Executive Magazine

It’s no day at the beach

by Thomas Schellen September 12, 2013

written by Thomas Schellen

It has been no magical mystery tour for Lebanon’s hospitality sector this summer. In advance of the year’s main vacation season, optimistic voices such as Phoenicia Hotel owner Mazen Salha had dared to hope for good tidings, political blessings and the enthusiastic return of Saudi guests after Ramadan observances. Instead, the resounding summary in August was as ominous as can be: coffin nails.

Uttered by caretaker Tourism Minister Fady Abboud to describe the impact on tourism of the abduction of two Turkish pilots in Beirut, the phrase all too soon had reason to resurface. Whether foreign or domestic, any incident of terrorism was the last thing that Lebanon’s tourism sector wanted to see but as hate not fate had it, terrorist attacks against civilians struck Shiite quarters near Beirut on August 15. A week later, twin bombings that targeted worshippers in Tripoli constituted the vilest single act of shedding civilian blood in the country since the 1996 Grapes of Wrath bombing of a United Nations shelter in Qana.

No wonder that Pierre Achkar, head of the hotel owners’ association, feels that this is a time when he could do “nothing” to improve the situation of a hotel sector with income in the year to date described as less than half of the peak tourism year of 2010.

The magnitude of the revenue contraction jibes with the trends reported by the Ministry of Tourism. According to its latest data the first seven months of 2013 saw around 750,000 visitor arrivals, down by 43 percent when compared with the same period in 2010 and 13.5 percent lower than between January and July of last year.

According to Achkar, hotels outside of Beirut have a few positive occupancy surges generated by Syrian and Iraqi customers while hotels in the capital benefit from the basic visitor volume that the city draws at all times for business or leisure. During the Eid al Fitr holidays in early August, some luxury hotels in Beirut filled to capacity but stays were shorter and room rentals were overall closer to 75 percent than to full occupancy.

The occupancies at the same luxury hotels dropped back to around 30 percent at the end of August and the reservations outlook for September was no better, said industry sources on condition of anonymity because they were not authorized to disclose the information at the time.

Other factors

As other fluctuation factors may have come into play, the drop in rates cannot wholly be attributed to last month’s security incidents and bombings. But conventional wisdom and professional data universally see a strong correlation between security and visitor flows; it would be foolhardy to expect anything other than further waning of visitor inflows in September and sector debility that may well last through to the religious holiday season of Eid Al Adha in mid-October.

Lebanon is not alone in the Middle East in suffering from tourism impairments this year. Egypt, where tourism is one of two hard currency providers along with Suez Canal receipts, is looking at a vanished summer resulting from the recent military coup overthrowing Mohammad Morsi and the violent clashes that followed. Some alternative destinations, such as Abu Dhabi, anticipate seeing above-average visitor numbers in October amid the expected extension of security risks in the Levant, but all this is of no comfort to the Lebanese hospitality industry.

With so few customers, why not have a nap?

The developments of the past eight months make it highly unlikely that Lebanon will perform according to predictions for year-on-year growth of 1.8 percent to $4.2 billion in direct tourism receipts and of 2.3 percent to $11.4 billion in combined direct and indirect receipts. But even if it is overstated, this forecast for 2013 by the World Travel and Tourism Council (WTTC) signifies the importance to the national economy of what the WTTC calls the tourism industry and tourism economy.

Tourism industry under this definition entails all direct contributions of travel and tourism to gross domestic product, which in the WTTC assessment amounted to $4.1 billion in 2012, representing 9.3 percent of Lebanon’s GDP. The multiplier of direct tourism receipts into the fluffy tourism economy, adding all indirect and induced economic effects to the direct results, is usually a factor of two to three. This means that by WTTC reckoning, Lebanon has a 24.5 percent “total” contribution of tourism to the economy and is among very few countries at the high end of tourism contributions to GDP along with island nations such as the Seychelles, Cape Verde and Barbados.

Such numbers cannot be accepted blindly, commented Garrick Aird, a tourism consultant and entrepreneur based in Beirut. “I don’t believe most of the numbers. The contribution of tourism to GDP is not reliable. It is a best guess,” he said, using the example that a Lebanese expatriate on a home visit will often already bank some of his income in Lebanon and thus will be spending money that is already in the country, meaning that it is an error to just multiply visitor numbers by average spend to reach a view on the contribution of tourism to the economy.

Recent explosions in Beirut have further damaged tourism

Whether the WTTC assumptions about the Lebanese tourism industry and tourism economy hold true or not, the hospitality industry is vital to society here beyond the various avenues in which visitor numbers and their expenditures can be extrapolated into GDP contributions. Plus, given the probabilities for new expansion of hostilities in Syria and further spillovers into Lebanon, lamenting further about how bad tourism in 2013 has been would be pointless.

Coping mechanisms

Executive therefore ventured to search for hospitality cases that work and for strategies by which tourism businesses and entrepreneurs cope with the situation. Venturing into the nooks and crannies of the Lebanese rural landscape, we found how entrepreneurial operators are creating success stories in boutique hotels and inns, achieving practically complete occupancies in the niche of small, quality-minded hospitality ventures.

Combining innovativeness with coping strategies, restaurant operators this year are capitalizing on their nature loving patrons to enjoy the outdoors. Summer venues have seen a renaissance and have allowed operators to divert traffic from their conventional “winter venues” — bars, pubs, and restaurants. Together with the resilient festival scene, these hospitality offerings and attractions all have in common that they address the domestic tourism market.

Banking on the local market was also the coping strategy employed by Ziad Kamel, hospitality operator and chief executive of The Alleyway Group. After growing his company together with business partner Patrick Cochrane, Kamel ventured into a restaurant focused on the segment of high-spending tourists.

Assuming that there could be no better place to start such an operation “than a luxury marina that is surrounded by thousands of luxury hotel rooms, which at the time were always at 90 percent occupancy,” The Alleyway Group invested $1 million into Amarres, a French eatery in the Zaitunay Bay development in the Beirut hotel district. Opening at the start of 2012, the venue initially performed according to expectations but then was hit heavily in May of the same year by advisories which Arab countries issued against travel to Lebanon.

Bittersweet investments

Hanging on for another 12 months, Kamel decided to close the restaurant and write off $1.5 million in investment and operating losses. The coping strategy was the expansion of the group’s other French restaurant brand, Couqley, into a second location. It was a “bittersweet moment” to shut down one venue and open another at almost the same time in May of this year, Kamel said, but it was a strategic decision to cut losses in a location that is dependent on tourism and that is in a situation of no demand without prospect to be resolved in the short or medium term.

Instead of throwing good money after bad in the Zaitunay Bay locale, Kamel allocated about $1.15 million in total for investing into the second Couqley and toward redeveloping two pub concepts in Beirut’s Gemmayzeh quarter, plus some innovations. This is all based on the resilience of the domestic market, he said. “We target Lebanese who work and live in Lebanon. These Lebanese don’t stop going out when the situation deteriorates — when there is an incident, business goes down only on the day or the following day but then it resumes.” In the wider context of the restaurant sector, Kamel, who is also the treasurer of the restaurant owners’ association, characterized the current time as a struggle for survival by three out of four venues. This, however, is a result not only of the dearth of foreign visitors.

Strong years of economic growth and good tourism in the second half of the past decade resulted in many restaurant investments and bar openings which today are not sustainable, especially if they target tourists. However, the sector is also fundamentally plagued by absence of standards and infrequent enforcement of regulations, he admitted, attracting countless operators who anticipate glamour and quick profits but have zero appetite to collaborate with or seek consulting help from the Syndicate of Restaurants, Cafes, Night Clubs and Pastries. Among the restaurants, Kamel sees “many losers and few winners”.

Those best positioned to survive are the operators that offer good value for money and have their own identity, ideally one developed over considerable time. “Generally the establishments that have been around for generations with top-of-mind awareness seem to be weathering the storm.”

Deeply embedded into the Lebanese hospitality sector’s struggle for survival appears to be the disorganization of the tourism industry. For Aird, the dominant impairment today is not the absence of Gulf visitors per se but the fact that access to Lebanon has not been developed because of the complacency of sector players.

Inherent contradictions

“If, rather than assuming that the flow of revenues is going to carry on forever, the market had been correctly diversified over the years that would have been good, I think this situation wouldn’t have occurred,” he said, citing airline structures whereby business travelers from Europe are discouraged from flying to Beirut and companies like his own will not bring clients to Beirut in the summer because available seat capacity is taken up by long-haul Lebanese expatriate travelers who in economic terms do not represent the average spend on hotels, restaurants etcetera that a business traveler represents.

There is an inner contradiction in the Lebanese tourism industry whereby the national openness to visitors clashes with long-standing deficiencies in the structure of the hospitality sector and the factors that determine success or failure of tourism.

For example, the World Economic Forum’s rankings on competitiveness in travel and tourism show Lebanon as the globally leading country, number one, for affinity to tourism in 2013. This is a measure of the attitude of a country’s population to visitors and the size of tourism in national GDP, among other points.

At the same time, Lebanon was among the worst-ranked countries when it came to environmental legislation and preserving nature as a tourism resource. It also ranked far below its station in the quality of tourism policies and regulations, ground transport infrastructure and security. According to the WEF study, the most competitive countries in tourism are not at all the cheapest countries. All global insights and studies on tourism today point to the importance of developing the sector strategically to be able to compete in a future where the contribution of tourism to global GDP will be only going up further.

The Lebanese affinity for tourism has potential that points outside of Lebanon’s borders, in many different ways. Kamel is an example of an entrepreneur who is now preparing to transplant his restaurant concept to other markets in the region. Aird on the other hand has leveraged his company’s expertise in tourism consulting into the creation of a hotel feasibility software package that was developed in Beirut and is serviced from there. The product, called Xiscope, was launched last March and surpassed first-year sales targets within four months of operations.

Coping strategies and methods to successfully leverage the tourism potential of the Lebanese into growth businesses may be found in many niches and often these opportunities seem to lead beyond Lebanon’s borders. That provides a strong note of well-warranted optimism at a time when the road to a flourishing tourism market and industry in Lebanon is long and winding.

September 12, 2013 0 comments

The Buzz

Business briefing: 12 Sept 2013

by Executive Staff September 12, 2013

written by Executive Staff

Economics and Policy

Sheltering in a bomb-proof safe room in a heavily fortified office in Baghdad is the new reality for a senior Western oil executive who runs one of Iraq’s oil field mega-projects.

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The United States said on Wednesday it saw "troubling developments" in Iran's nuclear programme and called on the country's new president to take concrete steps soon to ease concerns about Tehran's aims.

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September 12, 2013 0 comments

Business

Beefing up a classic

by Nabila Rahhal September 11, 2013

written by Nabila Rahhal

“We are not just a counter hamburger restaurant. We are a gourmet hamburger restaurant. That’s our niche.” With these words, Nadim Hammoud, chief executive of Par Contre, the founding company of Brgr. Co, summarizes the philosophy behind a burger joint that has been one of the country’s most successful since its 2010 launch in Ashrafieh.

Three years on, Brgr. Co now has two venues in Lebanon — the first in Ashrafieh was an investment of $500,000 and the second in downtown cost Par Contre $750,000 — one in London and a catering line that is busy all summer long. Revenues have tripled, says Hammoud, and are now close to $2 million. Par Contre has no plans to slow down and is expanding Brgr. Co locally and internationally, as well as branching into different culinary concepts, such as the soon to be launched Pzza Co, a $700,000 Italian restaurant concept that will turn its oven on in the Beirut Souks in October. Par Contre will also be launching their new 400 square meter (sqm) central kitchen in the area over their downtown venue, into which they invested $600,000.

Burgers are not new to Lebanon and many have childhood memories of the country’s first national burger joints which opened in the 1970s and 1980s, including Winners or Juicy Burger. In the 1990s came the advent of fast food, with Burger King and McDonalds setting up shop in Lebanon.

Such burger joints, and the success they met, established the foundations for future burger ventures in Lebanon. Starting in 2010, more than five ‘burger only’ diners opened up within a two year framework. Riding that burger wave was Brgr. Co. According to Hammoud, people are becoming more conscious of what they eat and are demanding traceability — to be able to track their meals back to a clean and safe source — and better quality food, something he says Brgr. Co is able to provide in a meal not commonly associated with refined dining.

The company’s Dowtown Beirut branch is proving a success

Brgr. Co’s emphasis on quality is also illustrated by their collaborators: Hussein Hadid, a well-known Lebanese private chef with 20 years of culinary experience in New York and 15 in Lebanon developing his own catering line and kitchen, is one of the partners in Par Contre and the creator of Brgr. Co’s signature burgers. “Hussein’s name is a seal of quality for our venues,” says Hammoud.

Other key figures that Brgr. Co has worked with include the architect behind their warm and classic décor, Gregory Gatserelia, an interior designer who has worked on Nikki Beach resorts around the world, as well as Cocteau and Balthus restaurants in Lebanon, and Maya Karanouh’s branding agency TAGbrands. “This is Brgr Co: all of the elements we use are quality and we are putting them all to work on the hamburger business. Probably, we’re the first globally to put this much emphasis and effort on a hamburger business and given it this much quality, elevating it like this.”

Quality does not come cheap, however. According to Hammoud the average bill at Brgr. Co is $20, which he says is “very affordable.” The bill can easily grow however, beyond the basic options, and online user reviews place the average cost for a burger and fries at no less than $30, which they generally agree is a little overpriced, despite it being a good burger.

The company imports its meat from Australia

When it comes to quality, Hammoud explains that Brgr. Co’s patty options are three different cuts of Australian Black Angus beef, generally accepted as the best beef on the market. They are offered in 8 ounce, 6 ounce, and 4 ounce sizes, the latter, which costs LL11,500 ($7.70), being the most in line with prices elsewhere on the burger market in Lebanon. “People will give you the same price [for the 4 oz burger] but not with Black Angus beef which we have. So, if you look at value you are getting, you are getting better quality at the same price,” rationalizes Hammoud.

If one goes for the 8 oz or 6 oz cuts, or tries one of Hadid’s signature burgers and adds appetizers, and extras such as fries or coleslaw, the cost begins to rise steeply, but

Hammoud maintains that their prices are reasonable for what they offer. “On some burgers we have very low margins as we are trying to respect the title of being a hamburger place, but at the end of the day when you come here and taste our burgers, you feel the quality and this costs money,” says Hammoud, explaining that while lower margins may not be financially sound, they hope to hook customers and thereby increase their visits.

With an average turnover of 400 to 500 customers per day on a weekend and 250 covers on a regular day in their Beirut Souks venue, Brgr. Co seems to be doing well despite the price tag.

Selling ice to the eskimos

Brgr. Co will be launching three new venues in Lebanon within the next three years, with one of them set to open in ABC Verdun upon its launch in the year 2015, according to Hammoud. Internationally, Brgr. Co London’s Soho branch — which opened as a franchise in December 2012 and seats 55 — is performing solidly, with around 300 to 400 covers per day. “Our London venue is as big as Ashrafieh’s but performing as well as Solidere’s, as the volume of people in London is different from Beirut,” says Hammoud, adding that the response for Brgr. Co London has been positive and that sales are growing. He is looking forward to their Chelsea branch which will be opening soon and will seat 100. Hammoud attributes their success in London to the high quality provided in everything from the décor, to the waiting staff’s crisp white uniforms, to the meat which comes from the Buckler Estate in Scotland. Brgr. Co London follows the typical franchise model of territory fees and a percentage of net revenues and is in strict coordination with Par Contre, which provides all recipes and implementation training according to set manuals.

Brgr. Co also has plans to open in Manhattan, New York, “the land of hamburgers” says Hammoud. While he realizes that New York is going to be a big challenge for them, Hammoud believes that, judging by the performance in London, chef Hadid has the ability to take Brgr. Co there. Hammoud explains that the New York expansion will be a franchise fully funded and owned by one of Par Contre’s board members in Beirut who will be funding all of the company’s growth in the United States.

This westward expansion is unusual for a Lebanese restaurateur and Hammoud sees it as adding value to their brand through perceived success in cosmopolitan cities that already have a thriving and competitive market for gourmet burgers. However, their next move might see Brgr. Co coming back to the Middle East. One of Par Contre’s partners is seriously contemplating an expansion in Dubai, a more natural “next step” for restaurants expanding from Lebanon.

“Par Contre is funded and overseen by a board of directors or partners who have the means and the power to see the company grow and go global,” Hammoud says. The board is made up of Hammoud, Hadid and three silent partners. Par Contre follows a ‘sweat equity’ model in which each of the partners owns 20 percent of the company but only the three silent partners invest capital in it — Hammoud and Hadid’s contribution is their hard work and ‘sweat’. Par Contre invested $3.5 million total, with $1.5 million coming from a subsidized loan from the central bank.

Par Contre, and its main business Brgr. Co, are still laying the foundations for success and heavily investing in their growth, explains Hammoud when asked about the return on investment which he says will be slow and not before the next five years. “It takes time to build quality and that is why the board is being patient. They are not looking for the quick buck,” says Hammoud.

Correction: A previous version of this article erroneously referred to sweat equity as “Swot equity”. The text has been changed to properly identify Par Contre’s business ownership model and more clearly explain the concept of sweat equity.

September 11, 2013 0 comments

The Buzz

Business briefing: 11 Sept 2013

by Executive Staff September 11, 2013

written by Executive Staff

Economics and Policy

Agricultural exports increased 5.4 percent in the first half of the year compared to the same period of last year, but remain lower than levels reached before the Syrian war, a report from the Lebanese Farmers' Association has said.

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September 11, 2013 0 comments

Comment

Statistically unsound

by Joe Dyke September 10, 2013

written by Joe Dyke

Friends of mine recently visited Lebanon for the second time, roughly a year since their first trip. Over the course of their weeklong stay they commented on how much more expensive things had become, especially in Beirut. “Everything costs about 10 to 15 percent more,” one said after a particularly overpriced dinner in one of the city’s less enjoyable restaurants.

In economic terms this type of mental accounting is, of course, gibberish. We had not been to the same tourist sites or eaten at the same restaurants and more importantly they had not recorded how much they spent a year previously. Using personal perception as evidence that prices are going up is perhaps the worst kind of do-it-yourself economics. Unfortunately, in Lebanon the lack of reliable statistics leaves few realistic alternatives.

This has become particularly apparent after the Central Administration of Statistics (CAS) announced late last month what sounded like a huge drop in the annual inflation rate. Based on the consumer price index (CPI), year-on-year inflation fell from 8.8 percent in June to 2 percent in July.

Contrary to common perception of ever-rising prices, could inflation have fallen by more than three quarters? Obviously not. This huge reported drop was not due to a sudden, huge decline in rates of demand or any lowering of consumer prices but because of poor statistical methodology.

Without going into technicalities, until June 2012 changes in the cost of housing had not been included in the official inflation statistics for three years. All of that increase over three years was then added at once — with the housing index component of CPI skyrocketing. As such, inflation soared — jumping from a little over 2 percent to over 8 percent. Therefore, as inflation is reported year-on-year, for the past year the country’s official inflation figure has been artificially high. Now it has fallen back to 2 percent but housing has again not been adjusted — so we can still have little confidence in the numbers. Estimating Lebanon’s actual inflation rate remains guesswork.

The fact that an economic indicator as key as inflation could be so badly calculated is a particularly egregious example of a much wider problem — Lebanon’s statistical base is desperately poor. Look at basically any of the key economic indices — from gross domestic product, to unemployment, to industrial production — and the data is potentially unreliable, at least in some parts. This makes measuring the impact of economic and political change on Lebanon’s society a near impossible task.

Take the Syrian crisis: the government has produced virtually no concrete data as to the impact of the vast Syrian refugee influx on Lebanon. As a result, the gap has been filled by various organizations, often with widely disparate results. In June, for example, the United Nations Economic and Social Commission for Western Asia (ESCWA) estimated that the amount that had entered Lebanon’s banking system from Syrian nationals fleeing the crisis at around $11 billion. Makram Sader, head of the General Association of Banks, reacted angrily, putting the figure at closer to $1 billion. The $11 billion would be equal to around 25 percent of Lebanon’s GDP, while $1 billion represents about 2 percent. The difference between these estimates is so vast that it seems prohibitive to use either figure with confidence.

This impact on the country’s governance is clear. Without numbers, good policymaking is all but impossible. Designing the best fiscal and monetary strategy to get Lebanon growing again in the coming years will be a difficult task but trying to do that with no reliable evidence on any topic is pointless.

Ambiguity creates friction as well. The fact that everything is unreliable enables all sides to make the case that they are getting a hard deal. Without established and widely agreed upon data provided by a genuinely independent body, politicians can claim that their particular constituency is economically underrepresented or that the state favors one party over the other.

CAS could still be that body. In the absence of holistic change CAS may represent the best hope for improving the country’s statistics. The body is flawed, as evidenced by the inflation debacle, but it is also crippled by limited funding and political interference. These are not insurmountable problems — the funding needed is relatively small, even for a deeply indebted country, and the positive impact could be significant.

In these increasingly fractious times for Lebanon, it may seem strange to be talking about statistics. But if and when the situation does calm down, one way to help unify the country is economic growth. To do that, we need data.

Joe Dyke is Executive’s online editor

Note: This article originally attributed the $11 billion figure to the World Bank, not ESCWA.

September 10, 2013 0 comments

The Buzz

Business briefing: 10 Sept 2013

by Executive Staff September 10, 2013

written by Executive Staff

Economics and Policy

Most Gulf bourses resumed declines Monday as the U.S. Congress prepared to debate on whether or not to approve a military strike on Syria.

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Egyptian troops and tanks backed by helicopter gunships swept through villages in the northern Sinai Peninsula, in a continuing attack on alleged militants.

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Lebanon’s telecoms revenues – a key income for the cash-strapped government – have seen a moderate decline this year amid a slowing economy and customers shifting away from text and calls to free messaging and Voice over Internet Protocol applications.

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The European Union has granted Lebanon the right to export 50,000 tons of potatoes, reversing a decadelong export prohibition, the Agriculture Ministry has said.

Business briefing: 9 Sept 2013

by Executive Staff September 9, 2013

written by Executive Staff

Economics and Policy

In a setback for Western efforts to tighten sanctions against Iran, a top EU court has thrown out penalties imposed on several Iranian businesses for their alleged ties to the country’s disputed nuclear program.

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Companies and Business

The online retail industry in the UAE is expected to be worth US$1 billion by 2020 as more shoppers swap the mall for the web.

The foundations of success

by Thomas Schellen September 9, 2013

written by Thomas Schellen

Chahe Yerevanian, the chairman and chief executive of real estate company Sayfco Holding, is clearly comfortable in his capitalist boots. He has no reason not to be, since he owns 50 percent of a company that by his own estimate is worth about $350 million and has accrued $40 million in net profits over the past three years. That profit is equal to or higher than what the entire company was worth when he and his brothers transformed Ara Yerevanian & Sons, the family business established by their late father, into Sayfco not even 10 years ago.

Related article: Q&A with Chahe Yerevanian

In the manner of a modern, corporate governance-oriented businessman, Yerevanian has no qualms disclosing his corporate pay to Executive — $40,000 per month versus an average employee pay of $3,000 — and explaining in generous strokes with the valuation brush that the company’s $350 million comprises assets — lands, the head office building, and cash and equivalent — of about $200 million together with $100 million plus in secured revenue streams from development fees.

The key to Sayfco’s rapid growth over the past three years has been its fee structure. Until 2010, Sayfco had success as a developer with the foresight to pursue projects that anticipated the shift in demand to affordable, small to medium-sized apartments on the outskirts of Beirut. The company was a conventional developer during these “old days”, Yerevanian says, buying land, designing a project, financing it with a mixture of own equity and debt, marketing and delivering the units and pocketing the profit.

From 2010, however, things took a radical turn. Yerevanian had picked up on the fact that he could sell his corporate expertise to landowners as a fee-based services package under a far more scalable business model whereby Sayfco provides development and marketing services while landowners retain the project ownership and the risk. “This has helped us grow exponentially,” Yerevanian says. “With our own money, we wouldn’t have been able to grow this fast. Secondly, it has limited our risks because we are purely service providers. It has helped to create what Sayfco is today.”

The foundations for the new model were provided by the reputation the company had built in the Lebanese market and by its strong promotional and sales track record, which was fueled by apt use of Facebook and online advertising.

The company applied the services formula in the execution of 11 of its 14 projects from the start of 2010 through the summer of 2013, a period during which Sayfco sold 3,109 units in total. Of these, 500 or fewer were units which the company developed conventionally as project owner. Yerevanian tells Executive that he expects to boost his portfolio cycle from these 14 projects to 50 projects in the next couple of years. The vast majority of these upcoming developments will also not be owned by Sayfco.

Factory model

As Yerevanian admits, the Sayfco of 2013 has become “a pure service provider” but he also likes to describe the business model as that of a “real estate factory” because of its streamlined processes.

Crystal Towers offers residential apartments and offices in Antelias

The way in which their “factory” generates profits is akin to revenue structuring by a funds management company. When signing Sayfco as their project developer, the landowner agrees to pay 8 percent of sales value over the project cycle. This comprises a basic development fee of 5 percent, calculated from the total projected sales value of the project, plus another 3 percent fee on sales.

This 5 percent basic fee is split into two equal tranches of which only the first is paid in cash by the landowner. The second half of the fee is collected by Sayfco from the down payments put up by buyers who sign for units in the first wave of marketing.

Fees keep flowing into Sayfco’s coffers during the three to four year cycle of project execution and also after completion. The company takes 3 percent from the installments paid by buyers when each installment is made and it earns a success bonus after the final delivery of the project.

This success fee is a hefty 30 percent on all amounts in sales revenue that exceed the project’s sales target which the landowner and Sayfco agree upon when signing their initial contract. “If total sales at $2,500 per square meter were $100 million and we were able to bring in $120 million, 30 percent of those added $20 million is ours,” Yerevanian explains.

Sayfco’s services entail project research and market studies, a concept and basic design for the development, detailed architectural designs and permit files, securing of all permits and official requirements, advertising, online marketing and sales management, and collection of payments and handling of relations with buyers until final delivery of their units.

Not included in the basic package is the construction management. Sayfco offers this option for a 12 percent fee on construction value.

Strong, but not invulnerable

Besides requiring little in capital outlay, the beauty of the model’s scalability affords Sayfco advantages such as extensive use of its marketing and project planning skills and efficiency gains from the pricing power that the developer holds vis-à-vis its own suppliers such as architectural firms for whom Sayfco is an attractive client.

While the company does not have the same operating profit margins as a conventional developer, the larger numbers more than make up for this. Theoretically, taking a project with $100 million sales value and construction cost of $40 million, a full execution package with fees of 8 percent (of sales value) for development and marketing and 12 percent (of construction cost) for construction management will generate $12.8 million. Success bonuses for revenue coming in above agreed targets can boost the total to an even more capitalist-heartwarming $19 million if the project sales clock up 20 percent over target.

As a percentage of total revenue in a highly successful development, this means Sayfco accrues an operating income that can reach up to between 14 and 16 percent of total sales. According to Yerevanian, the price tag of Sayfco’s services amounts to about half of the 8 percent basic fee. This means not only that profit runs at about 4 percent of total sales value but also that Sayfco reaches the breakeven point for its participation rather early in the project cycle, as the first tranche of the 5 percent basic fee is to be paid by the landowner at contract signature and the second tranche comes in shortly after marketing launch, which is well before the start of construction.

The model appears, however, to be just as vulnerable as any property development scheme to the common cyclicality in the real estate business; periods of slow demand can conceivably translate into pressure on margins when Sayfco’s high outlays during the early project phases cannot be covered fully from down payments. Profit also could take a hit when adverse market trends keep the final sales revenue close to the initial price targets. This would impair or cut off the flow of success fees, which by all indications supply a very significant boost to net results.

Smart marketing

So far, Yerevanian has navigated the recently sluggish streams of real estate demand in Lebanon very well. “In the past few months we have been selling 500 units a month. That is amazing,” he says. An example for the sales splurge was the 450-unit Les Roches project of chalets in Kfardebian, of which Yerevanian recorded 320 buyer reservations within less than a month. The marketing for the leisure units consisted of online promotions — a smart pre-launch campaign on Facebook where Sayfco is a global leader in the real estate sector by number of followers — combined with price psychology, enticing buyers with a low first down payment of $10,000 to reserve their unit.

“The down payment is extremely important. We have proven this with our many projects,” Yerevanian says, explaining that people are much more likely to sign up for a down payment of $50,000 that is staggered into five installments. “I am still getting my $50,000 but in a six-month period, whereas not many people will come in the other scenario when I say I want $50,000 as down payment.”

Possibly due to the heavy emphasis on promotions via social networking, Sayfco reached many local and expatriate Lebanese buyers in the age group of 25 to 39. Despite the low entry point to sign up for a unit and the less-established profiles of younger buyer groups, Yerevanian claims that legal defaults on purchase contracts were nil because the strong demand for the units so far always enabled the company to find another person to step into the contract if an original buyer had to pull out.

On to Beirut

A focus on low initial payments and unit prices that are attractive when compared with unit prices of larger apartments in the same area is also how Yerevanian plans to tackle the luxury market in Beirut — his next major move into new projects, which he says will be announced very soon.

Another important agenda point is the plan to transform the company again, possibly by partnering with a large Lebanese bank, whereby it could be shaped into a fund-like venture that buys land and develops it on behalf of financial investors such as high net-worth clients of the participating bank. “There are so many potentials that are not just talk, but have potentials for real people and banks to come in. That is why you will very soon see Sayfco managing 50 projects per cycle,” Yerevanian promises.

This will release the company from the constraint that the current base of client landowners numbers just about seven, who all approached Sayfco on their own, without the company having an acquisition strategy for this client group. On the other hand, upscaling the venture from 14 to 50 and diversifying, as Yerevanian intends, the activity into projects in every part of Lebanon, will be another challenge entirely.

September 9, 2013 0 comments

Real Estate

‘Without infrastructure, real estate is nothing’

by Thomas Schellen September 9, 2013

written by Thomas Schellen

Sayfco CEO Chahe Yerevanian runs among the country's most successful real estate firms. Executive sat with him to discuss the company's long-term strategy, Syrian refugees and the government's role in the Lebanese real estate sector.

You have told us that your company has achieved development of 14 projects in a three-year cycle that started in 2010. What is your growth expectation in the next three years?

I think the slope is going to be extremely steep and I forecast that we will have 50 projects in a cycle in the next three years, because we already have many in the pipeline and many close to the pipeline. So I can foresee 50 projects increasing from 14.

Your projects have been concentrated in the Metn region. What is your strategy of geographic expansion?

The next step is to go to Beirut; our strategy is to come up very soon with signature projects of [small] luxury units in areas such as Ashrafieh, Bliss Street and Verdun. I can even tell you that top local banks have approached us with ideas to be their real estate development arm.

Overall, projects are getting bigger and bigger in Lebanon. What kind of a role do you and your peers in the development sector play toward improvement of urban environments, infrastructure and planning?

Not enough. We haven’t done anything and much more can be done. I have plans to create a consortium of big developers to lobby for these issues. If not, perhaps I should become a minister and do it myself.

So what is the biggest need for the government to address in relation to the property sector?

The government should do its utmost in the next five years to re-plan at least the main infrastructure arteries to get the blood of the economy flowing. I hope they will wake up and especially in my industry, real estate, I can say that the only important thing for the government to do is infrastructure.

Doesn’t there have to be urban planning too?

Definitely but infrastructure is the priority; if you give me infrastructure, then you can give me urban planning and so on. If there is no infrastructure, there is nothing. Start with infrastructure.

In interviewing developers and intermediaries I heard of no joint initiatives or even ideas from private sector developers on how to help the state in housing predicaments such as the Syrian refugee crisis. Why is that and what role should the private sector play in addressing national problems on housing?

The Lebanese mentality is patriotic only in words. For my part at least I am proud to be Lebanese and I believe I am patriotic. I had the chance to go to other countries and work as a developer but I chose to continue investing here in these difficult times of war and explosions. We created this brand from a family company that ten years ago was not even selling 50 units a year to a company that sells 500 units a month. That is what I call a success made in Lebanon.

What does your company promise to landowners as average internal rate of return (IRR)?

The median rate of return of the 14 projects so far is 52 percent annualized IRR. That was achieved as average of the 14 projects between 2010 and now.

Is that the return that the landowner achieves on his investment?

No, that is on the project. As the landowner measures the investment into the project, he will say that it brought 52 percent IRR but not as return on [cash] investment. His return on investment is on average four to five times cash — if he invested $10 million, he is making $50 million.

This of course raises the question if this kind of investment gain is moral.

Is there such thing as a moral corporate gain? It is a big debate.

When states tax corporate gains, the intention is to make society more equitable and that at least makes the system sound more moral.

And that is why it was important that the Council of Ministers [Lebanon’s Cabinet] proposed to tax the banking sector and the real estate sector within the basket of tax increases sent to Parliament. I am among those people who are not at all against this but what I say is that much has to be done first. Clean up the corruption, stop paying retired general managers and stop paying employees that do not exist, and privatize the electricity. There is so much to do to run the country in a proper manner. Tax me but before you tax me, first clean up [the administration].

And you are ready to help with cleaning all that up?

I am definitely ready.

September 9, 2013 1 comment