Executive Magazine

Q&A: Makram Zard

by Thomas Schellen December 4, 2012

written by Thomas Schellen

With the latest cycle of real estate activity, a new generation of developers has sprung up. Some of them have come to the excavation sites with approaches that could be refreshing for the whole sector. Zardman is a young company that leapt straight into ambitious projects in the urban core, surrounding communities and outside of Lebanon. Executive quizzed general manager Makram Zard about the company’s performance and the force of experience that stands behind it.

What are your main lines of activity at Zardman?

We have two sides to the business, addressing the middle class in the Metn region and the higher-end market in Ashrafieh. As a third section we are now increasingly stepping into leisure with Nikki Beach [resort development in Damour] and a project in Faraya that is in the pipeline.

Between your projects in Metn and in Ashrafieh, and in the leisure developments, how much does each segment contribute to your business?

In the Metn region we have the bigger volumes in square meters [sqm] and in Ashrafieh we have the higher values. The Mondrian [building in Ashrafieh] alone is 27 floors at [an average sqm price of] around $4,500, so it can go up to $80 million in sales whereas our Bkheir project, which is our largest project in the Metn region, is $35 million. If we compare it in dollar terms, they are approximately equal. The leisure projects are just coming up in the pipeline so in terms of construction and sales costs, the leisure projects should reach about 20 percent of our portfolio; we are talking about 20 percent for leisure and 40 and 40.

How do land prices in the Metn region compare with Ashrafieh today?

Metn is still undervalued. If you ask me about buying a property to resell, not to rent, the Metn is the region to be today. The thing about the Metn region is that you have beautiful plots but they are not very accessible.

When comparing luxury and mid-market projects, where are the highest margins for developers in Lebanon today?

Margins are better at the high end but in terms of cash flow, easiness of the project [and] in terms of sales, the middle class is much easier, so it compensates.

How is the situation if you think beyond the middle class and high end, looking at the need for low-end housing where nobody seems to develop projects?

Actually we would love to do a project such as low-income housing and we tried to do a project. The only thing was that the land sale didn’t come through. As for construction it is totally feasible and very profitable. The margins are lower but you are doing many more apartments.

How big was this project that you were thinking of?

Our project was for around 140 sqm to sell for around $200,000 per unit, so it is very accessible to lots of Lebanese with the bank financing and home loan schemes that we have. Low-income projects require more from the developer because it needs 100 to 200 apartments to be feasible. Today as Zardman we are looking for that plot.

Does Zardman have a land bank of owned plots that you can develop at will?

No, we are not structured this way. My father, Georges Zard Abou Jaoude, is the backbone of the company. He of course is a big landowner in Lebanon. We as Zardman are only into developing projects.

You are a young executive. In Lebanon there is a perception that this can only happen in a family-owned company. Are meritocracy and family business mutually exclusive?

They do not exclude each other and if you look at our business cards we do not put titles. You always encounter this perception of being young as negative, especially in Lebanon where it is very rare that a young entrepreneur without the backing of a family will succeed. It is a shame for the country because if these young people go to the United States and London, they are really getting ahead.

What can you tell us about the projects portfolio of Zardman?

In talking about construction costs, our portfolio of projects under development comes to around $200 million, including Aura Erbil, a 200,000 sqm mixed-use project in Erbil, which accounts for a large chunk of this.

So you have $200 million in total construction cost, including Kurdistan, on your books?

About $200 million including Kurdistan but not including land cost and fees and without our latest leisure project in Faraya, which is another big project with 120 chalets of around 150 sqm each. It will represent around $20 million in construction cost.

How much of that $220 million total is in early stage, how much is ongoing and how much completed?

At the end of [2012], we will have 10 percent completed, 70 percent ongoing and 20 percent in early stage.

So you went from a single project worth perhaps a few million dollars to a construction cost portfolio of over $150 million in ongoing projects in how many years?

We started in 2008 and will celebrate our fifth anniversary in 2013.

Looking at your equity, do you have investors?

We have mostly family-owned projects. We have a few projects where we have investors coming in. We do not usually get investors to come in because we do not need that cash for the equity. The reason why we go with investors is for potential other business partnerships, [or] for marketing and public relations purposes. Our view for the future is to have larger projects with investors coming in for equity.

Will the geographic scope of these future activities be in the Levant or beyond?

I think that Africa would be a region with great potential to visit. Especially Nigeria is growing at remarkable speed. In Lagos you have the Eko Atlantic Project, which is as big as Manhattan. It is one of the biggest projects in the world and there are lots of opportunities there. We are looking to establish in Erbil and grow more there.

You seem to be eager to grow and not only in Lebanon…

That is exactly correct but as we are a young company, we think we have time. We are very hungry to find the market but we are trying today to establish our name in the best possible way. We want to finish all our projects in the best quality and delivery dates so that whenever we go to another market we have the portfolio needed to enter a market strongly.

What have you achieved so far in total sales?

We today have around $180 million in sales, cumulative. Our sales versus construction costs are quite high so on that front we are safe and sleeping well.

What growth rates did you achieve on the sales side and how strong an increase do you project for 2013?

From 2010-11 we had about 15 percent sales increase but from 2009-10 we had around 40-45 percent. In 2012 we did not have many new projects coming to sales other than the second phase in Bkheir. In 2013 we will have Nikki Beach, Faraya and the third phase in Bkheir, and the Mondrian. I think sales in Erbil will grow tremendously because we are doing the whole marketing and sales launch right now. With all these projects we should reach 60 or 65 percent sales growth next year.

How much is your father’s vision driving the company, or how much is it a vision being developed now?

It is more supervision than vision itself. At first we were following his advice, which was more of saying to us what to do. It is becoming more of discussion and more give and take and I think in the following years it will be even less. Today, even if we think that we did a great job, we should say that it was mostly because he was behind us. I want to emphasize mostly [because otherwise] we wouldn’t have been able to grow that fast. We might have been able to grow and become an established name but not in this manner [as we did].

December 4, 2012 0 comments

Society

Year of the bargain

by Nabila Rahhal December 4, 2012

written by Nabila Rahhal

“The dropping numbers of tourists, the decline in the country’s financial inflows and the plunging consumer confidence have placed the Lebanese fashion retailers in a critical situation,” says Jamal Rayess, general manager of Hamra Shopping and Trading Company. “Confronted with these challenges, we were compelled as usual to think outside the box and improvise ways to counter the rising difficulties.” With these words, Rayess effectively summed up the state of retail in Lebanon in 2012.

Fewer tourists to buy

The third quarter of the year, the peak of the summer season, was when the retail sector was hit the hardest with the significant decrease in tourist numbers, following Arab countries warning their citizens not to visit Lebanon. This was evident first by the deep drop in the percentages of visitors reclaiming their value-added tax upon their departure from Lebanon, as the numbers from Global Blue indicate. Also, the latest numbers from the Lebanese Traders Association-Fransabank index indicate that retail activity dropped 8.5 percent compared to the same period in 2011.

The report attributed this drop to: “…the apparent decrease in purchasing power and to the high reliance of the Lebanese economy on Gulf tourists’ spending who were absent from Lebanon in this quarter due to the regional and internal turmoil.”

“For the retail sector in Lebanon, 2012 was not a good year,” says Mher Atamian, manager of Atamian Group, a distributor and seller of luxury brand watches and jewelry. “There are areas which witnessed a steeper decline in activity and sales than others, especially those which somehow depend on tourism such as Downtown Beirut or Verdun.” He adds that areas catering more to the Lebanese, such as the malls in Dbayeh, performed better this year.

Local unrest

Any hopes of making up for those lost tourists and expats during the Adha holidays were dashed by the bombing in Ashrafieh and subsequent events that kept would-be tourists away. “The bombing right before Adha ruined our hopes for an increase in activity during this period,” says Sophia Salem, owner of Sophie’s Choice, a fashion boutique and café concept in Beirut Souks. “With the high rents we have to pay in Downtown, we need all the activity we can get and instead we have demonstrations occurring right next to our businesses. People have the right to protest for what they believe in, of course, but Lebanese in general should be more aware and act more responsibly.”

Said Daher, chief executive of Azadea Group, owner and operator of leading international franchise retail concepts in the Middle East and North Africa region, says its stores in Lebanon “were doing well until the explosion in Ashrafieh… when business became slow.”

“We are hoping for a recovery [over] Christmas and New Year’s,” he says.

The sporadic turmoil around other parts of the country was another factor negatively influencing the retail sector in 2012. Daher explains: “Our stores in the north and in Saida were unfortunately impacted by the tensions there. But we always have challenges, and I believe that at the end the market migrates.” Atamian added that areas such as Tripoli and the Bekaa, where the conflicts in Syria spilled over internally, saw business being affected even more than Beirut.

Diluted purchasing power

Not all shoppers were equally daunted by the crisis. “Despite the events of the year, we… are still doing quite good overall compared to other companies in the retail business,” says Atamian. “The high-end consumers were less affected than the mid-segment, as those with a high purchasing power were still affording and buying their luxury brands.”

Hassan Moustapha, Vertu regional manager of Middle East and Africa, also speaks of those with high purchasing power, saying: “The growth we saw this year was mainly fueled by the increased demand for our signature line of smart phones — valued at $13,000 — from visiting expats residing in the Gulf.”

However, Daher, whose brands of clothing stores mainly cater to mid-range shoppers, says they still performed well. “Before opening Le Mall Dbayeh we had no decline in our year-to-date comparative sales between 2011 and 2012. Compared to others in retail, we were not as affected by the events of the year,” says Daher, adding that Le Mall Dbayeh’s opening cannibalized business from their other stores, creating internal competition.

“This year everything became more expensive as people’s purchasing powers decreased,” explains Imad Shakker, owner of Bellio store in Mar Elias and wholesale importer of Turkish fashion items. “Therefore, the medium to high-end shopper saw she could no longer afford to buy those high costing items and had to buy from less expensive stores. Stores like mine benefit from this as we are affordable.”

Retail’s hard knocks

While Beirut still maintains its reputation as a trend-setter for fashion in the region, other Arab cities are surpassing it in terms of sales and activities.

“Our stores in the region are performing better than the ones in Lebanon. The Emirates benefited greatly from the turmoil in the region as it saw an increase in tourists and in retail sales,” says Daher. “It doesn’t mean we are complaining about business versus 2011, but I know for a fact that in Lebanon the entire retail industry should be doing better.”

Salem acknowledges that 2012 has been a harsh year for Lebanon in retail terms, but believes the year’s damages can be somehow minimized if the Lebanese are more aware and think of their country first. “The number of Arab tourists decreased significantly this summer and the retail sector suffered from this loss of revenues, but we have to deal with it and move on,” she says. “The more aware and responsible Lebanese are, the more we will be able to have some damage control.”

And yet stores still open

Despite everything, this year witnessed the opening of two major malls on Dbayeh highway. “We are opening ABC Dbayeh in quite challenging conditions, but this is Lebanon, and if you want to wait for five years of stability, you will probably never start a new project,” said Robert Fadel, owner of ABC, in a July interview with Executive, before ABC Dbayeh’s grand opening.

International brands also carried on with their strategic plans despite the crisis, with Montblanc expanding into Verdun with a three-story boutique, and Armani Store launching its first complete outlet in Lebanon in the shopping area downtown.

“We believe Lebanon is the perfect entry point for our brand in the Middle East because the Lebanese man is very aware of his appearance, is well traveled and appreciative of superior quality products,” says Nadim Chammas, chief executive of Menawear, distributor of Slowear in the MENA region, adding that though they certainly had concerns regarding opening their boutique store in Downtown in September, they decided to move on with their plans because they had confidence in their brand and in the market itself.

Looking to 2013

In such conditions, talking about the future becomes difficult as so much is uncertain. “Planning in Lebanon has become very difficult,” according to Atamian. “All our brands expect plans and targets from us for next year and the reality is that plans are meaningless when one political incident can alter your course. Realistically, we expect 2013 to be the same as 2012.”

Yet those interviewed are continuing with planning for their companies’ growth in 2013, seeing this as the only recourse they can take.

“For 2013, we will continue relying on our longstanding experience as well as our internal strategies for the development of our luxury division,” says Simone Jean Tamer, member of the board at Tamer Frères. “Keeping the crisis in mind, we will continue investing professionally regarddless of what happens around us.”

Others, such as Grand Store’s Rayess, advise those in retail to be innovative and embrace the opportunities offered by social media platforms to attract clients who are now “more careful about the purchases they make.” He also suggests e-commerce as a strategic way for retailers to expand their client base.

Although admitting that 2013 will not be an easy year for retail, Slowear’s Chammas sees the planned openings of more malls in and around Beirut as a positive sign which will hopefully bring some dynamism to the sector.

Daher sums up the retail industry’s forecasts for 2013 by saying, “It is challenging, and I am not that optimistic, but we have to have hope for the future.”

December 4, 2012 0 comments

Society

Nicholas Chammas assesses 2012

by Nabila Rahhal December 4, 2012

written by Nabila Rahhal

In September, Executive sat down with Nicholas Chammas, head of the Lebanese Traders Association (LTA), to discuss the retail sector’s weak performance following the events this summer, from the warnings against travel to Lebanon by Gulf states, to the kidnappings of foreign visitors and the closures of the airport. Given all this, it was no surprise that the LTA was warning of a major crisis should the situation persist. For our end-of-year issue, Executive sat down with Chammas again to see what, if anything, had changed since our last meeting.

Since our last chat with you, the third quarter index has come out. What can you tell us about that?

The third quarter of 2012, in comparison with 2011, saw a drop of 8.5 percent in the LTA-Fransabank retail index. All sectors have been affected but in different proportions. Durable goods [such as electronics and furniture] saw a steeper decline than basic goods [such as clothes, school items, food and drink]… as they are more expensive and are one-off items, while the others are basic staples and everyday consumptions which cannot be really postponed or compressed.

In fact, the only commodity whose purchasing percentages went up was fuel and oil [up 7 percent], because there is elasticity between the price and demand: when the price falls, the demand increases and this is what happened. Were it not for this, we would have had a double-digit drop in commercial activity.

How do you see the rest of the year playing out?

We usually have four high points on the trade calendar: the summer season, the Adha holiday period, the Eid al-Fitr holiday period and the Christmas period. This year, three of these points were hit.

As for the Christmas holiday period, things don’t look good so far because of regional and local tensions. Already half of the fourth quarter has been lost or wasted because of the assassination of Brigadier General Wissam al-Hassan [in October]. We are left with six weeks and if we extrapolate from an earlier period, I am not too optimistic. I hope for the best but fear the worst. If, God forbid, something negative happens in that period, then all will be lost and it will be one of the worst years for the retail sector since the [civil] war ended.

In 2013, the Beirut City Centre Mall will be opening its doors, as well as other malls outside of Beirut, such as the Cascada Mall in Bekaa. Do you think this will return some activity to the sector?

We hope so, but this is on the offer side, which is already dynamic. The offer is there, we have an oversupply even, but we need the other side of the equation, which is the demand. Once it’s there, there is no problem. The local demand is not nearly enough for the expanded offer that we have so we need the expats and the tourists.

What do you see for the retail sector in 2013?

There are three segments in the market, the Lebanese locals, the Lebanese expatriates and the Arab tourists, which are represented by a three-legged stool. One leg of the stool, the Arab tourists, has been lost. The second leg, the expats, has been coming more timidly to the country. So the country cannot survive without the three legs.

As for the Lebanese locals, as our report shows, there is shyness in spending and a drop in the purchasing power and disposable income of the Lebanese. So, this is why it is has been so tough. Here we need improvement across the board. We need stability and peace of mind for consumers to come back to Lebanon and spend.

December 4, 2012 0 comments

Business

Q&A – Saad Andary

by Maya Sioufi December 4, 2012

written by Maya Sioufi

The public sector’s support for entrepreneurship in Lebanon has largely been timid. One public institution that is trying to be active and encourage the country’s enterprising youth is Banque du Liban (BDL), Lebanon’s central bank. BDL has been organizing conferences and launched an online platform in 2011 dedicated to entrepreneurs, but it has failed to gain momentum so far. Saad Andary, vice-governor of Lebanon’s central bank, says BDL has not given up, however, as fostering young talent is essential for the local economy. Executive sat with Andary to discuss BDL’s support for Lebanese talent.

How will supporting entrepreneurs in Lebanon help spur the local economy?

Lebanon is a mercantile economy and it cannot continue forever like this because we are shedding a lot of talent year in, year out, as we can’t find them jobs. I am trying to reinvent the economy. What we can do here is build on the potential strengths of the economy, that we are a service-based society with human resources, a number of first-class universities and first-class academics. There is a mismatching in human resources so we have to build an economy that matches the talent, since it already exists. The economy should provide jobs for these talents, in medicine, educational services and financial services; in other words, in knowledge-based sectors.

What is the aim of the online entrepreneurs’ platform launched by the central bank?

We started working on the platform in 2009 and it was launched in 2011. Our aim is to get people to talk to each other. We are working on it. It is not gaining enough momentum though. We are currently speaking to entrepreneurs to help us revamp and redirect the website. We are doing things that are not the norm, not the way the government would expect you to behave.

Why is the central bank taking the initiative to support entrepreneurs in Lebanon?

As the central bank, it is not our mandate to do this. There is no evidence on the entrepreneurs’ platform that the central bank is behind it. We are the invisible hand that is motivating people to work because it will alienate people in high offices and in the ministries that the central bank is doing things they should be doing and have not bothered to do all these years. I used to go to them [to request their support] but they said they did not have the budget for it.

What is the central bank doing to help entrepreneurs secure funding?

Young people are always confronted with difficulty in finding funds. Banks won’t fund startups. They fund you if you have already started up, are already established and have guarantees and collateral. So we have to work on creating a capital market capable of providing equity financing, not just debt financing. We have a new financial market authority that has been instituted recently, presided over by the governor of the central bank [Riad Salameh] but it is still early days. Meanwhile, we are working on a project with the World Bank for equity funding. If you go to people who have equity in times of insecurity, they will hold back from deploying their capital. We have to start somewhere so we negotiated with the World Bank for a $30 million loan, which we will transform into equity.

Where do you stand on the launch of this fund?

We are finalizing it now. It needs approval by Parliament and maybe should be ready in a couple of months. The fund will invest in Lebanese talent in a knowledge-based sector with up to $500,000 per project. Kafalat [the government institution supporting small and medium enterprises in Lebanon by providing loan guarantees] will run it through a holding company. We think it is original and exciting and if we succeed, we can replicate it in the region.

What do you want from the government?

Before 2009, there was no entrepreneurship ecosystem. Many Lebanese came back from Silicon Valley, from London, from all over and found that the ecosystem is beginning to fall in place. What encouraged them to come back? I don’t know. Maybe our website? Your articles? I am hopeful. You can feel the buzz around you, the energy. We are trying to direct the energy, hopefully with the support of the government, but we don’t want direct intervention from the government nor do we want money or budgetary funds. We just want support to provide such or such a service.

Do you expect the long overdue electronic signature draft law to pass soon?

This law is ready. It is in Parliament now in its final stages. It is being discussed in committees… and should be implemented soon.

How about other laws such as the competition law, also essential to be passed to support entrepreneurs in Lebanon?

I think what is more essential than the passing of laws is the Investment Development Authority of Lebanon (IDAL) playing a more pivotal role. Ideally we should not be seen doing any of the [aforementioned] things that we have done. It should be the role of IDAL, but they have not done what their equivalent in Turkey has done. IDAL should have a vision and should be the focal point for all investors that are in Lebanon or coming into Lebanon. The prime minister and his office should support it directly; similar to what is done in Turkey. When encountering problems to bring in investments, IDAL could circumvent the red tape confronted when working with a number of ministers, because who is the head of the ministries? The prime minister, and he is best placed to solve any problems that might pop up.

How about universities — what can they do to support the entrepreneurship ecosystem?

At the conferences we organized for entrepreneurs, we used to invite universities and we were happy to see that universities built on ideas that we discussed. The École Supérieure des Affaires started offering a masters [degree] in entrepreneurship. The dean of business at the Beirut Arab University implemented an institute for entrepreneurs. The American University of Beirut launched a center.

What is needed for a startup to succeed in Lebanon?

You need two things to succeed in Lebanon: one is to have an idea that could work and survive in Lebanon, and the other is for the company to operate in international markets. Lebanon is too small to survive on its own; that’s why its youth are struggling.

What advice would you give to entrepreneurs in Lebanon?

My advice is that we have to get started, not to waste time thinking about impediments. Get started, plunge in, feel the pain. If you fail, try again. Go for it.

December 4, 2012 0 comments

Economics & Policy

Downsizing on the dollar

by Paul Cochrane December 4, 2012

written by Paul Cochrane

It has been a year most car dealerships would not like to see repeated. The economic downturn, inflation, high gas prices and political uncertainty have taken their toll on sales, with only a handful of dealers meeting, yet alone surpassing, their sales projections. In short, the automotive sector is yet another segment of the Lebanese economy that can be considered to be in ‘crisis mode’.

At first glance there would seem little cause for concern, with sales stronger than last year’s. In the first four months of 2012, 10,169 new passenger cars were sold, an increase of 12 percent on the same period in 2011, according to figures from the Automobile Importers Association (AIA). While sales slowed down over the summer, by the end of August sales were still up, by 7.6 percent on 2011, and up 2.1 percent on 2010, indicating that unit sales in 2012 would reach the benchmark figure set in 2008 of more than 30,000 new cars sold in one year. As of the end of October, overall sales had reached 29,198 units, up 6.28 percent on the previous year.

“Overall sales of new cars are very close to last year in terms of volume, although it’s not real growth,” said Nabil Bazerji, dealer for Suzuki, Lancia and Maserati, given that these statistics are for volumes, not turnover or dealership profits.

And it is turnover that is giving dealers headaches when they crunch the numbers, as 2012 has proved for the fourth year running that Lebanese are increasingly opting for small cars, with cars under $11,000 now accounting for an estimated 90 percent of all sales according to the AIA. This is important as, while selling a car is arguably, well, selling a car, the difference in margins between a vehicle with a $10,000 price tag and one twice or treble the price is huge, being around just $500 for a compact model; when you consider a dealership’s overheads, advertising campaigns and so on, that profit disappears about as fast as a liter of gas in a Hummer. As one dealer remarked off-the-record, “A mobile phone retailer has a higher margin on a mobile than we do on compact models.”

So, while volumes may be marginally better than last year, it is the smaller cars that are propping up the figures and making the sector seem falsely buoyant.
“There is a crisis when the market is up 6 percent but the luxury sector is down by over 10 percent,” said Pierre Heneine, financial manager at Bassoul-Heneine, dealer for Renault and Dacia. “Consumer confidence has been down for the past two to three years, and is down every month; why would you buy a luxury car?”

Unsurprisingly then, it is the brands with compact models that are having the best sales, and this has resulted in a kind of oligopoly, with seven brands accounting for three-quarters of sales, despite 70 brands being available on the market. Kia, Hyundai and Nissan are the top three sellers, with the Koreans brands accounting for 45.1 percent of the market and Nissan with 15.9 percent, followed by Toyota, Chevrolet, Renault and Volkswagen with a collective 15.46 percent.

“The Koreans have taken over the Toyota empire. Elsewhere in the world Koreans have risen, but they haven’t taken the same share like here,” said Marwan Naffi, general manager of Gabriel Abou Adal and Partners, distributor of Volvo. Kia has 27.2 percent of the Lebanese market, with 7,962 units sold as of the end of October, making Lebanon the only country in the world where Kia is the top-selling brand. Hyundai trails close behind with 17.91 percent of the market, at 5,230 units sold. For Renault, it has been “their best year since 1975,” said Heneine, with sales up 9.67 percent, with 1,066 units sold, and Dacia up 23.81 percent, with 338 cars sold.

Chinese brands have also had a bumper year, up 85 percent on 2011 with 308 cars sold, although accounting for just 1.18 percent of the market. Geely, which entered the market in June and is represented by Rasamny Automotive Industries — also the dealer for Hyundai — sold 143 cars in less than three months, signaling strong demand for low-priced models and raising questions whether Chinese brands could, in the near future, be the next usurper after the Koreans. After all, it was European car designers that turned around Korean brands, and Geely, for instance, has acquired Volvo, from which it is expected to benefit from Swedish design and technology expertise.

A perfect market

The dearth of public transport has driven demand for small vehicles as city run-arounds, and the transport ministry’s plan to introduce 250 public buses in the near future is not likely to dent sales of compacts until a more nationwide plan is, if ever, implemented. High fuel prices are pushing compact sales further, averaging more than $20 for 20 liters this year, and this has also had an impact on used car sales, down 17 percent on 2011 as of September, a trend compounded by dealerships pushing three to five-year warranties and service deals on new wheels. “People are asking about fuel efficiency. With the minimum wage $500 a month, people have no choice but to opt for a small car,” said Dayala Dagher, Natco, distributor of Kia.

There may also be a correlation between the surge in sales of compact cars, the drop in used cars sales and the loss of cheap smuggled fuel from Syria due to the conflict there, a supply loss which has been offset by Lebanon’s imports of oil and mineral fuels surging 89 percent in the first half of the year relative to 2011, to $3.2 billion, according to Bank Byblos data.

Losing the middle ground

Dampened economic sentiment in general has clearly impacted car sales, certainly in the above-$20,000 price bracket, and it has been a bad year for luxury car sales. “There is a crisis in the automotive sector and it is affecting the mid-class car segment, at $25,000 to $90,000, which was the core of the business,” said Bazerji. “Does it mean the middle class is poorer? If so, it is very dangerous for the economy of the country.”

The former cars of choice for Lebanese, German luxury brands such as BMW and Mercedes, while still enjoying relatively good sales, have seen sales of used models plummet; consumers are not just downgrading to cheaper Korean compact models, but sedans and sports models as well.

“Kia can now not be viewed as solely low cost, as people are upping their budgets. Before it was only $10,000 for a Kia, now it is $20,000 to $40,000 plus,” said Dagher. “And mentalities are changing. Former Peugeot, VW and BMW drivers are now switching to Kia as the quality and design has improved.”
In a market where dealers are seeking just a slither of a pie dominated by seven brands, this has resulted in price wars between mid-range and luxury brands, even to the detriment of brand equity. “There is competition in the luxury segment and it is affecting margins. And when a car sells for $55,000 and is then reduced to $38,000, what happens to the resale value and the brand equity?” said Cesar Aoun, general manager of Gargour and Fils, distributor of Mercedes, Smart, Jeep, Chrysler and Dodge. “The other school says ‘introduce the new model at $55,000 and then increase the price, as the customer will be happier as it is more of an investment’. It is like Rolex’s policy to increase prices by 10 to 15 percent every year, and why their watches still have value.”

Sales of Mercedes are down 7.95 percent, as of October, on the previous year, with 567 units sold in 2012, and Jaguar sales are down 18.8 percent, although BMW sales are up 43 percent on last year, to 567 units, attributed primarily to the release of the new 3 Series models.

In commercial sales, it has not been as bad a year as for passenger cars, with sales up 9.29 percent on 2011, from 1,743 units to 1,905 units. Renault-Dacia is this year’s number one in this segment, collaring 23 percent of the market.
Over in the rental sector, things have been far from rosy, due to a dearth of tourists. “It was killer this summer, with no business with rental companies whereas usually it’s a boost,” said Farid Homsi, general manager of IMPEX, distributor for GM, Chevrolet, Cadillac, Hummer and Isuzu.

No-show motor show

In such a downbeat environment, dealers were putting their hopes on a successful Beirut Motor Show in November to raise the sector’s profile, sell more units and offset a lackluster summer. But at a time when the dealers needed every boost they could get, it was decided in September to cancel the show due to political instability. The move has been criticized by dealerships, and some members of the AIA internally conceded in early October that the decision was perhaps not the right one.

“The downturn could’ve been countered if the motor show had not been canceled,” said Bazerji. “My point of view is it was a big mistake. Not only a mistake, a shame because we are not respecting an agenda of having this show every two years. When you’ve an agenda you follow it, whether it is a success or a flop.”

He added that, “Unfortunately the 2010 motor show was 6 years behind the last one, and while I accept 2006 was canceled, a force majeur, but other cancellations? …It is in a period of crisis that a motor show would be of use to the sector.”

Abou Adal’s Naffi also thinks it was a bad idea to cancel in the current doom and gloom. “It was a very bad idea not have the show, as it was needed to change the mood of the people,” he said. “The public have 1,001 things to worry about so we should’ve had the motor show as it would have changed the situation for 10 days and given us a strong sales hook, as the show has the highest traffic of all exhibitions in Lebanon with over 100,000 visitors.”
But other dealers think the costs of being at the show were economically unjustifiable and worth canceling. “In the two months leading up to the show everyone is waiting for it, so people don’t buy, and for two months afterwards you sell, maybe 3 to 5 percent more, but it is expensive to be there,” said Heneine.

“October started well but definitely since the assassination [of intelligence chief Wissam al-Hassan] things have been pretty slow,” said Homsi. “You feel consumers are a bit uncomfortable; we’ve had many potential buyers postpone. October’s sales were down by 2.21 percent on the same month in 2011, with European and Japanese brands particularly feeling the downturn, slumping by 2.97 percent and 19.63 percent respectively on October 2011.
“You can’t forecast the rest of the year and the market is very much day-to-day,” said Homsi. “I think the last few months of the year will not be that easy and the figures will not be that strong.

Rough roads ahead

The outlook for next year is as unpredictable as sales for the last two months of the year, and there is no crystal ball into which dealers can look. The AIA has projected that the number of imported and registered new and used cars will have dropped to 70,000 in 2012, from 74,000 units in 2011, and 92,000 units in 2010.

“This market is unpredictable,” said Bazerji. “If the situation doesn’t deteriorate further, 2013 will be equal to this year, but it is directly linked to politics and the regional situation.” However, the economic forecast for next year is not overly promising, and there is also not likely to be a fall in oil prices. This is likely to ensure continued strong sales of smaller vehicles and the further marginalization of brands that don’t have compact cars in their line-ups. Dealers are, however, upping marketing campaigns, offering special deals, and opening new showrooms to encourage potential buyers to stop sitting on their wallets.
Dealers are also forecasting that the current market dominance by the Koreans will fade, especially if the Korean won appreciates relative to the Japanese yen. “I think the market is cyclical, and over the next four years people will move back to the European and Japanese heritage brands,” said Heneine. “And I think the trend for buying new small cars will lead to consumers shifting upwards to new, mid-range cars in the B and C segments, between $15,000 to $17,000. But for this to happen we need stability in the country and more consumer confidence.”

In the meantime, dealerships are opposed to a government plan to reintroduce diesel passenger cars, not only because of health hazards — the World Health Organization recently listed diesel as a carcinogen — but also due to the havoc caused in the market when the state changed diesel laws a decade ago, which dealers do not want to see repeated. Dealerships are even more opposed to a plan to raise value added tax (VAT) by 50 percent on imported cars, from 10 percent to 15 percent. According to the AIA, this will lead to a 30 percent drop in car sales and an aggregate drop of $182 million in government revenues from customs duties, VAT and car registration fees. While the government estimates the VAT rise will lead to an additional $60 million in related tax revenues from imported cars, the AIA estimates that the net loss in government revenues from the VAT rise will reach $122 million in 2013.

“It is the wrong time to do this. The luxury market is down by 10 percent, so if VAT is increased by 50 percent it will completely kill the premium and luxury market,” said Heneine. “If VAT increases, we will have to think about our future strategies, and we won’t be hiring anymore staff.”

Instead of imposing the tax, the AIA is calling for the government to enforce the collection of unpaid road-usage fees, which are estimated at $56 million a year. According to the AIA, 829,000 registered cars, or 64 percent of total registered cars in Lebanon, pay road tax every year while 36 percent, or 467,000 registered cars, do not.

December 4, 2012 0 comments

The Buzz

Morning briefing: 3 Dec 2012

by Executive Staff December 3, 2012

written by Executive Staff

OPEC member Qatar will ask firms to tender for a 1,800 megawatt (MW) solar energy plant in 2014 costing between $10-20 billion as the world’s highest per capita greenhouse gas emitter seeks to increase its renewable energy production.

Building regardless

by Thomas Schellen December 3, 2012

written by Thomas Schellen

Screech! Honk! And a few polite words. That is what it takes for the 40-ton dump truck on a busy intersection at noontime in the middle of Beirut’s Ashrafieh district to make cars give him enough space to squeeze a left turn onto the district artery, Independence Avenue. Neither the narrow side street from which the trucker emerged with a load of sand and rock, nor the main street, is suited for heavy vehicles. But a fleet of his colleagues will repeat the exercise every 20 or 30 minutes throughout the day, and not only on this one sunny November day. They are hauling excavated soil from a massive construction site on the southern slope of the Ashrafieh hill over the course of several weeks, so that the foundations for another multi-story apartment block can soon be poured.

The project where these lorries are loaded is not the only hyperactive property excavation in Ashrafieh in the fourth quarter of 2012, not by a long shot. Other earth removal motorcades are operating on other sites all throughout the busy district. Construction is ongoing along the district’s perimeter, at its very center and highest point, and on many of the narrow streets in between.

Projects are digging deeper and building higher than ever before, with residential towers reaching 20, 30 and even more than 40 floors into the urban sky. Around the 600-meter-short Omar Haimari Street, which marks the district’s highest stretch, just 40 steps away from Independence Ave, three massive developments are under way, including the 43-story Sky Gate, which, at only half its final height as November ended, was already visibly redefining the Ashrafieh skyline. It, and what is slated to be the even taller SAMA Tower that is reaching toward its 195-meter target height just west down Independence Avenue, are but two of a tide of projects altering the Beirut cityscape, and the fabric of suburban areas and the countryside around the capital, in profound and unprecedented ways.

The numbers don’t tally

At the changeover from 2012 to 2013, Ashrafieh is only one of many hotspots of construction activity; other hardcore development areas are the central district managed by urban renewal company Solidere, and parts of the ring road around the Beirut Municipality territory where some trash lands spotted with ugly commercial structures have been discovered by developers. Outside of the capital and immediate suburbia, residential clusters in the Metn region and leisure areas higher up the mountainous surrounds are flush with projects.
What makes this fin-de-2012 image of high-gear development activity a puzzling picture is that it is being splashed across the small Lebanese canvas at a time when all indicators on real estate are, at face value, negative.

According to indicators compiled in the Bank Audi third-quarter economic report on Lebanon, cement deliveries, the number of real estate sales transactions and issuances of building permits were all down in the first three quarters of 2012. Property sales fell 9.2 percent for the nine-month period from a year ago, and contracted by an even higher 11.4 percent when comparing just the third quarter of 2012 with the same period in 2011.

The eight-month figures on cement deliveries were down to 3.4 million tons in 2012 from 3.7 million tons in 2011, and in square meters (sqm) worth of construction permits, issuance contracted to 10.7 million sqm 2012 from 12.4 million sqm in the first nine months of 2011. This constitutes drops of 7.9 percent on cement and 14.3 percent on licensed floor space. When factoring in the drop in property transaction numbers, the trio of real estate sector indicators shows, at least in theory, downturns on completed, ongoing and planned projects.

The caveat here is that these numbers are likely not entirely accurate. Property registrations are often delayed for purposes of tax avoidance and building permits don’t always translate into the same actual built-up area. Even cement figures have been suspected to be muddied by grey exports.

However, while developers and intermediaries in the real estate industry almost uniformly say that the situation must not be called a crisis, developers tell Executive that the slowdown in their activity in 2012 is real and the outlook for 2013 is muted.

Sales developments for the real estate projects of MENA Capital (which focused traditionally on the high end of the luxury market in prime areas of Beirut and whose largest project is Sky Gate) were negative in 2012 and 2011, confides Nabil Sawabini, the company’s chief executive. “The cumulative value of sales has been declining in the past two years; we sold more in 2010 than in [each of] 2011 and 12,” he says. Nonetheless, units in Sky Gate are about two-thirds sold, he adds.

Georges Chehwane, chief executive of developer Plus Properties, and of communications media and real estate conglomerate Plus Group, says regional uncertainty contributes to the slowdown, but adds that, “the main part is the large number of units that [have been] in the market since 2009, as there is a gap between the yearly demand and the yearly offer of supply. This is the main problem today in addition to the political situation in which people are not buying.”

The current real estate market confronts investors with a state of uncertainty, says Houssam Batal, chief executive of developer Prime Projects. “It is not very clear to say where [the market] will go. There is a feeling that there will be an oversupply in many product types. The main thing that is affecting the market right now is the political situation and instability, and the grey outlook related to Syria and to domestic issues that we have. The investors are worried about the dangers of bigger problems to come.”

Sadly for buyers, this does not mean that property bargains are going to abound next year.

“Demand has decreased, the economy is in a difficult situation and the future is somewhat blurred but prices for apartments and real estate, especially in prime areas, have remained stable and have increased in some cases. It is a weird economic picture,” says Ziad Maalouf, chief executive of Capstone Investment Group, a financial firm whose activities include real estate development.
Zardman, a developer that is fairly fresh in the market and claims to have seen moderate sales growth in 2011 and 2012 against market trends, also sees prices as moving sideways. “We have two sides to our business, addressing the middle class in the Metn region and the higher end market in Ashrafieh,” Makram Zard, the general manager of Zardman, tells Executive. “The Metn region was extremely good this year. Ashrafieh is doing well. I don’t think… that prices are dropping but sales are not quite as good as last year.”

Less for more

Maalouf’s and Zard’s assessment of unwavering prices fits with what other developers say, and statistics show that the cumulative value of property sales in Lebanon this year, despite the contraction in transaction volume, was up from last year. Correspondingly, the average value per transaction is the indicator that in 2012 showed the most pronounced gain for the year-to-date.

At $6.3 billion, the total value of the nine-month tally of registered property transactions was up 4.8 percent, but the average value per transaction increased 15.4 percent year-on-year to $120,000 from $104,000 for the January to September period, according to government figures cited by Bank Audi in mid-November.

The trend of price inelasticity is long-term. Although demand for real estate had been slowing since late 2010, expectations for lower prices harbored by property seekers had been disappointed even back then, according to Maalouf. “I have heard of a lot of people since 2009 and 2008 who had been delaying the purchase of an apartment in the hope of buying the same apartment later at a lower price. But this has not happened,” he explains.

At the junction of 2012 and 2013, the real estate market in Lebanon is a buyer’s market in terms of choice and options in up-market locations as long as a buyer has cash-stuffed pockets or a high and growing income. In terms of pricing, it is not a buyer’s market at all.

The market for the most important development resource, land, is also not a buyer’s dream. To the contrary, developers are faced with a very hard seller’s market, Maalouf adds. “Land prices have actually increased, despite everything. The weird thing is that expectations of land owners do not reflect realities. This is a catch for developers,” he explains. “On one hand you have buyers who see the prices for real estate as high and on the other hand you have land owners who have unrealistic expectations.”

Why so buoyant?

The reasons why even the oversupply of Lebanese properties does not generate much downward pressures on prices in the market for residential units are complicated.

One key factor is financial. Many developers in Lebanon self-finance, and the absence of funding pressure allows the economic self-interest of many developers to keep focused on achieving the maximal rate of return that they fixated about when embarking on their project. Developers in this category typically wait out the market if bid prices are below their expectation and can do so because they have no lending officers breathing down their necks.

Development activity may even be a one-off business for many and they base their profit modeling on building cost and land pricing, often adding in an upward revaluation of the plot during the development process — a reevaluation that, according to Zardman’s Zard, can be far higher than the amount that the interest component in a land financing agreement would represent.

Applying standard models where project companies are financed by equity from investors and by debt, or source revenues via off-plan sales, makes the developers more sensitive to market trends. This leads to more client-responsive pricing behavior and also supports rational adjustments of development activity, such as switching to more moderate unit sizes. According to Zard, developers like him — whose land value calculation in unit sales prices is based on land cost at purchase plus regular interest — transfer land value gains early on to the customer. “This is one of the reasons why our sales have been excellent when compared with the market,” he claims.

Oft-quoted rationalizations why property prices in Lebanon would not follow cyclical patterns that are familiar from other markets are the high density of the population, the small surface territory of the nation (167th among 249 countries and territories in the world by land size), and the even smaller size of land accessible for development. According to Chehwane, roughly half of the national territory is off limits for property development because of terrain conditions, agricultural usage and ownership by religious orders.

Weighing in on the demand side of the equation are not only the young families living in the country but also the outsized theoretical buyer pool of the so-called Lebanese diaspora, which comprises millions of Lebanon-born and descendent citizens of countries in South and North America, Oceania, Europe and Africa. The second notable source of external demand is from Gulf buyers. “The Lebanese market for real estate is very dependent on Lebanese living outside the country and also on foreigners,” says MENA Capital’s Sawabini.

Brand it, baby

Younger Lebanese who have acquired sufficient means to buy an apartment in the high-priced Ashrafieh market, by laboring as expatriate managers in Dubai or Riyadh, may be less attached than earlier generations to traditional ties of kin in their residential choices but they also display strong patterns of selectivity in property buying. It is the location and the “prestigious address” that matters greatly to them, according to Zard.

This means that developers are paying increasing attention to building a reputation and brand identity for their pricey towers.

Branding a project and defending this brand against copycatting is also crucial in differentiating a project, says Ayad Nasser, owner and chief executive of developer Loft Investments. “In Lebanon, 99 percent of the projects look the same,” says Nasser. “The entire market is focused on the 99 percent of the population [who buy those types of properties]. I am not marketing to a percentage. I am marketing to people who have that drive to live in a different project.”

The differentiation of his projects is not by location but by concept and design, services and quality, he claims, and in that space “it is very important to have a brand today. ”

Counting urbanity

But before discussing the future potentials of some branding or non-branding concepts on Lebanese real estate, or musing on the ironies of cement blocks bearing names such as ‘pretty house’ or ‘xyz gardens’, some much more elementary points call for clarification. Such as, how many floors of concrete are being cast presently in areas like Downtown Beirut or Ashrafieh? How many and what sizes of units are going to drop into the Lebanese market in 2013?
Prime Projects’ Batal, a university-trained professional in real estate, answers the question on the incoming supply by saying, “There are data reports suggesting that supply is broadening versus demand but I don’t know if these reports are reliable and accurate,” adding that he has no numbers on how many projects were going up in Ashrafieh in November 2012.

He is not alone. Loft Investments’ Nasser, who says his track record of delivery includes 270 apartments since he started out with a single suburban unit in 1994, is not convinced by market research or price comparisons. “I never consult statistics; I never do a marketing plan, nothing. We just feel it. I am very confident about my clientele. I have in my portfolio different clients who became friends and I know that 10 percent of those people will be my clients, so while I am buying the land [for a new project], I call them,” he says.

Nasser admits that he does not even know the asking prices in developments going up next to his projects, but he affirms on the other hand that Lebanon’s developers “need to assess the market and the government needs to put some rules.”

Both market assessment and better rules are points that Plus Properties’ Chehwane sees as paramount necessities. He is one of the players pushing actively for realizing a professional association of developers, which he envisions to have as its core activity the compilation and publication of sector data.

Chehwane adds that there are no statistics on the real property development situation in key areas such as Ashrafieh. When asked what he believes to be the number of projects and units under development in this very district, he answers , “100 projects, at least. I believe [Ashrafieh has] around 3,000 units today under construction.”

It is futile to query either public officials or private developers for an accurate number on buildings under construction in Beirut today. So to garner at least some idea of the actual number, Executive reverted to good ol’ fashioned journalism — a pad, a pen and pounding the pavement in a random part of Ashrafieh.

Within less than ten minutes walk on one trajectory only, ascending from the Hospital Dieu area toward Sioufi Gardens, Executive found six residential projects in progress, of which one looked ready for handover (14 stories), two 12-story ones were in advanced stages of construction and should be ready for occupancy in 2013, one was a six-story shell that was frozen and the two largest sites were in the excavation phase. One of these two will have 28 stories with 43 flats of 320 to 540 sqm. The other will comprise office, commercial and residential units in two towers of eight and 11 floors.

Next was a check of the cobweb of narrow passages and bumpy streets between this project site and Alfred Naccache Street. This little quarter revealed another five projects and one plot that looked ready for the start of excavation. The largest site here was an apartment complex nearing completion with four segments ranging from 13 to 20 stories. On the eastside of Alfred Naccache Street, three more new multi-story buildings added to the ongoing development tally of this southeastern corner of Ashrafieh, in an area fully coverable on foot within 15 minutes.

Expanding the random walk of Ashrafieh to a wider grid, Chehwane’s estimation of at least 100 ongoing projects doesn’t actually look far off the mark; if anything, it is an underestimation.

Bigger fish to fry

One has to note here that getting better data is a strategic need for developers; however, it is not an existential problem for the property makers. Their concerns and hopes lie elsewhere. The most important factor influencing Lebanese real estate now is Syria, says Capstone’s Maalouf. “If there is regime change in Syria tomorrow, I think this will have very positive spillovers on the market here. I foresee a boom [under such circumstances] simply because the confidence in the Lebanese real estate sector is going to be regained.”

For his part, Chehwane sees only temporary worries in the current oversupply with units. “The moment that we will have a positive atmosphere and positive situation, 50 percent of the stock that is available in the market will be sold. We need one year like 2006 before the war or 2008 before the crisis, and you will have a very good situation,” he enthuses.

From another, more public perspective, development takes on a different angle. Only reviewing the last five years, the cumulative square meter figure for building permits issued between January and August of each year comes to 39.85 million sqm. That is an addition of roughly 10 square meters per resident of Lebanon in a very short time, in a country that already feels stuffed with concrete buildings.

Despite developers chiming the marketable tune that land is scarce and unaffordable for them, it can be predicted that another tide of private real estate growth will happen, quite likely within a decade at most when considering the activity cycles of the past 10 years.

Factor that in and it becomes over-evident how urgently the Beirut metro area and the country as a whole need to achieve some crucial changes of behavior: Lebanon needs planning. It needs development norms and standards that are sustainable and applied universally. It needs infrastructure, namely infrastructure that is adequate and steers growth in directions that make sense for the future. Public and private property represent the spine and skeleton of Lebanon’s future living quality. The spine has to be straightened out.

December 3, 2012 0 comments

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Entering subsistence

by Jihad Yazigi December 3, 2012

written by Jihad Yazigi

One of the main questions surrounding the Syrian uprising at the beginning of 2012 was if and when an economic collapse would occur. As the year draws to a close, the question has instead become whether one can still talk of “a” Syrian economy as such.

What remains of the country’s formal economy has seriously deteriorated throughout the year. Business activity significantly contracted and although the government has released no estimates, gross domestic product is believed to have fallen by at least 25 percent in the first nine months of 2012. Disintegrating distribution and supply networks, a government increase in energy prices and a hike in the cost of imported items all combined to gradually increase the inflation rate; the consumer price index was up by 40 percent on an annual basis by August.

The Syrian pound, after having resisted all forms of pressure relatively well in 2011, lost ground. From a rate of 60 to the dollar at the beginning of the year, the exchange rate fell to over 80 pounds by mid-November 2012.

An important development has been the expansion of the violence to Aleppo during the summer, a city that had largely remained outside the popular uprising until then. Aleppo is Syria’s largest city by population, but also the country’s main manufacturing hub as well as a major trading and distribution center for agricultural products. The unrest in the city led, among other things, to the closure of its industrial city with some 600 factories suspending production.

However, while observers continue to monitor most formal indicators — such as inflation and the currency rates — as a means to measure investor sentiments, in practice most of the country’s economy now falls outside these numbers.

The expansion of violence and the varying degrees of state control over large sways of Syria have profoundly transformed its economy to the extent that one can now talk of a war economy, the creation of new business networks and the development of various new forms of trade, including smuggling, looting and kidnapping.

Some areas of the country are still firmly under state control and as such continue to be provided by regular government services — these include the provinces of Latakia, Tartous and Suweida as well as the central parts of Damascus. In these parts of the country the supply of products continues at relatively normal levels, although prices have skyrocketed.

Other areas have little left of the state, such as the rural parts of Aleppo, Idlib, Hama, Homs and Daraa. Meanwhile, the cities of Aleppo and Der-ez-Zour are under constant bombardment and have almost no business activity to speak of, while the northeast of the country is growing increasingly autonomous in the management of its day-to-day affairs. Looting is common in areas where inhabitants have fled; smuggling to and from neighboring countries has exploded as the government’s control over its borders weakened, customs tariffs increased and formal international banking transactions are at a standstill; kidnapping for ransom is widespread.

As the autumn pushed on, the government finally began to express more openly its concerns for the near future. In a well-publicized statement, the deputy prime minister in charge of economic affairs, Qadri Jamil, said in September that in the absence of a political solution to the crisis gripping the country, the economy was heading towards “a stroke” by the end of the year. Jamil was forced to retract his statement a few days later, but the damage was done.

Meanwhile, in early October, the Minister of Agriculture Subhi al-Abdallah encouraged his fellow citizens to “grow whatever they could grow and raise whatever animal or chicken they could raise.” Abdallah’s words echoed a prevailing sentiment in Syria: slowly but surely, the economy was moving towards subsistence mode.

The depth of distress in the economy, reflected in these statements, points to the major challenges ahead for Syria’s future decision makers. Syria may manage to rebuild relatively quickly its physical infrastructure, but it will require a very significant redefinition of economic policy, an overhaul of existing business and trade ties and a formalization of much of its economic activity before the country truly recovers from the devastation it is facing.

Jihad Yazigi is editor-in-chief of The Syria Report

December 3, 2012 0 comments

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No end to injustice

by Ahmed Moor December 3, 2012

written by Ahmed Moor

For the Palestinians the passage of time offers little reprieve. While their circumstances have changed this past year, they have only changed for the worse. Israel has systematically worked to isolate them and hem them into smaller spaces. Governments worldwide seem prepared to accept their continued deprivation and Israel’s steroidal apartheid. The latest salvo between Palestinians in the Gaza Strip and Israel ended with more than 150 dead Palestinians, the majority of whom were civilians, and five Israelis killed. The conflict is deepening.

Some analysts continue to insist that there is a two-state blueprint that is workable for the Palestinians and Israelis. In fact, reality has moved sharply away from any such accommodation. The settlements in the West Bank and around Jerusalem have altered the ‘reality on the ground’ in irreversible ways. Jerusalem is being ethnically cleansed. Palestine has been colonized into nothing. That’s the reality.

At this stage it is worth evaluating what the overall Israeli policy in Jerusalem and the West Bank appears to be. While decision-making in Israel appears to be driven by short-term considerations, there is a long-term outlook, and it is becoming more evident daily. Nir Barkat, the Jewish Israeli mayor of West Jerusalem, has been very effective at restricting the growth of Palestinian neighborhoods in occupied East Jerusalem. In some cases, public works projects are cynically announced with the object of forestalling Palestinian development. For instance, a large tract of private Palestinian land near the neighborhood of Silwan has recently been designated as “state property”. The Jerusalem municipality has declared that a park will be constructed on the site, a claim that some observers regard as a pretext for continued Israeli colonization of East Jerusalem.

In Jerusalem, Palestinian life is so circumscribed that many of the city’s indigenous residents are forced to live elsewhere. The lack of development in Palestinian neighborhoods along with the refusal to grant building permits work to drive the Judaization of the city.

Processes in the West Bank follow the dominant Jerusalem strategy. More than 60 percent of that occupied territory, the Oslo process’s “Areas B and C”, is off-limits to Palestinians. They are not granted building permits in their rural villages — a policy that forces many people into the Palestinian Authority (PA) administered “Area A”. In other words, a West Bank version of ‘bantustanization’ — the apartheid-era South African policy dividing up the territory of black inhabitants — is developing with few impediments.

Essentially then, the Israeli strategy is to Judaize Jerusalem through ethnic cleansing while doing the same to Areas B and C of the West Bank. The “Gaza solution” — isolating Palestinians in shrinking cantons — is being adapted to the particular geography of the other Palestinian territories.

Historically, the PA leadership has demonstrated its profound impotence in the face of persistent Israeli apartheid and occupation. But that may be changing.

President Mahmoud Abbas’ decision to seek a status upgrade at the United Nations on November 29 is the most concrete challenge the PA has posed to the Israelis in years. In fact, the move poses a serious threat to the Israeli leadership because it could provide the Palestinians with access to international adjudicatory bodies. In particular, the International Criminal Court could be called upon to intervene in cases where sufficient evidence of Israeli crimes exists. Analysts have speculated that the Israeli decision to attack Gaza in November is linked in part to the Palestinian Authority’s decision to petition the United Nations for upgraded status. The Israeli elections in January and the fact that the other three Knesset elections this past decade were all preceded by massive military operations against Palestinian areas provides additional context for understanding the extent of the airstrikes.

The context of the attacks in Gaza — indeed, the broader context of what’s happening to the Palestinians — has changed. The Middle East is no longer ruled by programmable autocrats. Egypt and Turkey in particular may produce a ceasefire in the short term and a change in European policy — if not American policy — in the long term. Egypt and Turkey succeeded in enhancing their diplomatic clout after brokering a ceasefire between Hamas fighters and the Israeli government; that trend is likely a sustainable one.

It is far too early to know what the different constellation of powers in the Middle East means for the Palestinians in the long term. As for the short term, the safest assumption is that 2013 will bring no real change; apartheid and arbitrary war are the twin governors of the Palestinian territories. The Palestinians will continue to suffer into the near future.

Ahmed Moor is a master of public policy candidate at the Harvard University Kennedy School of Government

December 3, 2012 0 comments

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One pharaoh for another

by Dalia Rabie December 3, 2012

written by Dalia Rabie

It seemed to many that President Mohammed Morsi was paving the way for his own dictatorship at the end of November when he issued a game-changing constitutional declaration radically expanding his authority, and further deepening the divide in an already polarized society.

The seven-article declaration effectively immunized all presidential decisions from formal oversight, whether parliamentary or judicial. Following the declaration, Muslim Brotherhood offices around the country were ransacked and thousands flocked to Tahrir Square denouncing the move, while others rallied at the presidential palace in support of Morsi. As Executive went to print, both Morsi supporters in the Muslim Brotherhood and opposition figures were rallying Egyptians to the streets for mass protests.

What Morsi’s detractors see is a power grab, with articles in the declaration ominously reminiscent of deposed President Hosni Mubarak’s notorious emergency law under which arbitrary arrests were common on the pretense of protecting national security. Morsi supporters say his declaration is a necessary measure to protect the revolution and preserve national stability.

Either way, it caps off a year beset by turmoil. The unrest of 2011 continued straight into 2012 when, on February 1, fans of the Al Masry football club attacked fans of the rival Al Ahly club in Port Said Stadium, killing 74 and injuring thousands. Accusations abounded that the security services had been complicit in the massacre. Anger amplified towards the then de-facto rulers of the country, the Supreme Council of the Armed Forces (SCAF), triggering a vicious cycle of public protests and violent repression, which resulted in at least 11 further deaths.

The country then shifted attention to the first free election for a head of state since the end of Mubarak’s 30-year autocratic rule. The Presidential Elections Committee, however, disqualified some of the most prominent candidates mid-campaign, spurring another round of protests that left at least 10 dead when Salafi candidate Hazem Salah Abu Ismail was barred from running.

SCAF then weighed in, dissolving parliament — based on a Supreme Constitutional Court ruling that the 2011 parliamentary elections were unconstitutional — and then issuing a constitutional declaration broadening its powers and stripping the president’s office of much of its executive authority, only hours before the preliminary election results were announced. Somewhere in the middle of all this, Mubarak ‘awoke’ from a questionable coma to begin serving a life sentence in prison. All this, on top of an ailing economy, lax security and widening fractures between the country’s different factions.

Sadly, hopes of seeing old regime elements purged from Egypt’s different institutions after Morsi took the presidential oath were short-lived. While among his first orders of business was to replace Hussein Tantawi, head of the armed forces, and the chief of staff, Sami Anan, as well as to cancel SCAF’s constitutional declaration, these ‘bold moves’ were seen by many as the outcome of closed-door deals guaranteeing SCAF’s ‘safe exit’.

Morsi has since faced a series of domestic crises — the most painful of which was a bus crash south of Cairo that took the lives of 49 schoolchildren in early November — to which he was generally seen to have reacted poorly, and he has largely failed to live up to the ambitious 100-day program he set for himself.

Even some of the most basic human rights and standards of transparency, which were expected to take hold after the revolution and set the new Egypt apart from its predecessor, still seem out of reach. Human rights groups criticize the current government’s unwillingness to abandon repressive tools and guarantee citizen rights in the draft constitution. A report prepared by El Nadim Center for the Rehabilitation of Victims of Violence, assessing Morsi’s first 100-days in office, says that arbitrary arrests, torture and ill-treatment of citizens continued unabated.

Morsi’s recent declaration, however, does reopen investigations into the crimes against protesters last year. This, on top of foreign policy successes — most notably helping to broker the ceasefire which ended Israel’s recent assault on Gaza — are among the new president’s few shining achievements in the eyes of Egyptians. Thus, with the second anniversary of the January 25 Revolution approaching, many wonder whether the shadow of another pharaoh looms over Egypt. With little positive change materializing on the ground, the same chants will likely echo through Tahrir Square in future months, with people still demanding “bread, freedom and social justice.”

Dalia Rabie is a Cairo-based journalist

December 3, 2012 0 comments