the sphere of who can open a business. Many entrepreneurs in Executive’s top 20 Lebanese entrepreneurs have been beneficiaries of the scheme.

Sectoral discrepancies

The economic downturn has not hit all sectors to the same extent, tourism reflects the most significant fall from grace. As President of the Association of Hotel Owners Pierre Achkar told Executive in September, “all hotels are partially closed.” News like this may make entrepreneurs in the tourism industry think twice before expanding their businesses, or delving into startup projects.

The tourism sector received 122 loans by the end of October 2013, compared to 166 in the same period in 2012, a 26.5 percent decrease. As the number of tourists travelling to Lebanon has decreased, particularly with the hesitation of lucrative Gulf tourism, banks are understandably tightening their loans to this sector, blocking even the bravest of entrepreneurs adventurous enough to start a business in these turbulent times. Banks have increasingly refrained from offering the Kafalat Plus program — a completely collateral-free loan — to the sector, says Abi Habib, and have favoured the Kafalat Basic program, where they can take up to 50 percent of the value of the loan in collateral.

Closely following tourism’s misfortunes was the industrial sector, with a decrease of 25.7 percent in the number of loans. Remaining comparatively constant however were the agriculture and crafts sectors.

In contrast, the number of loans to the high technology sector actually saw an increase, showing that not all entrepreneurship is hindered by the economic downturn. Though still not making up a great percentage of Kafalat’s loans, the number of loans extended in the technology sector actually increased by 23.5 percent from 13 to 17 projects between October 2012 and October 2013.

Trends and guarantees

Lebanon’s entrepreneurs have been fairly resilient to the various stresses the country has witnessed. “[Economists] wonder why our economic activity in this country hasn’t dropped further,” says Abi Habib. He ventures that Lebanese entrepreneurs being so accustomed to civil instability is a central reason the country has not witnessed a number closer to an 80 percent drop in loans. But as long as hard times continue, he adds, people will be more skeptical of launching or expanding their enterprises.

A similar resilience can be attributed to the banks, who continue to lend. Although banks are not required to share with the program the number of Kafalat loans they refuse, Kafalat has not been made aware from the side of the entrepreneurs of a higher than average number of rejections.

Nonetheless, the banks would more likely be conservative if it were not for Kafalat’s guarantees, particularly when lending to startups, for whom Kafalat’s incentives guarantee 90 percent of the loan, given that only one or two out of 10 are likely to succeed. In fact, Kafalat’s program for startups is operating at a loss, and is subsidized by more profitable programs that handle less risky businesses.

Despite a general decrease in Kafalat loans, the small but growing high-tech sector presents a glimmer of hope for economic growth, however limited, through entrepreneurship.

December 16, 2013 0 comments

Real Estate

Concrete ambition

by Thomas Schellen December 16, 2013

written by Thomas Schellen

Statistically, by almost all indicators available to Executive, activity in the field of real estate development and building construction in Lebanon is in a slump. In the first nine months of 2013, the indicators of property transactions, construction permits, engineering insurance premiums and morale among construction managers concerning their businesses were down compared with the same period in 2012. The only exception is that cement deliveries were up.

Recorded property transactions were lower by 5.2 percent in volume and by 4.5 percent in value: with slightly fewer than 50,000 transactions from the start of the year until September 30, with a total value of $6 billion. Within the overall contraction of deals, the share of property sales to non-Lebanese also exhibited continued weakness, regressing from 1.86 percent in 2012 to 1.81 percent in 2013.

The issuing of construction permits during the first nine months in the lower two thirds of Lebanon receded for the third year in a row, with 7.8 million square meters (sqm) licensed by end of September, a drop of 14 percent, a similar contraction to that witnessed between 2011-2012.

The Order of Engineers in North Lebanon allotted permits totaling 9.7 million sqm for the first nine months of 2013 compared with 10.7 million sqm in the same period in 2012, translating into a narrower contraction of 9.3 percent year-on-year.

Meanwhile, insurance premiums in the engineering industry fell 7 percent to $8.2 million in cumulative revenue for the first three quarters in 2013, according to figures provided to Executive by the Association des Compagnies d’Assurances au Liban (ACAL). In the third quarter of 2013, engineering premiums dropped to about $1.75 million, the lowest quarterly amount since the fourth quarter of 2011.

Development activity shifted in 2013 to outlying areas of the capital and farther into the provinces where land and development costs are more compatible with end buyers’ financial means. The Beirut governorate represented no more than 5 to 6 percent of building permit issuance in the year’s first three quarters.

A slow year has contributed to an atmosphere of pessimism among many industry leaders.
In a second quarter survey conducted by Banque du Liban (BDL) in which enterprise managers were asked to assess the evolution of their businesses, the majority expressed that 2013 had been a year of decline rather than improvement.

Moreover, the survey revealed that managers of enterprises dealing with construction and public works saw the most recent quarter as having reduced activity versus all 11 quarters between Q4 2010 and Q2 2013.

A manageable challenge

Statistics on cement deliveries — which are correlated during the middle and later implementation phases of construction projects — provided an exception to the downtrend.

Cumulative deliveries of cement were up 7.2 percent from 3.4 million tons in the same period in 2012, according to BDL. However, the question remains how much the increase in volume says about the state of the industry. Cement deliveries during the first eight months of any of the past five years have been in a range of plus/minus 6 percent of 3.5 million tons.

While the stats point to a property market recession in Lebanon, the sentiments that developers shared with Executive during the research for the 2013 sector review were not your expressions of the bust phase in a typical boom-and-bust cycle.

Approximately one third of the developers and intermediaries that Executive talked to assessed 2013 as the worst year for their respective companies in years or even since they started doing business in Lebanon. Ramco, one of the most experienced intermediaries, up-market developer Premium Properties and Prime Consult — the property firm best known for its association with Lebanon’s soon-to-be tallest building, Sama Beirut — all expressed such sentiments.

However, while developers overwhelmingly said that the year was tough, they also insisted that it was a challenge that was manageable and not entirely unexpected. Whilst admitting the year in Beirut “was tough for everybody,” Ayad Nasser, chief executive of niche developer Loft Investments, argues that perceptions of a very bad year were shaped by the fact that the sector became accustomed to high growth and returns in the years 2008-2010. “But I can assure you the market is not dead. People are doing some transactions, we are still alive, and we are cool,” Nasser says.

Inquiries by people who called in search of a property were “rare” this year, concedes Mireille Korab, the head of sales and marketing at FFA Real Estate. She qualifies her remark with a note of optimism, however, by adding “but you still have people calling and they are more serious. People are not shopping around, they are serious and they know what they want. If you present them with the opportunity, they will buy.” Ramco director Karim Makaram similarly concedes that while business is down, there are still sales to be made, “even at the upper end of the market, which was the most negatively affected by the downturn.”

Still in the mixer

Many developers who took note of regional changes and their ability to negatively impact Lebanon were prepared for the slump ahead of 2013, choosing not to embark on new projects whilst adjusting market strategies. Loft Investments’ Nasser says he opted against new projects in anticipation of a slower market and Houssam Batal, chief executive of Premium Properties, says that his company put itself into “a position to be successful by off-loading most of our inventory.”

One unforeseen incident that greatly hindered the real estate sector was the collapse of the Mikati government in March 2013 followed by consequent failures to establish a new cabinet.
In the view of Massaad Fares, chief executive of Prime Consult and head of the Real Estate Association of Lebanon (REAL), a lack of confidence was the decisive factor impinging the market. Samer Bissat, senior project manager of the Majd Al Futtaim (MAF) Waterfront City project in Dbayeh, argues that the detrimental impact of the domestic political impasse was more significant than that of crises in countries around Lebanon. “The political scenario affects the mood in the market, the mood of the investors, and it affects the foreigners more than the locals and the expatriates,” explains FFA’s Korab.

While the political class is not everyone’s darling, another part of the administration appears to have a solid fan base in developer circles: the central bank. “The incentives that the Central Bank Governor [Riad Salameh] provided did have a real positive effect and helped the property market not to stagnate despite the deteriorating political and security situation,” says Hassan Tajideen, chief executive officer of developer Tajco.

Central bank intervention could go a long way toward explaining why the dynamics of the Lebanese property market in 2013 were not exhibiting the marks of a bust phase. In focusing much of the 2013 economic stimulus package of $1.46 billion — of which 56 percent was allocated to home finance support — on real estate, the central bank has pursued a policy to make real estate finance easier for families in the lower and middle income brackets. This stimulus policy was the opposite of the monetary tightening by which central banks conventionally respond to boom phases.

Having low-cost access to funding under the 2013 stimulus package, banks could lend money to home buyers at comparatively low rates of interest. The stimulus measure appears to have softened the pressure on the real estate sector which accounts for 13.8 percent of Lebanon’s aggregate economic value, according to figures from the Central Administration for Statistics.

With the support of the stimulus package in 2013, one third of demand — the home buying of first-time owners and young families — was functioning rather normally while two other demand categories — up-graders and Lebanese expatriate and foreign buyers who want to invest — were subdued.

Fares sees the value split in the market as heavily skewed toward the two latter categories. “If the market is $7 billion a year, they probably represent $6 billion,” he says.

“The young generation buys the smallest apartments and the least expensive ones,” he adds.
Buyer’s market

For property buyers who had the cash, the confidence, the speculative bravado, or the absolute need to hunt for a new home in 2013, the market was to their advantage, at least relatively speaking. Newly constructed budget apartments that would have been available for significantly less than $100,000 per unit eight or nine years ago will most likely never again be that affordable. But compared with 2010 or 2011, new units in this market segment were available to Lebanese buyers in the past year at stable or sometimes slightly reduced prices, with financing terms and loan rates that could be called affordable by emerging markets standards.

Buyers who had the means to aim for a medium to high-end property had leverage to negotiate for lower prices. Developers Executive spoke to had different approaches — some insisted they had not and would not agree to bargain — but many readily admitted to having considered offers that were 10 percent or more below their asking prices, depending on the project and its demand experience. If they had the resolve to test the developers’ pain threshold for prices by negotiating aggressively, end buyers could get 15 or sometimes 20 percent discounted on the asking prices, according to comments from various experts.

According to property experts, these discounts may still be found in 2014 but most developers expect the strong buyers’ market to taper out in the course of next year. Makram Zard, chief executive of Zardman, says discounts were stronger in Beirut’s Ashrafieh district than in the Metn region. “I am guessing that these discounts won’t be there anymore in the middle or second half of 2014 as the market will pick up and the developers will be in a stronger position.”

Talking of better days to come, the tapering or durability of discounts will of course chiefly depend on market trends and here developers expressed optimism. REAL’s Fares predicts that in 2014, “the real estate market will start the up cycle. I think by January/February we will hit the real bottom and we will start going up from the beginning of spring. If the political situation is stable and clearer, this will give an added push.”

Sleeping giants

Batal of Premium Projects says that his company hopes for the political situation to clear up but emphasizes that they will be working on new projects in 2014 regardless of political currents. “I have a feeling that we are almost at the end of this tough period,” says Loft Investments’ Nasser. Chahe Yerevanian, chairman and chief executive of Sayfco, also strikes a positive note. “I foresee a general improvement in the market starting in the summer,” he says.

There certainly are enough projects on the drawing board by which developers are seeking to reignite a new profits cycle, and naturally they hope to rouse the market out of its current slumber, the earlier the better. The central bank has already said it will help with another, albeit smaller, stimulus package. On the other hand the meager estimates of the coming year’s real GDP growth — the World Bank is talking 1.5 percent — and the many vagaries of the regional situation serve as a reminder to keep realistic.

On the balance, undertones of caution contextualize any optimism and no one is expecting a jolly ride to profits in 2014. MAF Waterfront’s Bissat, who does not expect to see large changes in the market in 2014 compared with 2013, emphasizes that developers will need to demonstrate staying power and keep their ear to the ground in researching customer demand.

Building the future

Developers will also need to have new ideas, of this FFA’s Korab is sure. “The whole issue about coming up with a successful project is that the markets are changing very fast and we need to be up to speed. To succeed in this market, you need a new type of product; you need a smart product,” she says.

Beyond that, she is sure of one more thing: there is no alternative to having a positive outlook. “We don’t believe in stopping. Lebanese don’t stop and we don’t nag. At this point we are positive and we should always be positive. What should happen? We have been through war, through bombs, through everything and the market in Lebanon proved to be a really solid and mature market. If something unforeseen happens in 2014, it will be the same as this year perhaps; it can’t be worse.”

December 16, 2013 0 comments

Real Estate

‘A new government could save real estate’

by Thomas Schellen December 16, 2013

written by Thomas Schellen

As the property market entered into a troublesome year, the Real Estate Association of Lebanon (REAL) began 2013 by celebrating its recognition as a syndicate aiming to unite real estate intermediaries under a code of ethics. Executive asked REAL President Massaad Fares about the body’s first achievements under the new status as well as its plans.

E REAL has been active as a full syndicate for around a year. What have been the main achievements in this period?
We were previously active as an association and incorporated into a syndicate, as you said, about a year ago. Our major activity was the signing of an agreement with the [American University of Beirut] for the first real estate course in Lebanon: introduction to real estate brokerage.

E How long does the course run, what does it entail, and why is it important?
It is eight weeks, three times per week and three hours each time. The professors are all AUB professors. We give the introduction at the beginning of the session but the rest is all given by AUB professors. It covers negotiations, marketing, finance and banking — all related to real estate. We hope to continue with this education so that we are getting more advanced and this is our achievement in this year.

E Has the membership in REAL increased this year?
Yes, we have about 30 new members in the past eight months.
E That sounds like a significant increase, given that the membership in 2012 was below 30 companies. But how do you see the state of business for real estate intermediaries in 2013?
2013 has been the worst year in the trade. The political and economic situation coupled with our cycle has made it really the worst year.

E The worst in how many years?
I have been in Lebanon since 1996. I think this year has been the worst for me, mainly because of the lack of confidence. Not the lack of money, not the lack of product.

E How did the situation of the Lebanese government and the state of the cabinet influence the sector?
This is [the root of] the confidence issue. If we have a new government today, you will see that the whole market will change. All businesses will be positively affected. Confidence is the basis of economics. If one does not have confidence in the economy, one is not enticed to do anything.

E How about the impact of government inaction on the side of regulations and urban planning?
This is a long story. Unfortunately the laws in Lebanon are very old, most [have been there] since 1965, and they vitally need to be updated. They have not passed parliament yet but I can tell you that we all say we need them. Nothing has happened.

E Are there laws or law projects that specifically affect the intermediaries?
A few laws were introduced but they did not so much affect the business. The industry needs a total revamping in order for us to be able to say that the laws affected the industry positively. The development business is one of the strongest sectors in the Lebanese economy, and developers come maybe in second place after the banks. Unfortunately, the government is not looking at them this way. The government is only looking at them whenever they want to gather some more money and say we introduce a new tax on real estate. This is not the way one does development. Real estate is in the long vision. Real estate must be looked at as a long-term business and a wealth–generating industry, not as a product like in a supermarket.

E How about the professionalism among intermediaries? I understood that one reason why you introduced the course at AUB is that there is a need to improve the professional standards of the people in real estate.
All over the world, many people who have no [related qualifications] work as real estate brokers. Lebanon is the same. But here many buyers were taken advantage of by these [unprofessional brokers]. Perhaps because they don’t know how to read the floor plan correctly or don’t know how to read a contract. Thus the buyers feel cheated.

E When you attend an event or a social function and introduce yourself as a real estate intermediary, do you ever have people complaining to you about how bad the intermediaries are?
Yes. This is exactly why I started the association. I was tired of people telling me, ‘in this business, you are cheating people’ and using the word real estate broker like an insult. I wanted to change this. I wanted to tell the people in the Lebanese market that their broker is [a person of confidence] like your lawyer, your banker. He knows the inside of your problem and can help you solve your challenges, can help you get to where you want. I don’t want the real estate person to be your enemy. I want the real estate person to be your friend.

E That sounds like a tough challenge.
It is. It is a tough challenge but the situation is changing. Now when I am with people at dinners they say, ‘yes, you now have an association.’ This is very good and we have many plans that I don’t want to talk about yet. We have, for example, an awareness campaign [about] what a real estate broker is.

E For the general public and not just for those people who want to enter the profession?
For the general public because we want people to know that if they need a real estate broker, they should go to the broker that is licensed by the syndicate. Don’t go to the hairdresser, the butcher or the concierge. Go to someone that can be accountable.

E There is no existing mandatory liability insurance for brokers?
No. We are working on a proposed law to [to ensure the] intervening of a real estate broker becomes mandatory in all real estate transactions.

E That would make the brokers established as intermediaries by law. But is there a law to protect the customers of brokers against errors, like they happen in every profession?
No. But this comes along with the [other law]. They go together.

E What you are saying highlights why you attach so much importance to educating intermediaries and having them acquire certification. How many people participated in the first course in AUB?
Each course is [currently] limited to 25 people.

E Were some of them regular students or were most participants real estate professionals?
All are members of the syndicate and we will not open the course to the public until we finished [educating] all [members].

E And the members have to pay for the courses?
We are offering the program free of charge to syndicate members. We are financing it.

E May I ask how much the budget is?
Our cost is $800 per person but this is a price that the AUB gave us with about 50 percent discount.

E What do you expect for the syndicate in 2014?
REAL is going to make everybody know what a real estate broker is and how important this job is. And it will make the real estate brokers be proud of their profession. This is our plan in 2014. We have several activities and all are focused on this: awareness of the profession, awareness of the need of the real estate broker. Parallel to this we are working on the project of the law.

December 16, 2013 1 comment

Economics & Policy

Brave new worlds

by Tara Nehme December 16, 2013

written by Tara Nehme

‘Quit your job. Buy a ticket. Get a tan. Fall in love. Never return.’ — a five sentence meme that made its way into my Facebook newsfeed and struck the kind of chords that left me wondering what on earth I was doing with my life. In reality, it wouldn’t have been difficult to bring me to such a lost and confused state anywhere between 2009 and 2011. Twenty-hour workdays consulting for a corporate giant, despite being a pretty cool job, can do that to a person. So one day in June 2011, I made it past the meme’s first sentence. I walked away from the only cubicle I had ever known and, one over-rehearsed speech later, I officially burst out of my corporate bubble. This was no longer a thought that wormed its way into my brain every month: I was actually free.

The news didn’t go down too well with my old-school parents to whom “free” sounded more like “unemployed.” “Tickle my what?” my father shrieked as he surrendered the phone to my mother. “Your daughter wants to quit her job in Dubai and move to Beirut!” As I listened to my dad denounce his biological ties to me, a mix of happy and nervous feelings took over. This was the reaction to be expected from my parents. But I would move back, I would start my own business and I would attempt, for the millionth time, to prove my father wrong.

My roller coaster ride to creating a company within Beirut’s startup scene was nothing like I expected. First of all, I didn’t expect there to be a scene. I didn’t know anyone within it and there was no introduction manual. My adventure began from behind my MacBook inside Hamra’s jam-packed coffee shops. I had a name: ‘ticklemybrain’ and I had an idea: people, much like myself, didn’t know the first thing about getting their careers on track. And that was about it. As the months rolled by, words such as Berytech, Beirut Digital District and Endeavor pervaded my new habitat and slowly but surely I was welcomed in by the cult: the people that rule Lebanon’s entrepreneurial scene. Though I was introduced to all the cool (and not-so-cool) characters that comprised it via separate avenues, I soon realized they were all connected. Event after event, I began meeting a budding and ever growing core group of 200 to 300 people that consisted of entrepreneurs (the ‘successful’, the ‘attempting to be successful’ and the ‘wondering whether they want to risk attempting to be successful’), venture capitalists, angel investors, accelerator/incubator founders, co-working space owners, techies, designers and media folk. What made all of this even more fascinating was that all these people hovered around one central idea: somewhere within this bunch existed the next Steve Jobs. And all of this in Beirut; it was phenomenal.

Fast-forward two years and here I am, a proud member of Beirut’s startup scene; a part of the cult. I am tired of hearing the standard assessments of this country: Lebanon has no future, economy, water, electricity and Internet. The road may not be paved with gold but I see a different Lebanon. One with a startup scene that could easily be ranked among the finest and most progressive in the region and which is filled with ambitious people trying to break with convention. ‘Here’ is a pretty cool place.

The most recent proof of this can be seen in the Global Entrepreneurship Week, celebrated from November 19 to 24 of this year. The week started with Bader’s flagship opening party in which the winners of their Startup Cup were announced and ended with Executive’s closing party, where 20 entrepreneurs were awarded for their exceptional work. And it isn’t just now; all throughout the year there are events, workshops, conferences and more to celebrate and empower entrepreneurial growth and the amazing drive of the Lebanese people.

We hear stories of people stuck in dead end jobs who finally snap. For many, embracing the entrepreneurial life comes as a form of salvation for their economic blunders. For others, it comes as a spark. For me, the change came as a chance of freedom for my brain, which had felt limited by the confines of what it knew. Striving to be a successful entrepreneur has been a powerful experience filled with both joyous and heart-wrenching moments. Never knowing what my day will hold, combined with the constant fear of failure keeps me on my toes. So while I haven’t lived up to the meme in the exact direction it prescribes, taking it easy on an island in the sun, I’m definitely on the right path.

December 16, 2013 0 comments

Society

Hospitality in inhospitable times

by Nabila Rahhal December 16, 2013

written by Nabila Rahhal

As a new year approaches, Lebanon’s hospitality and tourism sector is limping along in a dismal socio-economic situation — severely sprained but not broken.

According to the latest statistics from the Ministry of Tourism, the number of tourists entering the country during the first 9 months of 2013 is down by 10 percent from the same period in 2012, itself a poor year for tourism. The biggest drop in numbers was from the Gulf Cooperation Council, though there was an overall drop across all nationalities. With an unstable security situation fueled by the war in neighboring Syria, Lebanon is no longer the blossoming vacation destination it once was.

While hotels are obviously the most negatively impacted sector, most other hospitality dependent ventures have suffered as well. Some areas typically frequented by tourists are almost deserted, although a few are witnessing a boom in their local market clientele. Owners of Lebanon’s hospitality venues have been tested in 2013, with only the most seasoned professionals passing unscathed.

Turnover from restaurant purchases at the country’s two main fruit and vegetable markets — a measure used by the Syndicate of Owners of Restaurants, Cafes, Nightclubs, and Patisseries (SORCNP) to assess performance — is down by half from 2012 and by 40 percent at the main liquor distributors.

Even among those restaurant and bar owners still making a profit that Executive spoke to, many experienced a drop in revenues and footfall. “There is a difference between making money every night when the country is stable and making money only on weekends and holidays, which is what is happening now,” says Rabih Mockbel, founder and chief executive officer of Mockbel Holding, which operates a string of venues on Uruguay Street in Beirut. Although Mockbel reports a profit, their margins have dropped 40 percent from 2010.

Here, there & nowhere

Fawzi Ghantous, the food and beverage (F&B) operations manager at Found’d, which owns Downtown, DT, So and The Gathering restaurants, reports a 7 percent decrease in overall profits and a 30 percent drop in turnover but points out that they are better off than many venues which have had to close down rather than incur further losses.

Paul Ariss, the head of the SORCNP, says while many established venues have felt the noose tighten and some clubs in Beirut are operating only on weekends, the situation is much worse outside of the greater Beirut area. “There is certainly a big problem in the mountain areas such as Bhamdoun, Aley and Faraya, and many did not even open this year. In Aley, only around 20 of the almost 80 venues there opened this year. The Bekaa was even worse and some of the big restaurants there lost money this year,” he says.

While it is a given that areas frequented by tourists will suffer as the number of visitors plunges, even those venues which do not generally depend on the largely Arab tourist audience were still affected by their absence: “Though we do not cater to tourists much because GCC nationals usually prefer Lebanese restaurants… those who benefit from tourism in the country spend at our venues and so we are indirectly affected by the lack of tourists,” says Ghantous.

The unstable domestic situation and the lingering global economic crisis discouraged another main hospitality sector energizer, the expat, from visiting as frequently this year, often restricting their trips home to only the major holidays, when previously they may have come for many short visits, even weekends.

“The Lebanese expat is truly the unknown soldier of our economy when you consider that we have more than 1.5 million Lebanese expats in Africa and the Arab countries alone, who spend even more than the Arab tourists when they do visit Lebanon. Our main problem is that they are not visiting as much,” says Ariss.

This drop in international demand forced those in the hospitality business to concentrate their efforts on the domestic market during 2013. “I believe in order to have a successful hospitality venture in Lebanon these days, you need to have the right concept and not be dependent on a potential overflow of customers in the form of tourists or expats,” says Mockbel.

The hospitality venue owners and alcohol distributors Executive spoke to all agreed that the best performing venues of the year were those located in Uruguay Street in downtown Beirut and Mar Mkhayel in the capital’s Ashrafieh, two areas which are generally not tourist reliant.

The local formula

“We designed Uruguay Street to appeal mainly to the resident Lebanese community and it was a success story this year,” says Marwan Ayoub, partner in Venture Hospitality which initially developed the project in the Old Municipality Building on Uruguay Street. The bars on the street generally cater to Lebanese professionals between the ages of 25 and 40 with a comfortable income.

In fact, Mockbel was so convinced of the street’s potential that, following the success of Bronz, his first venture, he rented eight additional venues in the location. Venue operators on the street and Ayoub agree that other elements which contributed to Uruguay Street’s popularity included a good security system, parking access and the backing of a developer which prevented the street from growing in a haphazard manner. “The only concern we downtown venue operators have is that what happened in the past in downtown in terms of sit-ins and demonstrations will happen again; this will truly be a nightmare to all of us who invested in the area,” says Mockbel.

According to Ariss, Mar Mkhayel is one of the few areas that has continued to expand this year as restaurant operators there have focused on concepts with good quality and low prices. Ayoub believes Mar Mkhayel succeeded because the area’s artsy vibe and refurbished heritage buildings offer a unique atmosphere.

Restaurants and cafes operating in malls have a mutually beneficial relationship with the mall operators and have also maintained a solid performance this year, says Ariss. According to Omar Zantout, general manager of consultancy firm Eaternity, Magnolia Bakery — which it brought to Lebanon in December 2012 — sees an average of 300 customers daily in Dbayeh and has just moved to an enclosed space in ABC Ashrafieh where Zantout expects even more customers.

Finally, the summer saw a surge of seasonal outdoor clubs and bars, such as MusicHall Waterfront and Garden State in addition to the weekly outdoor parties by Decks on the Beach, C U Nxt Sat and The Gärten, all highly popular among mainly Lebanese clientele looking to enjoy a cigarette in the open air. Fueled by the smoking ban and a short winter season, open air concepts such as terraces and rooftop bars are indeed a rising trend, according to Ayoub. Furthermore, Lebanese bargoers’ choices tend to be heavily dictated by trends, Found’d’s Ghantous says, explaining why some places soar in popularity while others find it difficult to reverse their dwindling numbers.

Catering to the local Lebanese customer means competing in a very narrow market with a low purchasing power. “The challenge here becomes to show who provides the best in service, drinks and food,” says Toni Rizk, managing partner at TRI Food and Beverage, adding that PR and social media are also important aspects in attracting customers these days.

Indeed, with so many venues competing for attention, restaurant operators have had to struggle to distinguish themselves, and elements such as quality, service and ambiance become even more important — factors Ghantous gives as reasons for two of their venues’ longevity (Downtown has been in operation for 25 years, So for 15).

No purchasing power

The decrease in local purchasing power has also meant that people went out less in 2013 and spent less when they did go out. Ariss speaks of restrained orders from customers who used to order the entire menu at Lebanese restaurants and of decreased profits even in the fast food and delivery operations as more Lebanese try to save money.

“Those who have money are still spending as before but those who are of a mid-income level are spending a bit less, creating a vicious circle where if one does not make money, one cannot spend as much and this in turn reflects on the venue owner. This is normal in tough economic times,” says Rizk.

As a result, some in the F&B business have bet on external success by taking their concepts abroad. But while this has proved successful for club concepts franchised to the UAE — such as Iris, Music Hall, and The One which all opened up abroad in 2013 — Ayoub sees that the market for Lebanese restaurant franchises is being tightened as Gulf nationals are “learning the franchising game and looking at other countries for fresh concepts, making Lebanese concepts less attractive than before.”

In these tough times, the hospitality sector is in need of support. Ariss says that Kafalat, which has given loans to many in the sector, has been very understanding in reprogramming or postponing payments and that the syndicate was in discussions with the government to lift penalties on the sector’s taxes. Ayoub speaks of the banking sector’s support in rescheduling loans and in the continuation of subsidies from the central bank.

Ayoub sees another harsh year of “survival of the fittest” for the hospitality sector in 2014 with some established operators falling out of the race due to their high overhead expenses. “The operations doing well due to local demand are but a drop in the sea of the hospitality sector, which is suffering,” he says.

Though those Executive spoke to are carrying on with their expansion plans and developments, nothing can compensate for the internal stability which can automatically breathe life back into the sector. “We need security and a stable economy and for the tourists to return. Something has to improve so the sector can be revitalized as it is currently not doing well overall. Many people are emigrating to the Gulf due to the lack of opportunities here and no new people are investing in the country as it is becoming very difficult to maneuver in,” says Rizk.

December 16, 2013 0 comments