Executive Magazine

The Buzz

Business briefing: 25 July 2013

by Executive Staff July 25, 2013

written by Executive Staff

Economics and Policy

Kuwait's investment environment is "repellent," according to a new report.

Turning heritage into profit

by Nabila Rahhal July 24, 2013

written by Nabila Rahhal

A short walk in practically any area in Beirut — be it Hamra, Gemmayze, Zuqaq Al Blat or Ashrafieh — leaves one in awe at the neck-breaking speed at which Beirut’s urban structure is changing. High rises cast shadows on what is left of buildings dating back to the French and Ottoman mandate, and even most of those are being demolished to make way for more towers.

Yet the situation has created a backlash in the market where many young and affluent urbanites long for the simplicity and authenticity of architecture from the olden days — a sentiment that commercial establishments are making use of while preserving heritage at the same time. Today, some of Lebanon’s most beautiful and popular restaurants — such as The Gathering, Enab or Sud — have breathed new life into traditional homes by incorporating the architecture into their venue, a trend that is on the rise in the food and beverage industry.

The issue of preservation of heritage homes paints a dismal picture of a state wittingly or unwittingly playing into the greed of landowners and developers who, motivated by profit, cast a blind eye on heritage. “The state gave every incentive for people to tear down their heritage homes instead of renovating them,” says Giorgio Tarraf, founder of Save Beirut Heritage, a non-governmental organization that champions the protection of the city’s historical sites.

His words ring true when one considers the urban planning and the old rental laws. Karl Sarkis, general manager of Blox Real Estate Services, explains that the pre-1992 rental laws have the tenant paying miniscule amounts: “The average rent for a 200 square meter venue [according to pre-1992 laws is] around $80 per month. With this situation, how can the landlord of an old building maintain it? It’s not economically feasible for him to do so.”

These laws, coupled with the increasing price of land in key areas in the city, set the wrecking ball swinging for traditional architecture in Beirut. “The real catastrophe for heritage homes is our development and construction laws, which make it much more lucrative to build towers in the city instead of preserving a two-story heritage home,” says Khaled Rifai, an architectural inspector at the General Directorate of Heritage at the Ministry of Culture.

Despite what seems to be a losing battle, the Ministry of Culture, with backing from civil society, has made some efforts to preserve these traditional homes. Tarraf explains that in 1996, an NGO called the Association for Protecting Natural Sites and Old Buildings voluntarily did a tentative overview on the area surrounding downtown Beirut and came up with a list of 1,600 buildings to be preserved.

In 1999, Khatib and Alameh, a Lebanese construction company commissioned by the state, pared down the list — still limited to the area surrounding downtown — to 500 heritage buildings classified across five levels, with “A” being the most significant to save and “E” having the most damage. Those classified as either D or E could be torn down and so, today, only 250 of those classified remain, according to Rifai. “There was a game of influences happening at that time and classifications were based on the current state of the building, not its inherent value,” says Tarraf.

According to Rifai, focusing only on the areas surrounding downtown left a lot of unclassified heritage homes across Beirut, which is why in 2010 the Ministry of Culture decreed that no home in Beirut can be torn down without the ministry’s written consent. Though the ministry’s role remains advisory and the final decision to demolish a building lies with the Municipality of Beirut, Rifai is content with this step and says the ministry has saved 200 previously unclassified homes in the past three years, adding that the municipality has complied with their advice so far.

With only two architectural inspectors for heritage homes across all of Lebanon, Rifai admits that there is nothing they can do to prevent homeowners from intentionally damaging their property in the hopes of gaining a permit for its legal destruction. Rifai says, however, that the General Directorate refers cases where a building “suddenly” collapses to General Security. If it was a classified heritage building, the owner can be prevented from building on it or selling.

But real estate agents who spoke with Executive all disclosed that when an investor has enough influence, no classification stands in the way.

A sense of nostalgia

“The trend is changing and people are developing an appreciation for heritage homes, now seen as a luxury. There is an increased awareness from the public, and today a demolition of a house makes front-page news,” says Tarraf.

While cases of preserving heritage homes for residential purposes are rare, preserving them for commercial use is becoming more of a norm. Commercial uses include spaces for art galleries and banks, but perhaps the most profitable and successful venues are in hospitality, where heritage acts as a multiplier of commercial use value.

This trend of capitalizing on heritage has been growing, with approximately 25 restaurants in heritage homes across Ashrafieh, Gemmayze, Mar Mikhael and Hamra. This number is easily twice what it was five years ago, and it seems that around 10 percent of remaining registered heritage houses in Beirut are restaurants.

Blox’s Sarkis says he has noticed an increase in demand for old houses “with charm” among those interested in developing restaurants, as well as landlords who specifically ask him to put up their properties for rent as restaurants. He has recently rented two heritage homes in Mar Mikhael that will shortly be launched as restaurants and says that investors are interested in 10 heritage homes in the same area, but that they are tied up in inheritance issues.

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“90 percent of the old homes in Ras Beirut have been renovated into restaurants or furnished apartments,” says Anis Rebeiz, a real estate agent in Hamra, adding that, to his knowledge, there are no more heritage homes available for rent as restaurants in Hamra. “Whatever traditional homes are left in the area are either classified and cannot be played with or are forgotten by their owners, who are mainly abroad,” says Rebeiz.

A rental lease for a restaurant is usually a long-term one, says Sarkis, and annual rent for a heritage home in Mar Mikhael is between $60,000 and $120,000, depending on the size of the land. “For landlords, renting their homes is profitable because they price the rent the same as if it was a floor in any building in that area, and usually restaurateurs choose areas that are already booming and so land price would be high,” explains Sarkis.

There are other reasons landlords might choose to rent their homes to restaurant owners: the home is too small to sell for a bigger development; the real estate market is in a slump, which makes it more financially sound to rent than sell; or simply because the owner appreciates heritage and would like to see it put to good use.

Converting a heritage home into a restaurant requires a deep appreciation for traditional architecture as well as a clear vision because the renovation process requires one to two years and a budget ranging between $750,000 and $2 million, according to restaurant owners. “Heritage homes are expensive to rent and expensive to renovate as opposed to other successful bars or restaurants built from scratch, which were much cheaper to develop,” says Ussama Makarem, owner of Clé, a bar and restaurant in Hamra.

Restaurant owners shared with Executive stories of the original states of their rented venues, many of which had no running water or electricity or were not even hooked up to the sewage system. They were met with challenges such as interior walls being too thick to be broken down without special tools or having to mix cement manually as the area was too tight for a mixer. All said they had to incorporate structural support to compensate for weak foundations. However, they all said they “fell in love” with the charm and history and could not envision their restaurants anywhere else.

But passion alone cannot guarantee the long-term preservation of commercially-used heritage houses. Since these sites are usually offered for lease and not sold, the owner can refuse to renew the lease agreement with the restaurant owner, or the restaurateur may choose to close down the venue if it is not performing well. “We can be happy that architectural heritage is safe for the time being but without property sale, no one knows what the future will bring,” says Sarkis.

For the time being, there are two factors that speak to the long-term future of commercially-used heritage houses: investments in concepts where whole hospitality identities are built around the inclusion of heritage, and the passion of the operators.

Some venues, such as Noa or Sud, only preserved the façades of their buildings while constructing completely new interiors in line with their concepts. Other restaurants, such as The Gathering, Clé or Enab preserved as much of the interior as possible. “We kept the original tiles, the wooden beams on the roof, the window sills and even the lime wall interior,” says Tamara Zeidan, co-owner of The Gathering.

These varied efforts and different concepts have been rewarded, operators say, by steady streams of customers who seek out heritage in hospitality venues. To safeguard these venues even better, the public sector could contribute a great deal through indirect measures, such as allowing trade-offs on exploitation ratios, and direct measures, such as strict heritage protection of buildings and even neighborhoods. Until that day of administrative awakening, however, Beirut’s heritage will remain only under the protection of a lease.

“There is indeed a rise in interest in such projects and in going back to heritage and simplicity, though some investors still look for the easy way of building. We can all build new venues and have the same concept but then what makes me different?” asks Michel Yazbeck, owner of Sud.

July 24, 2013 0 comments

The Buzz

Business briefing: 24 July 2013

by Executive Staff July 24, 2013

written by Executive Staff

Economics and Policy

Plans by Gulf countries to crack down on Hezbollah may pose a bigger threat to Lebanon’s fragile public finances than to the party itself.

‘I can’t see Lebanon getting one percent growth’

by Zak Brophy July 23, 2013

written by Zak Brophy

The trade sector is a fragile creature, susceptible to the vagaries of the market and those fickle human sentiments of confidence and trust. So it is little surprise that it has endured a bit of a tossing in the wake of the political crises and economic malaise besetting the country. Executive met with Chairman of the Beirut Traders Association Nicolas Chammas to hear how he and his colleagues are weathering the turmoil.

You have just received figures for the sector’s performance over the first quarter of 2013. How are they?

They show a clear downward trend in retail sales. The figures include more than 40 sub-sectors in Beirut and we have noticed for three quarters in a row a decline in retail activity. Internally we can point to the political cleavages and bickering and the security issues we face every single day and the absence of the government, which resigned late in the first quarter. This is not to even speak of the absence of the Arab tourists in Lebanon.

Is this trend a reflection of an actual contraction of economic activity or rather a reflection of low confidence and uncertainty over what the future holds?

Actually there are both. There is the wait-and-see attitude from the low confidence in the market, which is confirmed by the consumer confidence index. On the other hand, there is the lack of demand from the absence of the Arab tourists. In some commercial sectors that are related to consumer spending such as jewelry, clothing, fragrances, leather goods and so on, the contribution of tourists and especially Arab tourists is around 45 percent of duty free purchases. When these people are absent, we get hammered. The decline in the retail sector over the first quarter compared to the same period last year is 14.4 percent in real terms, which is huge especially when you consider that commercial activity accounts for around one third of the Lebanese economy. This talk of growth of 1 or 2 percent in the economy, I really don’t see it when we talk about the real economy. I can predict that if things continue going as we see them now, we will see negative growth this year.

Are there certain areas where the influx of Syrians, especially from the middle and upper classes, have buttressed retail activity?

They did boost retail, but in very limited sectors, essentially living essentials. But this did not compensate at all for the loss we have suffered elsewhere. The purchasing power of a migrant coming from a war zone is not a fraction of what it is with a tourist coming from the Arab countries. Even middle class families that come with some savings, they are very frugal with the ways they spend, perhaps over fears of worse days to come later on.

There is an excess in supply of retail space in the current market. Has this translated into a fall in the cost of leasing retail property?

No, unfortunately not, as many of the leases have been contracted from more than one, two or three years ago. We are stuck with these rates and this is becoming a very big problem for retailers as we have turnover coming down and other operational expenses going up and leases representing a bigger and bigger proportion of turnover. Unfortunately, the owners of malls and large shopping centers are not very flexible with us, even though there is some excess capacity.

What about new leases for businesses who are entering the market, relocating or expanding?

If there is any downward flexibility it is really very marginal, even though we have seen such deterioration in our work environment over this past period. It is becoming a big problem and it is likely more and more people will have to evacuate their rental places in light of these problems. We are facing a liquidity crunch in all of the commercial sectors, from mild to severe. In the best cases you have to pay your bills immediately and your receivables take a long time to come in so you have a mismatch in your payments and receivables. In the worst conditions we are suffering huge losses in terms of solvency. You know we have problems of liquidity arriving to solvency problems so you have structural deficits and we are witnessing more and more of this all the way to bankruptcies.

Minimum wage legislation was adopted about a year ago. Have you been able to pass on much of this increase in costs to the consumer?

We have not been able to pass on much of the wage increases as we simply don’t have any pricing power. The purchasing power of the population is so brittle you can’t increase prices. In fact we are seeing the opposite with retailers offering discounts at the height of the season just to clear inventory so as to be able to pay their bills and suppliers.

We are witnessing an increased clustering into new malls. What kind of pressure is that putting on retailers in traditional and dispersed locations?

This is absolutely the case and their business pool is shrinking. This is not unique to Lebanon but is happening everywhere and is now catching up in Lebanon. However, as it comes amidst a quasi-recession in Lebanon, it is a double whammy for the traditional markets. On one hand they are suffering a lack of business that is plaguing the entire nation and at the same time more business is being taken by the malls.

We think these two channels have to live side by side. We don’t at all want the end of the traditional traders as they are integral to the social texture of Beirut and Lebanon, but of course they need to modernize themselves and as such the financing from the banks needs to be there. The subsidized loans have benefited industry, tourism, housing, agriculture and so on but not the trade sector. There is a prevalent misconception that trade is mostly light assets, which is not the case. If you look at our balance sheets we have lots of fixed assets and there we would benefit from subsidized loans. Traditional retailers need some money to modernize themselves, just like we have seen in the restaurant sector in recent years.

Why have you recently released a branded card for the Beirut Traders Association (BTA)?

This is to help more of the traditional and smaller retailers. It will increase the loyalty between them and their customers. It will be a win-win situation with discounts and benefits for the customers as well as increased financial proceeds for the retailers. Most importantly, we are hoping this will stimulate much needed demand in the market, to somewhat offset the drop in external demand from tourists and expatriates and to tap into forgotten corners of the internal market. Since smaller retailers cannot bargain for good conditions vis-à-vis the banks it was important to have this co-branding between the BTA and Blom Bank so that all participants operate under the umbrella of the BTA.

July 23, 2013 0 comments

Finance

Planting cedars in America

by Maya Sioufi July 23, 2013

written by Maya Sioufi

The slump seems to be history. While its problems are not forgotten, the housing market, whose crisis pitched the United States economy for years after 2008, is this year flipping into the engine of economic growth, if statements of US banking majors are worth the paper they are printed on. “If this call is right, housing will take a leading role,” JP Morgan Chase said in a special report on the US economic outlook at the start of 2013. They reinforced their expectation even further in March by predicting US home prices to increase 7 percent this year.

For those who are fascinated with catchy numbers and price records, the latest benchmark of the US housing market’s recovery is New York’s General Motors Building on Fifth Avenue. In a transaction that valued the GM Building as the most expensive office building in the country, a 40 percent stake in the sprawling 50-floor tower changed hands for $1.4 billion last month.

The deal involved players from the Middle East. The sellers were Kuwaiti and Qatari sovereign wealth funds and the United Arab Emirates-based Meraas, a holding associated with the ruler of Dubai, Sheikh Mohammed. The buyers had a Lebanese angle — albeit slightly remote — as one of the investors was M. Safra & Co, the New York investment arm of the Brazil-based Safra banking dynasty of Syrian-Lebanese extraction, who acquired the stake alongside a Chinese business magnate. More interestingly, the $1.4 billion price tag of the transaction puts the GM Building’s new value at $3.4 billion, up 20 percent from the last transaction on it, which was in 2008.

A few blocks down from the GM tower stands 285 Madison Avenue, the home of advertising agency Young & Rubicam (Y&R) for almost a century. At the beginning of this year though, Y&R sold the property for $190 million to RFR Holding, among whose partners in the transaction was private equity firm Quilvest, based in Paris and headed by Lebanese Fady Michel Abouchalache.

This is where the recovery of the US real estate market gets interesting. Not only did headline deals like the GM and 285 Madison transactions signal profit potentials, but trends in the US housing market indicate a range of opportunities for investors. Commercial real esta ste prices increased 4 percent year-on-year in April, and home price performance was even more robust, up 11 percent year-on-year in March.

The value of all this to Lebanese investors is that they can access US real estate opportunities through local intermediaries. Quilvest’s clients include Blom Invest, part of Lebanon’s second largest bank. Optimum Invest, a Beirut-based investment house whose license was upgraded to financial institution last October, is partnered with Colony Capital, a Los Angeles-based investment company. Colony American Homes Inc, a subsidiary of Colony Capital that specializes in the acquisition and rental of foreclosed homes, benefited strongly from the recovering home market.

Lebanon fronts the money

“At Blom Invest, we have zero expertise [when it comes to investing in the US real estate market]. At Quilvest, they do all the research and identify opportunities,” says George Abboud, head of private banking at Blom. With Blom raising $20 million over three months until March 2013 from 40 Lebanese clients, the Lebanese bank is one of several clients for Quilvest’s REP II Fund, a $300 million global opportunistic real estate private equity program.

The REP II fund is the second generation of this program after the $240 million REP program, which was launched in 2009 and included deals such as the one for 285 Madison. The new fund will invest opportunistically in real estate funds and in direct property deals globally.

However, since Blom Invest is only interested in exposure to the US real estate market, it has created a special purpose vehicle which will only participate in US deals with an aim to invest in up to six specialized real estate funds and four direct property deals.

So far, Quilvest has invested around 25 percent of Blom’s $20 million commitment into four funds and one deal. “We told our investors to expect their money to be invested in three to four years but we aim to do it in less than two years,” says Abboud. “I hope all the money will be invested by mid-2014 as the market is going up.”

With a minimum ticket of $250,000, the investments are expected to stay on investors’ books for at least five years with the fund managers targeting a 15 percent annual internal rate of return. Raising funds from Lebanese investors wasn’t child’s play in these turbulent economic times, but Blom found among its roster of clients Lebanese investors looking to diversify away from their shaky home country. While Blom has not directly invested in the fund, some senior managers of the bank have committed their own capital for a total not exceeding $1 million, or 5 percent of the $20 million commitment.

For Optimum Invest, partnering with Colony Capital, headed by Tom Barrack — also of Lebanese roots — was a great fit to provide its clients with access to US residential investment opportunities.

“Colony has the infrastructure and the expertise of entering the real estate market and managing a portfolio. It bought a society [Colony American Homes] which is now part of the fund that specializes in renovating and managing single family homes,” says Optimum’s Chief Executive Albert Letayf in explaining his firm’s partnership with Colony.

Colony American Homes benefited from the recovery of the US housing market and the demand for rental homes to such an extent that the company announced plans for a $260 million initial public offering (IPO) at the end of May. It delayed the IPO plan just a few days later as market conditions for real estate investment trusts weakened temporarily. According to Letayf, the postponement was because Colony believes there is “a lot more upside potential,” implying that investors in the fund will reap additional returns from the IPO.

With a minimum ticket of just $50,000, the average ticket size was much higher at $1 million, and the total commitment in Colony’s $2.4 billion American home fund stood at $8 million as of January. While the fund has been closed to further capital since January, Optimum has invested a stake in the fund — with the size undisclosed — and would sell part of it to interested clients.

While the fund has a life of seven years, Letayf expects his clients to start reaping revenues as of next year. As the fund aims to renovate and rent out the homes acquired, Letayf expects dividends of up to 7 percent annually. As for the annual rate of return, Letayf forecasts up to 20 percent for his investors while adding that they have higher expectations at Colony.

“You can’t do [real estate investment] as an amateur anymore. The time when you would buy an apartment in Paris because it was cheap and wait for the price to go up is in the past. Things are more complicated now because of tax issues, contract [constraints], etcetera,” says Letayf, as he explains how he intends to continue working with Colony Capital.

Lebanese and other Arab investors are often property-savvy, given that real estate is an asset class with extensive tradition for them. The changing conditions of risk and reward for property investments in Lebanon today, according to the sector leaders that conversed with Executive, mean that most Lebanese investors have saturated their appetites for local luxury properties.

The uncertainty over short-term price developments after the stagnation of property prices in the past year apparently led to further investor diversification toward international opportunities where the US markets and Berlin are adding new chances for those who have in the past already reaped returns from the US and other markets such as London, Paris and Beirut.

July 23, 2013 0 comments

The Buzz

Business briefing: 23 July 2013

by Executive Staff July 23, 2013

written by Executive Staff

Economics and Policy

The European Union has placed Lebanese party Hezbollah's military wing on its terrorism blacklist because of its alleged role in plots in Europe and the Syrian civil war.

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Companies and Business

Lebanon's Blom Bank saw profits rise by 6.4 percent in the first half of 2013 compared to the same period last year, despite political turmoil in the country.

Helping the youth from desk job to day job

by Leila Hoteit & Mounira Jamjoom July 22, 2013

written by Leila Hoteit & Mounira Jamjoom

The Middle East, and the Gulf Cooperation Council in particular, is investing heavily in education to tackle high levels of youth unemployment and close the wide gap in skills between what students learn and what the market wants. While higher quality and relevant educational offerings are important, our research has shown a corresponding need for career development programs where large unused potentials wait for public and private sector engagement instead of the current haphazard approach.

Industrialized countries’ education systems teach career development directly and indirectly. For instance, the United Kingdom and Canada have built indirect career development opportunities into higher education curricula, widening the focus from immediate choices to personal development and broader decision-making. In combining traditional career counseling and personality aptitude testing with extracurricular activities, the broader programs instill confidence in students, an understanding of the importance of enterprise plus the ability to seize opportunities and to engage in life-long learning.

By contrast, the Gulf region’s education systems still prioritize knowledge absorption over skill acquisition and governments still use a haphazard approach in which career development programs are not integrated into curricula, even though some career counseling may be offered. The focus on knowledge absorption fails to build students’ problem-solving abilities, leadership skills and creative aptitude. While governments address this issue with varying levels of effectiveness, the absence of career development from the curricula exacerbates the problem of making sure students are ready for the real world. Far too many students have a limited view of their future, which can lead them to believe that a career within the public sector is their only option.

In our recent survey of more than 1,300 students in the GCC, we found that students are largely uninterested in working for the domestic private sector, the part of the economy that governments want to expand. For the most part, students choose the public sector for job security, or multinationals for career development, something which they believe is not offered by the local private sector.

Students have insufficient exposure to entrepreneurship, whether of the commercial or civic variety, and have little experience in volunteering for charities or civil society organizations. This robs the economy of potential entrepreneurs and prevents talented students from becoming wealth creators.

Shifting focus

To address this problem, Middle Eastern countries need to educate students about employment, not just for employment. In the GCC, governments will have to lead the way. Over many years, Gulf states have invested in public sector employment programs that were benefiting their citizens and increasingly supporting the advancement of women. However, the focus on making the public sector the employer of choice has hindered private sector development.

It is difficult for Middle East companies to compete with the security and generous pay of the public sector. Governments should address this imbalance by restructuring public sector employment in ways that reduce the differential with their national private sectors.

In opening private sector potential by leveling the playing fields, governments will provide a central and effective boost to national private sectors and economic diversification. To unleash the potential further, government agencies will need to change their focus in career development programs. At present, many governments are tackling career development issues through re-skilling programs available only to graduates. While these are useful, governments need to create career development initiatives run by ministries of education that teach students from the start of the education process.

Governments can also act as convenors of the stakeholders: ministries, private companies, teachers, parents and the students themselves. Governments need to publicly articulate the importance of career education for the region’s students while enlisting the support and input of other stakeholders.

To make higher education more practical and oriented to both national economic needs and the career needs of students, the leadership of governments has to be complemented by the broad involvement of educators, professionals and companies. Education ministries, and other official education bodies, have to work closely with teachers and academics to modernize the curriculum. They should use curricular and extra-curricular mechanisms to communicate the importance of careers, enterprise and private sector work.

The region’s education ministries can consider developing national frameworks for career education that outline the government’s priorities and plans so that pupils and their parents are aware of these career development efforts. For example, Australia’s Department of Education recently introduced a National Career Development Strategy that announced the country’s career development objectives and sought to obtain input from the public.

The education system should deliver lessons about employment and careers in a sustainable manner. Curriculum standards will also need to change to encourage a positive attitude toward work and learning. The curricula of the future should ensure that high school students are able to evaluate the relationships between their individual interests, their abilities and skills, and achieving their goals, whether personal, social, educational or career-related.
reaching out

The private sector has a vested interest in participating in building career skills. Yet there is a reflex in some parts of the private sector to sit back and wait for governments to take the lead. Instead, companies should be proactive and incorporate the career development of their community’s youth into their corporate social responsibility plans. Such plans can involve forging alliances with schools and universities to offer apprenticeships and summer placements that will make students more employable. Too many students miss precisely this exposure to the private sector that is routine in developed economies.

Families are also important. In a recent survey in the GCC, we found that a large majority of parents want their children to have a safe public sector job. Often, this desire is influenced by a lack of awareness of the added opportunities that private sector employment has to offer. If government agencies and educators provide parents with information on their children’s career development opportunities, parents can be taught to encourage their children to take risks and support them in their career choices or accept these choices if they choose to break with family tradition when it comes to their career.

Finally, the students have to be engaged in career education and development. Our survey indicated that GCC students understand the shortcomings of their education and want to be involved in reforming it.

Career education has multiple benefits, preparing students properly for university life and teaching them to prioritize their studies and learn independently. Above all, it instills in them the value of life-long learning and personal development, attitudes that drive the innovation that the region’s economy needs.

Leila Hoteit is a principal at Booz & Company and Mounira Jamjoom is a senior research specialist at the Ideation Center, Booz & Company’s think tank in the Middle East

July 22, 2013 0 comments

The Buzz

Business briefing: 22 July 2013

by Executive Staff July 22, 2013

written by Executive Staff

Economics and Policy

Iran has denied it failed to make payments on its loans to the World Bank for the last six months, blaming Western sanctions for preventing an intermediary from forwarding funds to the global lender.

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The biggest mistake deposed Egyptian President Mohammed Morsi made was stopping wheat imports, Egypt’s new supplies minister has said.

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Also in Egypt, the United Arab Emirates has transferred the $3 billion it pledged to Cairo's new government.

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Companies and Business

Dubai Financial Market (DFM), the Gulf's only listed stock exchange, said second-quarter net profit surged on the back of higher trading values and renewed interest among investors lured by an economic recovery in the emirate.

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Beirut's real estate is the second most expensive in the Middle East, a new report has shown.

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Emirates NBD said its second-quarter net profit rose 50 percent, beating analysts' forecasts, as Dubai's largest lender benefited from an economic recovery in the emirate.

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July 22, 2013 0 comments

Real Estate

Beirut must develop horizontally

by Karim Makarem July 19, 2013

written by Karim Makarem

Beirut is a growing city. It extends well beyond its official municipal borders, and there is pressure for it to spread even farther. The need to accommodate young families and individuals demands a wholesome living environment, and so does the future of Beirut and its property sector. Planners, developers and real estate professionals have urgent stakes in responding to the growing demand for affordable housing, and we hold to the view that adequate, inexpensive housing for limited-income families can be provided within a 25- kilometer belt outside Beirut’s city limits.

A promising calculus
Several factors have put growing pressure on Beirut to spread out from its current tri-partite center of the Central District, Ras Beirut and Ashrafieh.

The first is demographics. Beirut already accommodates more people than its space and infrastructure can adequately support. One need only look at the traffic jams or the sewage system that floods with the first drop of rain.

Secondly, local, middle-income families are increasingly finding themselves priced out of housing. It is nowadays impossible to own a new apartment anywhere in Beirut for less than $250,000.

Lastly, Beirut plainly lacks green spaces, public gardens and even trees along many of its sidewalks.

The trend for development to move away from Beirut is well under way. Together with the Greater Beirut region, the provinces around the capital are home to the majority of the population. In our opinion, however, development is not spreading fast enough, and certainly not reaching far enough.

We believe that spreading development to regions within a 25-km radius from Beirut will translate into a sizable drop in the cost of housing. While land in Beirut and its immediate surroundings costs today anywhere between $1,000 and $5,000 per square meter (sqm) of sellable built-up area (BUA), the cost of land in areas between 20 and 25 kilometers from Beirut can be as low as $150 per sqm of BUA.

Construction costs of $500 to $600 per sqm can be achieved for mid-market housing, bringing total costs to around $700 per sqm. Adding in developers’ borrowing costs and profit margins brings the selling price of the most affordable finished apartment at the lowest end of the market to about $1,000 per sqm.

It is therefore perfectly conceivable and indeed very possible to offer adequate housing to middle-income families at a starting budget of $80,000 for a 100 sqm apartment. This is well within the subsidized housing loan (iskan) ceilings and within the reach of every income-earning family, which could easily transfer the minimum currently required monthly rent of $400 — equivalent to $4,800 per year — to housing loan payments.

A greater vision
Taking the 25-km belt as our development scenario, we envision a huge urban hub around Beirut, stretching from Nahr Ibrahim in the north to Jiyeh in the south, going through areas such as Qleiaat, Metn, Sofar and Deir el Qamar. We expect that the creation of the hub will provide a much-needed boost to economic growth and also boost the entire real estate industry if certain obstacles can be removed.

The most obvious problem is the creation of an infrastructure that will facilitate a daily commuting time that should not exceed 45 minutes from anywhere in the 25-km zone. While all the areas within this radius are serviced with roads, electricity, sewage systems, telecoms, etc., the commute to and from Beirut, which will remain the business hub and thus a daily destination, is restricted to very few means of transportation — cars, mainly.

Developers might also require an incentive to venture out of town, such as tax exemptions or easements of permits and other official paperwork. In many instances, exploitation ratios are low, limiting development to independent housing or villas. Local municipalities might have to revise their construction regulations to allow for higher exploitation within, of course, a cohesive master urban plan. Urban planning, which for decades has been almost non-existent in all areas except for the Beirut downtown, is a must to successfully develop the city and its belt.

As for alluring prospective homeowners, the opportunity to live in a decent, healthy environment should be motivation enough. However, local services — such as schools, hospitals, shopping and entertainment — should also be encouraged.

The need to develop a 25-km city belt is dictated by Beirut’s demography and geography. Our job is to make it happen in an orderly manner with intelligent urban planning and far-sightedness.

Karim Makarem is director of Ramco Real Estate Advisers

July 19, 2013 0 comments