Executive Magazine

Morning briefing: 8 May 2013

by Executive Staff May 8, 2013

written by Executive Staff

Economics and Policy

Saudi Arabia should cut energy subsidies that are burdening public finances, the economy minister and the head of the state-run utility said, a move that would also tackle the issue of erosion of crude exports.

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OPEC has appointed a Saudi Arabian candidate as its head of research over an Iranian, OPEC delegates told Reuters on Tuesday following a meeting at the organization’s headquarters in Vienna.

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Internet connections between Syria and the outside world were cut off on Tuesday, according to data from Google Inc and other global internet companies.

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Companies and Business

Saudi Basic Industries Corp (SABIC), the world's biggest petrochemicals group, will issue a sukuk late this year or next year to fund coming projects, a senior company official said on Tuesday.

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Two Omani electricity generating companies plan initial public offers of their shares around June next year, the companies said in statements on Tuesday.

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Dow Chemical Co has received $2.2bn in damages from Kuwait's state chemicals company, bringing an end to a more than four-year dispute over a scrapped plastics joint venture.

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May 8, 2013 0 comments

The Buzz

Morning briefing: 7 May 2013

by Executive Staff May 7, 2013

written by Executive Staff

Economics and Policy

Kuwait's inflation rate fell to a three-and-a-half year low in March, with drops in housing costs and utilities driving the decline, KFH-Research has said in a new report.

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May 7, 2013 0 comments

Economics & Policy

Clever planning keeps airports aloft

by Fadi Majdalani, Alessandro Borgogna & Marwan Bejjani May 7, 2013

written by Fadi Majdalani, Alessandro Borgogna & Marwan Bejjani

Unexpected disruptions are a regular ocurrence for air travelers across the globe, including in the Middle East. Bad weather, civil unrest, industrial action or even a volcanic eruption in Iceland can be the culprit. While the impact on travel is considerable, the potential damage to airports’ reputations and long-term business can be even worse. It can result in travelers avoiding certain airports or regulators pushing for costly controls and financial penalties. Ultimately, such disruptions have detrimental consequences for the Gulf Cooperation Council’s thriving aviation industry, which plays an important role in the region’s economic diversification.

Disruptions can severely affect the main priority of an airport: to maximize revenues by having as many passengers board planes as safely as possible. Airports achieve this goal through sophisticated and complex procedures that, if disrupted, limit valuable capacity and the number of flights they can operate.

Airports that lack the ability to handle these disruptions can face severe repercussions. Major and even minor operational disruptions can lead to significant revenue losses, incur massive response costs and cause broader economic losses at the local, regional and national levels. Disruptions from the 2010 spread of Icelandic volcanic ash over European airspace had a $253 million net impact on the aviation sector in the Middle East and Africa, according to Oxford Economics, a United Kingdom-based forecasting and analysis firm.

The disruption resulted in roughly $11 million in lost business each day for Emirates Airlines, whose European routes make up a third of the carrier’s operations.

In addition to facing knock-on effects from other regions, GCC airports experience local disruptions such as those that stem from fog, which annually causes disruptions of more than 200 flights, affecting 30,000 passengers in the United Arab Emirates alone.

Airport disruptions are typically caused by one of three types of factors: circumstantial, structural or administrative. Circumstantial factors, such as political instability or natural disasters, can have low to high impact on airports and are nearly impossible to control. Structural factors are those that involve infrastructure and facilities, regulatory constraints and operational complexities, which can have low to medium impact on airports. Airports have a low to medium degree of control over these factors.

Lastly, there are administrative factors that can be fully managed, but will have considerable impact on airports if ignored. These problems stem from a lack of collaborative planning, command and control, use of information and technology or dedication of resources, or from the failure to make continuous improvement to airport operations.

While some disruptions caused by circumstantial and structural factors are clearly unavoidable, others can be eliminated or reduced by administrative improvements. But all potential disruptions, whether avoidable or inevitable, must be addressed, meaning that operational resilience should be a strategic priority for every airport in the Middle East.

Operational resilience

With the region’s airports becoming increasingly important global hubs, operational resilience should be considered crucial for the future economy of the entire GCC. One regional hub, Dubai Airport, has become the world’s second-busiest airport for international traffic, accommodating 57 million passengers in 2012, compared to 10 million in 1998. Similarly, Jeddah Airport served 19 million passengers in 2010, up from 10 million in 1998. Additionally, regional air traffic is set to rise further due to investment in airport infrastructure in places such as Qatar, Oman, Kuwait and Bahrain.

So far information on the number and type of disruptions at regional airports has largely remained anecdotal and exact numbers on administrative disruptions are not available for analysis. If anything, this highlights even more the urgency for regional airports to deal with not only resolvable but also circumstantial and structural factors by achieving and maintaining operational resilience.

Attaining operational resilience requires airports to plan for the foreseeable and prepare for the unexpected. A resilient airport should be able to prevent or manage and recover from a disruptive event. In essence, airport managers have to proactively get on top of manageable resilience issues, such as clear command and control structures and well-coordinated management of passenger welfare. By improving operational resilience airports can mitigate the impact of disruptions, maximize their capacity and continue to maintain their high standards.

Moreover, operational resilience can enhance an airport’s overall performance, not just during disruptions. For this reason, efforts to improve operational resilience should be implemented in line with a coherent strategy that addresses the short and long-term priorities of the airport as a business and the interests of the entire community of airport stakeholders.

Operational resilience involves focusing on 10 key areas. Successfully focusing on these will likely require substantial and often transformational changes to airports and their management, but all will make them better businesses.

The first is ensuring that resilience is a strategic priority for the airport. This is best done by making operational resilience a key part of the chief executive’s agenda and securing support from senior executives who can champion it constantly.

The second area involves taking additional steps to maintain solid relationships among key stakeholders, including base carriers and providers of priority services such as air traffic control and emergency response. Airports can achieve this by conducting regular meetings with stakeholder representatives so that resilience plans can be shared and coordinated, ensuring synchronized readiness among stakeholders when a disruption occurs.

Enabling proactive ways to respond and manage disruptions is the third area of focus. Airports can do this by increasing their capabilities, setting up early warning indicators that are monitored and acted upon and establishing an airport operating plan so that decisions are made in the interest of the entire airport.

The fourth area involves leveraging information such as historical and real-time information and making it available to all stakeholders. Airport executives will likely find that using information platforms and databases are helpful and can provide analysis on everything from operational performance to forecasts and threats.

The fifth area involves uantitatively measuring performance and impact to better understand an airport’s strengths and areas for improvement. Airports should aim to capture a complete view of the situation, which they can do by employing a response scorecard that assesses key performance indicators, and by taking into account media coverage and financial impact.

Sixth, coordination among command and control centers is key. Airport executives must ensure these centers operate in close coordination, and that roles and responsibilities are well defined so crisis responses are quickly implemented.

New and innovative technologies are the seventh area of focus for airport executives. Airports should employ closed circuit television with automatic incident detection and airside and landside vehicle tracking to enhance operational resilience.

The eighth area revolves around preparedness. Airports and stakeholders need to exceed regulatory requirements with additional scenario planning, training and testing based on potential disruptions common to the airport.

The ninth focus involves remembering that passengers are the airport’s number one priority. One way to achieve this is by developing a cohesive and effective airport passenger welfare plan in coordination with the airlines.

The 10th and final area is continuous improvement. Airports have to review and refine contingency plans every year and examine the previous year’s disruptions. The aim is to ensure that sub-par responses are not repeated and that positive aspects are praised.

By coping with disruptive events through operational resilience, Middle East airports can maintain their capacity and value, and they will be able to contribute to the growth of the global aviation sector. Most importantly, they can improve their operations year-round and consistently offer passengers a first-rate experience.

Fadi Majdalani and Alessandro Borgogna are partners, and Marwan Bejjani is a senior associate at Booz & Company

May 7, 2013 0 comments

Finance

A breakthrough for Middle Eastern mergers? Don’t be so sure

by Thomas Schellen May 7, 2013

written by Thomas Schellen

When news broke late last month that the total value of mergers and acquisitions (M&A) in the Middle East and North Africa had doubled in the first quarter of 2013, many saw it as a sign that the region’s markets were maturing. Based on data released by consultancy Ernst & Young, (EY), M&A activity in the region reached $14.6 billion, up from $7.3 billion in the same quarter a year ago. Nice numbers on the surface, but when compared to global M&A trends and even more so when put in the regional context, MENA mergers once again look feeble.

Still small fish

On the global scale, M&A values in the Middle East in the first quarter of 2013 were (as usual) outclassed by deals in the United States and elsewhere, which totaled $479 billion according to Ernst & Young. The announced buyout of Dell, the American Airlines/US Airways merger, and the takeover of H.J. Heinz by Warren Buffett and friends were collectively assessed at $63 billion, boosting M&A activity in the US to $219 billion in the first six weeks of the year.

And last week the long-awaited completion of the world’s biggest mining merger, the creation of Glencore-Xstrata, caused a price spike of 4.5 percent on the new combined stock’s first day of trade. The finalization of the deal was made possible in April by getting the blessings of China, the new don of global commodities, and the UK courts, guardian of the formalities of listing the new Glencore-Xstrata.

In a different bracket of M&A processes, the first quarter witnessed the closure of the $55 billion acquisition of Russian oil producer TNK-BP by Rosneft — also Russian — that created the new world leader in oil production by output.

In this context of major deals, the Middle East's share of global M&A has yet to grow beyond the lower single digits and Q1 2013 reinforces the view that the region is still a very minor sideshow of the global circus.

Misleading giants

Furthermore, in the Middle East the regional tally is distorted by two outsized transactions – the Aldar-Sorouh real estate merger in Abu Dhabi that was approved by shareholders in March and the ongoing acquisition bid for Egypt’s Orascom Telecom Holding (OTH). The fact that these two deals accounted for more than two thirds of total deal values in the first quarter casts doubt on hopes for a new trend in the region.

The $2 billion Aldar and Sorouh deal in Abu Dhabi was the largest domestic M&A transaction in the region in the first quarter. Given their shareholding structures and alignment of the two companies with the emirate’s state-driven development strategies, non-market factors cannot be neglected as the deal’s driving forces. Therefore the lack of market forces at play suggests the deal is perhaps unlikely to trigger others or lead to a greater consolidation of the real estate sector in the UAE and the wider region.

Even more important is the latest transformation in regional telecoms ownership represented by the quarter’s biggest transaction by far, the bid for full acquisition of OTH by a Cypriot unit of Alfa Group – a Russian investment group. Ernst & Young’s valuation of this acquisition ($6.4 billion) accounts for the entire increase in regional M&A in Q1 2013 vis-à-vis the same quarter in 2012.

The big share of this one transaction again suggests that this is not a new dawn for regional markets. Telecoms mergers have in the past caused upward spiking of regional M&A statistics as operators were an exceptionally attractive set of takeover targets, where other sectors in the MENA were not so. Previous telecoms acquisitions thus made waves in the region but did not mark sea changes.

Another interesting facet of the offer to buy out the minority shareholders in OTH — which was viewed by a Reuters analyst as undervaluing the stock — is that this acquisition of a Middle Eastern asset is indirectly correlated to the large Rosneft takeover of TNK-BP. Russian billionaire Mikhail Fridman, who cashed in $7 billion in divesting from TNK-BP, has reportedly allocated $1.8 billion of that new liquidity to taking full ownership of OTH — of which he already controls a majority stake.

In that sense, the currently largest merger in the MENA and most significant inbound investment into the region by a wide margin appears to be an outflow of global M&A streams and may indicate that some assets in the Arab world are looking attractive because they may be undervalued.

There are many reasons why M&A matters, not least because it is generally viewed as a sign of economic vibrancy, but also because companies see opportunities to expand geographically, consolidate and streamline co-operational synergies with industry peers, or buy market share in quest for greater dominance. With regard to the region as a whole, the baseline figures may be positive but closer analysis suggests there are few signs that Middle Eastern markets are about to boom.

May 7, 2013 0 comments

The Buzz

Morning briefing: 6 May 2013

by Executive Staff May 6, 2013

written by Executive Staff

Economics and Policy

Prime Minister Nouri al-Maliki's State of Law coalition won the most provincial council seats in seven of the 12 Iraqi provinces that voted, according to results.

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Turkish energy company Kartet has secured a deal to export electricity to northern Iraq and has applied for an export license. That development could add to tensions between Baghdad and Ankara.

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The Louvre Abu Dhabi on Saadiyat Island is a step closer to completion as builders have poured the first concrete into one of the four piers set to hold up the museum's massive dome.

Revisiting the Trans-Arabian Pipeline

by Maya Sioufi May 6, 2013

written by Maya Sioufi

In the midst of all the chatter around Lebanon’s new potential oil and gas reserves offshore, an art exhibition in Karantina’s Sfeir-Semler Gallery reminds us of an era when Lebanon was a major player in the region’s black gold. Titled “The Shortest Distance Between Two Points”, Lebanese artist Rayyane Tabet’s exhibition tells the history of Lebanon’s role in the transportation of oil. Starting in 1946 and continuing over the next three decades, oil traveled from Dhahran, Saudi Arabia, crossing Jordan and Syria to reach Zahrani in Lebanon. From there it was then exported, generating wealth for the country.

The Trans-Arabian Pipeline (TAPLine) Company, a joint venture between United States oil companies Caltex, Esso and Mobil, built and operated a 1,213 km pipeline until, amid increased regional political and military conflict — including Israel’s bombing of the Zahrani terminal in 1982— it abandoned the pipes underground in 1983, the same year Tabet was born. Oil has since traveled by ship, a longer route illustrated at the exhibition by two contrasting chalk lines: a straight line representing the shortest distance by land and a curved line passing through the waters.

Reimagining a line

Tabet first encountered the TAPLine in 2007 as he was heading to the beach in southern Lebanon, detouring around the highways that had been bombed during the 2006 war with Israel. As he reached the town of Saida, huge cylindrical shapes on a hill sparked his attention. They were the remains of TAPLine, and that’s where his investigation started.

It’s been six years since that day on the beach. With no information to be found in Lebanon’s public archives, Tabet researched the company in American university libraries and conducted extensive interviews with former employees and their relatives.

Tabet’s investigation eventually led him to the company’s headquarters in Beirut’s Hamra area, a property owned by Lebanon’s Arida family. When he asked the family for permission to search the premises, they told him, “It’s trash on the floor; take it, do whatever you want with it.” He was stunned to find that the offices were left completely untouched, and that is where he found two of the seven pieces of the exhibition: empty letterheads, withered with time, which were also featured at the Frieze Art Fair in London last year, and the five different color mail tags, representing the five cities in Saudi Arabia from where the oil was extracted.

With no roads connecting the cities to each other when the project was initiated, basic necessities — food, water, clothes, etcetera — were delivered to the workers daily by plane from the south of Lebanon, and the color-coded mail tags simplified the task of delivering the goods. Only 40 km of the pipeline ran through Lebanon, and for each kilometer Tabet reproduced a fraction of the pipe using the same metal and replicating the thickness of the original pipeline. These replicas were produced in a steel mill in Aleppo before it was bombed during the ongoing conflict.

The path of the pipeline is shown with folded rulers with different shades of yellow, each symbolizing a country under which the pipeline crossed. White folded rulers linked to Jordan’s borders represent where the pipeline was originally destined to end: Palestine. Following the United Nations partition of Palestine in 1947, the pipeline’s final destination was changed to Lebanon. “Just like I saw the remains of the company [in the summer of 2007] by accident, the company itself arrived to Lebanon by accident,” says Tabet.

With plans to develop further replicas of the pipeline — Saudi Arabia’s portion is currently being replicated in a German steel mill —Tabet’s ultimate project is to reproduce each country’s portion of the 1,213 km pipeline and eventually reunite the pieces in a future exhibition.

The underlying theme of the exhibition seems to be to remind the Arab world of a time when it was more united, more connected; a time when the different states along the pipeline route were somehow able to work together to share responsibility for a resource and create mutual prosperity. Tabet’s question to us, then: will this be possible again?

May 6, 2013 0 comments

Comment

A border erased

by Nicholas Blanford May 6, 2013

written by Nicholas Blanford

The deterioration of security along Lebanon’s northern border from Arida on the Mediterranean to Masharih Al Qaa in the east presents the Lebanese army with an insurmountable challenge. The western half of the border, particularly a cluster of mainly Sunni villages between Abboudiyah and Dabbabiyah, has come under regular Syrian army shellfire since last summer. These villages are supportive of the Syrian opposition.

Some stretches of the border have become de facto safe havens for Syrian rebels who use the area to rest and to plan and launch infiltrations of Syrian territory. The Syrian army shelling, which occurs mostly at night, is intended to interdict infiltrating rebel forces as well as collectively punish the local Lebanese for supporting the opposition.

On the eastern half of the northern border, in the Shia areas running from the frontier village of Qasr to Hermel, 10 kilometers to the south, the local population has come under rocket fire from Syrian rebels. The rebel forces are incensed at the presence of Hezbollah combatants who are fighting alongside regular Syrian troops in a cluster of villages, many of them populated by Lebanese Shias, west and south of the rebel-held town of Qusayr. The Syrian rebels fired for the first time into Lebanese territory in mid-February when two rockets struck Qasr but failed to explode.

An intensification of fighting in the Qusayr pocket in April, however, led to repeated rocket attacks. On April 14, two people, one of them a teenager, were killed when rockets hit Qasr and nearby Hawsh Sayyed Ali. After that fatal incident, the Lebanese army said that units were “deployed widely across the area and took measures in the field necessary to protect people and to respond to the source of the attack as appropriate.”

If there was any deployment, it did not last long. A visit to the Hermel and Qasr area five days later revealed that not one on-duty soldier could be seen north of a temporary checkpoint set up beside the Assi river on the southern outskirts of Hermel, a full 10 kilometers south of the border. Even that checkpoint was only set up during a recent kidnapping crisis between members of the Jaafar clan and residents of Arsal.

It is unclear what “measures” the army could take to “protect people and respond to the source of the attack.” Even if the army had artillery positions in the area and counter-battery radar to determine the origin of rebel rocket fire, it would not have the political latitude to undertake offensive operations into Syrian soil. It could shell rebel rocket positions in the Qusayr pocket, but the army would be opening itself up to criticism for not taking the same action against Syrian army artillery batteries that shell northern Akkar.

However, the army has taken the initiative in Akkar of erecting several fortified observation towers. The towers, which have been constructed in Menjez, Chadra and Moqaible, are fitted with sophisticated monitoring devices, allowing the army to gaze deep into Syria. The purpose of the towers is a demonstration of the state’s presence in the troubled district and to allow for more accurate reporting of developments. But they have failed so far to stem the Syrian bombardments of Akkar. Furthermore, there is no intention to construct similar observation towers along the eastern half of the border in the northern Bekaa, which may be attributed to objections from Hezbollah, the dominant force in the area.

There is a certain inevitability about the worsening security situation along the northern border, exacerbated by the palpable sectarian dimensions of the conflict. Hezbollah increasingly appears to view the war in Syria as an existential battle and as such is committing ever more resources to ensure the survival of Bashar al-Assad’s regime, or at least the preservation of the pan-regional “axis of resistance”. By the same token, Levantine Sunnis stretching to Iraq are inspired by the notion of Damascus being wrested from the Alawites and dealing a blow to Iran and Hezbollah.

Therefore, it is hardly surprising that the Lebanese army — and by extension the Lebanese state — can do little but watch from the sidelines as the sectarian conflict in Syria gathers strength and seeps ever deeper into Lebanon.

Nicholas Blanford is the Beirut-based correspondent for The Christian Science Monitor and The Times of London

May 6, 2013 0 comments

The Buzz

Morning briefing: 3 May 2013

by Executive Staff May 3, 2013

written by Executive Staff

Economics and Policy

Lebanon’s budget deficit decreased to LL27 billion ($18 million) in January 2013 or 1.71 percent of expenditures compared to LL265 billion ($176 million) or 14.94 percent of expenditures during the same month last year.

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The JW Marriott Jeddah will open in 2016, Marriott International confirmed today.

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Real estate developer Deyaar Development on Thursday declared around 100 per cent increase in its net profit, citing the reason of improving market conditions in Dubai.

Fueling Lebanon’s oil delusions

by Zak Brophy May 2, 2013

written by Zak Brophy

Those attending the official launch of Lebanon’s first licensing round for offshore oil and gas exploration on Tuesday may have been forgiven for thinking they had walked into a Gebran Bassil fan club convention.

The session opened with an unintentionally comical animated video of the minister’s fantasy for a future Lebanon. During “A father’s journey… A nation’s dream”, the viewer was led by the minister of energy and water as he guided his son through a utopian vision of Lebanon freed from so many of the ills that currently burden this dilapidated country.

The car seller of Kabul

In this glorious vision the minister’s hometown of Batroun had been protected and developed as a picture postcard of Lebanese heritage, Beirut had a modern metro system, a sleek railway sped along the pristine coastline liberated from the existing “private infringements”, Beirut river was covered in a solar roof and children played in parks where waste mountains had once stood.

This beautiful hallucination was of course enabled by the great gas wealth of Lebanon and the tenacious efforts of Minister Gebran Bassil. “I looked at my son. I wanted to tell him that I was sorry. Now I hope he understands that the years he was deprived from his father’s presence were not in vain,” the minister’s voice-over chimed.

Back in the real world

Without wanting to be a killjoy, perhaps a dose of sobriety would be of use here. First, Lebanon has no proven commercially viable gas reserves. The adverts that flanked Bassil’s podium read, ‘Our country now has oil for the transport network, army, social services etc.’ are quite simply not true. So far what Lebanon has is indications of significant deposits of potentially commercially viable gas, but until companies start to dig we cannot be certain that it exists and in what quantities.

But let us ignore these doubts and run on the assumption that Lebanon is actually sitting on a treasure trove of gas reserves that will flood into the nation’s piggy bank in the coming decades. It is lovely to assume that this will be a panacea to the nation’s travails but such a reality is far from assured. Indeed, without major reform it threatens to compound an already faltering nation.

Will billions in dollars really translate into bullet trains, public beaches, a powerful army and a sustainable social security program for the elderly? This dream, which we all covet, will surely be impeded by the very structure of the body politic in which Gebran Bassil is very much entrenched.

The fact is that the public institutions of this country have been gutted of real substance, while the ministries of government are treated as little more than bargaining chips for financial and political influence to be traded among an anachronistic elite. Instrumental in this arrangement is the almost complete power afforded to ministers over institutionally weak ministries.

In Minister Bassil’s vision for the future the Turkish power ships no longer exist and Zouk power plant emissions have been reduced by 90 percent. Back in the real world things have already started to go awry, with the first barge shutting down its turbines during its first month on Lebanese shores.

The manner in which the $360 million deal was agreed between the government and the Turkish firm, Karkey Karadeniz Elektrik Uretim, is perhaps indicative of some of the fundamental problems that threaten to undermine the huge potential for development.

Firstly, there was almost no transparency surrounding the deal, with one senior member of government telling Executive it was a “black box”. From the first furlong there were problems as the fine print, in what is in essence a public-private-partnership (PPP) deal, was bungled leading to delays over payment agreements and delivery.

The fact is that while there is a PPP law in parliament there is scant enthusiasm from the ministers and their patrons to pass the legislation. The fear is that it would undermine the almost complete control each minister has over his dominion, along with the money spent and earned within. A more transparent process, involving numerous stakeholders and resulting in a genuine partnership between the government and private enterprise, would rock this steady boat.

So while the minister’s vision includes a gas coastal pipeline the current day reality gives another indication of what obstacles lay ahead. The project proposal for this pipeline is sitting in parliament but the government doesn’t have the $450 million it needs to pay for it and is highly unlikely to find it soon. With the PPP law in place the government would be much better set to tap into private sector wealth. The investors are ready and waiting, the government is not.

Gebran Bassil may like to see himself as the shepherd that will lead Lebanon to much brighter days, but the reality is that the fate of this hydrocarbon jamboree is much bigger than him and, if managed badly, could prove disastrous for Lebanon. This is not scaremongering, but rather a sober reflection on the state of the country’s hydrocarbons. The minister can do all the dreaming he likes, but without reform those dreams will turn to nightmares.

Zak Brophy is Free Speech Radio News’ Lebanon correspondent and a freelance business journalist

May 2, 2013 0 comments

Real Estate

Planning your Lebanon property investments

by Karim Makarem May 2, 2013

written by Karim Makarem

For hundreds of years, land has been a refuge investment and much-preferred option to cash. The same is true today, as investors have had enough scares with financial market investments — stocks, securities, futures and, of course, the more toxic products that came to surface during the 2008 financial meltdown. Land, though the least liquid of those assets, has proven to be a secure placement in Lebanon and, in some cases, extremely lucrative.

For investors who want to take a position in the Lebanese property sector without exposing themselves to the vagaries of project development, buying land is a safe haven and financially attractive in the mid-to-long term. Data gathered by Ramco show that appetite for buildable plots in Beirut is as vigorous as ever, despite the clear slowdown in real estate activity, the drop in many real estate indicators and the volatility of the political situation.

Buying land in Beirut involves two main investment strategies.

The long play

The first is a long-term investment strategy with an element of seeking considerable financial gain while perceiving land to be a safer option than equities or alternative investments. The long-term angle means that investors are willing to hold their properties for several years as their values continue to appreciate.

Buyers using this approach would search for plots in neighborhoods or areas that are currently snubbed by developers and end-users but offer obvious future growth. Such was the case with Corniche el Nahr and Mar Mikhael a few years ago. When the first investors bought into the areas, they were opening new markets. Pioneers in buying properties there did so at extremely attractive prices and were able to triple their initial investments — or more — in less than three years.

The safe bet

A more conservative strategy is to purchase land in established neighborhoods that are in demand by developers and end-users alike. This is a very safe investment, as land values are well assessed and a plot’s potential is easy to identify.

In this case, however, investors will have to be content with smaller profit margins, as the price growth potential of plots in renowned neighborhoods is limited. At the same time, the constant demand in those areas makes for, by property market terms, a very liquid market and investors can resell a property on short notice.

Such a strategy is appropriate for neighborhoods such as Ashrafieh’s ‘golden square’ or Hamra. It becomes critical in this case, however, to buy at the exact fair market value. As prices do not appreciate greatly in established neighborhoods, investors cannot hope to make a profit if they purchase above fair market prices.

For this reason, investors should be aware of the price of the built-up area (BUA) of the land, and not rely strictly on the practice of some landlords and brokers to quote the price of land in square meters. The price of the BUA allows investors to compare the value of plots with different exploitations. BUA prices are affected by zoning and additional exploitation benefits gained from being on corners, and so forth.

In many cases, it is also advisable to request a professional valuation of the plot to assess the accurate fair market value at the time of purchase.

Investors who do their homework on the fair value of a plot, are clear on their strategy and make their moves according to an area’s characteristics of either value retention or potential for future value appreciation will find that Beirut and its immediate suburbs still represent strong investment options.

At the same time, Beirut today is but one of numerous interesting options for land investors. As Lebanese real estate prices were booming for half a decade before they started stabilizing in late 2010, we encountered buyers who wanted to invest in land but could no longer afford the very high prices for plots in the Beirut metro area.

These buyers are looking farther afield and some areas, notably the coast between Beirut and Batroun, have been appreciating at quite a vertiginous pace. The market is dominated by speculative investments. Although many areas are not heavily developed (which is part of their charm), these communities are slowly being enveloped, with construction and plot values following on a constant rise.

Karim Makarem is director of Ramco Real Estate Advisers

May 2, 2013 0 comments