Executive Magazine

I’m not buying it

by Nabila Rahhal October 4, 2012

written by Nabila Rahhal

Social buying seemed like such a wonderful concept at the beginning when my friends started talking about it three years ago. But it seems to me that after the novelty has worn off, so did a lot of the interest in such sites.

It is one of the standard arguments of these sites that ‘everybody loves a bargain’. But that is only partially true when it comes to the Middle East because in this culture there is a general attitude that it is somehow cheap to try to save money through bargains. When they are complimented on a nicely fitting new blouse or fashionable pair of jeans, most of the people I know will emphasize how dear that item was and would not readily admit if they had snapped up a bargain.

However, there is also the opposite trend where young professional Middle Easterners of my generation praise their bargains and social-buying sites may have quite a lot to do with that. “I feel a certain rush when I find a service I want in a place I like on these websites,” says Masha, a frequent user of social-buying sites. “It is as if I am somehow smarter than the rest who paid full price or didn’t know where to look for the deal. It makes the service that much nicer.”

Some operators of social-buying sites were obviously able to convey the image that it is both trendy and smart to score a deal, especially when it comes to services. The top-selling deals on most of these sites are for services such as personal care and for experiences like restaurants or lessons in skills such as French cooking or yoga classes.

However, the psychological appeal of a deal alone will not be enough to draw in new users and make them repeat customers. The sites also need to prove themselves in offering attractive brands and in creating a link between the popularity of these brands and their own. “Groupon and Cobone are the sites I check out the most because they have the best suppliers,“ explains Layla, a fan of social buying who lives in Dubai.

Cobone, a site founded locally in the United Arab Emirates, and Groupon Middle East, the local branch of the global market leader in social buying, are generally seen as the most popular sites of this type in the UAE. In becoming popular, sites can make their deals buzz and have a better chance to create followings. On the other hand, even a popular site may experience that, when the brand it is marketing is not strong, a deal can linger on the site for while, as is the case with certain beach resorts in Lebanon. Even a discount of more than 50 percent on an unpopular resort’s admission will not be enough to make it sell online.

Sites can be a gateway to experiences if the experience is novel and is made to be “fun sounding”. This lowers our resistance to try something new if the price is right, and this is what social-buying sites count on. “I once saw a deal for Salsa dancing lessons,” says Jad, a user of UAE-based site Makhsoom, “and it was something I hadn’t thought of trying; it sounded like fun and came at a good price, so I said why not, and gave it a try.”

This in no way implies that people who buy a lesson in the oud or the sitar out of curiosity will all sign up for enough training to become a Munir Bashir or Ravi Shankar — or even go and redeem their first coupon — but it is a fact that the sites can help foreigners access the local culture in a place such as Dubai where expats are the dominant users of social buying. “I am in Dubai for a relatively short time for work, so I take advantage of any offer I find to experience the country without spending much,” David, a British teacher in the Dubai American Academy, told me, adding that his favorite bargains are for restaurants and exclusive beach resorts.

The cloud of fraud

Among the drawbacks of social-buying sites is the potential for fraud. With stories of phishing and new viruses coming up every day, especially in Lebanon where I live, many people here are reluctant to use their debit or credit cards online. Banks offer “safe” online-buying cards, but this requires a trip to the bank and takes away from the convenience of any e-commerce experience. “I have sometimes found attractive deals online, but none have tempted me enough to get a credit card and buy them,” says Dima, a professional working in architecture. I share this view. Some local social-buying sites like ScoopCity invite you to pay at their offices, but this still seems inconvenient.

As time goes by, someone like myself who is not a full-fledged fan of social buying, discovers more downsides to the sites: they generally offer no cash refunds for unused deals, their customer service is not always as good as I need it to be, and after browsing page after page of similar offers, I ask myself, “Nabila, do you really want this?”

According to frequent users, the quality of deals goes down on most of the sites they are visiting and bargains then linger that much longer on internet shelves, catching virtual dust. If asked what social buying can do better in the region, my answer is that useful and appealing deals, combined with a safe and convenient method of payment, would have me taking a second look at social buying.

October 4, 2012 0 comments

Society

Junkyard tapas

by Nabila Rahhal October 3, 2012

written by Nabila Rahhal

What do you do with your plot of land waiting for a delayed permit from the Ministry of Tourism to build a new restaurant on it? Options vary from converting it into a parking lot to watching the weeds grow as the space goes unused.

Mario Junior Haddad and Chef Tomas Reger, respectively owner and executive chef of Le Sushi Bar, however, had other ideas, and decided to have fun with their space by turning it into the ‘Junkyard Pop Up’ — a temporary outdoor restaurant located in the alleyway next to the United petrol station in Mar Mkhayel. They plan to build an Italian restaurant there when the permit comes through — hopefully, they say, early next year — but in the meantime, the Junkyard is great publicity for their restaurant consultancy company Food for Thought, and a trendsetter in Beirut’s restaurant scene — being the first pop-up restaurant in the city.

With Christmas lights hung all above a flooring of grass and gravel, the restaurant has a Mexican backyard party feel. Divided into two areas, on one side there is a square bar set on oil barrels that seats several dozen people around its four sides, and to the other a seated dining area. Even on the weekday Executive visited, the bar started filling up around 8 p.m. and was packed an hour later, while the dining area required reservations ahead of time.

For a place with relatively little publicity, the Junkyard is surprisingly popular. “As this is a temporary project with a low budget, we did not want to spend too much on promotions,” says Guy Salame, brand developer at Food for Thought. “We used word of mouth, and some social media, therefore creating some mystery, as well as a snowball effect where people tell each other about the place and create a buzz.” The temporary nature of the restaurant also created a sense of immediacy, that one needs to try it at least once before it shuts down.

In terms of décor, the Junkyard lives up to its name. Broken-down 1960s style televisions lead the way to the bathrooms, which are themselves housed in cargo containers rescued from the Beirut Port. The kitchen is located in a similar, yellow container, which has led some to dub the makeshift restaurant the ‘Yellow Container’. Charming, junky decorations — such as the old fashioned blender still used to make drinks, lights hanging off a helicopter blade above the bar and the antique water heater lying on the grass — provide nostalgic conversation cues to clientele, and also come at a low cost to the owners. Salame again talks about the low budget in relation to the décor, which he says inspired the architect to use rescued and recycled items.

In keeping with the idea of having fun with their place, Chef Reger changes the menu daily. While chicken, meat and seafood are always on offer, the methods of preparation and type of fish will differ depending on what is fresh in the market, and what the chef’s mood is that day. Executive tried the wild mushrooms dish, the teriyaki chicken and the steak with butter sauce. Though it sounds like a hefty plateful, the portions are small and are meant as tapas to share, rather than full meals. The wild mushroom plate was a medley of tasty fungi garnished in a light soy-esque sauce, the pepper-seasoned steak was rare and juicy, though the chicken was a touch oily. The average bill per person — for a drink and three tapas — was approximately $40, thus don’t come on an empty stomach unless you’re prepared to pay $120 to get full. At such prices, this ‘fun’ restaurant, with little overhead to speak of, likely also leaves the owners counting cash with a smile.

“The pop up concept is an idea Food for Thought might repeat next summer in other locations,” says Salame. “We could just take our yellow container and set up somewhere else.” In the meantime, he says he wouldn’t be surprised if other restaurateurs began copying the “pop-up” formula. While it is yet to be determined how popular the idea will be, the Junkyard is currently providing a unique and rustic dining experience — and one that will only last so long.

October 3, 2012 0 comments

Society

House of Stone

by Nabila Rahhal October 3, 2012

written by Nabila Rahhal

Anthony Shadid’s remains were scattered under the olive tree in the garden at his house in Jdeidit Marjeyoun, South Lebanon. He was not buried in the United States where he was born and raised, but in the home he had chosen as his own. This home, or bayt, as Shadid refers to it, is the main character in his third book “House of Stone”, and represents the very human concept of belonging.

Returning to Lebanon on sabbatical from his post as a journalist covering the Middle East for the New York Times, Shadid was not at peace. In his words he was “stunned by war, and shockingly no longer young, married or with my daughter Layla.” Perhaps this emotional state is what led Shadid to decide to fix his ancestral home in Marjeyoun, as a distraction from his internal turmoil and to finally have a place he could call home.

Through describing the renovation, Shadid draws a picture of modern life in a small town. His prose is simple yet well crafted, bringing the characters to life with an objectivity which allows the readers to draw their own opinions of each. Shadid enters Marjeyoun a stranger, but since his roots are from there, townsfolk immediately know his whole family history and think him insane for deciding to repair the house; others simply think he is an American spy. Gradually though, some warm up to him and Shadid’s retellings of nights around the dinner table with some of his new friends are absorbing.

The repair process clearly fascinates Shadid and some parts of the book get weighed down with the details of knocking down a pillar or building up a stone wall.

However, interactions between contractor and workers lighten the tone with humor. When he tries to locate antique tiles for his flooring and ends up meeting a dealer who strips tiles from homes destroyed by the war, the story sheds light on the lesser known aspects of home repair in Lebanon.

Rebuilding memories

Parallel to the home repairs is Shadid’s recounting of the history of the house and his ancestors who lived in it. With the same precise attention to detail he was known for in his journalism, Shadid reconstructs the life of his great-grandparents, while imagining them in the various rooms of the house and what they would have been doing at the time.

Through this, the reader learns about life in Lebanon during the Ottoman Empire and the French Mandate which brought on the beginning of Lebanese emigration.

Shadid’s depiction of his great-grandfather, Esper, and his struggle to decide whether to send his children to the United States for a chance for a better life, or to keep them with him in the perilous times he was living, carried an understanding and sensitivity for not just his own ancestor’s quandary, but one still as relevant to Lebanese families today. And while Esper’s children emigrate after all, they take their home with them in their hearts.

This is evident when Shadid describes the almost daily Lebanese gatherings his grandparents used to host in the US, which again parallels the experience of many Lebanese emigrants to foreign lands who try to build space in which to belong.

Unfortunately, the author passed away before he had the chance to really enjoy the fruits of his labor, his bayt, and after finishing the book, the reader is left with a sense of loss for Shadid, his home and a Lebanon long gone.

It was not in the house of stone’s fate to be forgotten once again, however, as neighbors say Shadid’s second wife and his son still reside there on weekends and vacations. Shadid would be pleased.

October 3, 2012 0 comments

Society

Nicolas Chammas under the cosh

by Nabila Rahhal October 3, 2012

written by Nabila Rahhal

There seems to be little end to the litany of woes Lebanon’s economy has been suffering this year, brought on by regional unrest and internal instabilities mushrooming across the country. Many industries have felt the impact. For a closer look at the implications of this soured environment on the country’s traders, Executive sat down for a frank one-on-one with Nicholas Chammas, head of the Lebanese Traders Association (LTA).

Mohammad Choucair, president of the Lebanese Chamber of Commerce, Industry and Agriculture, as well as some economists we have been speaking to, are saying the economic situation in Lebanon is the worst it has been in a while. What are the figures that alarm you the most?

In the first quarter of the year the numbers were exceptionally good where the trade sector is concerned. We had an increase of 7 percent compared to the same period in 2011, and this is because it came in the realm of a very strong fourth quarter for 2011. Unfortunately, the middle of the second quarter (April-June) 2012 saw a strong turnaround due to the events in the north and the other instabilities, which led to a barely even quarter as compared to 2011. In the third quarter, all hell broke loose due to the closures of the airport road, the abductions of foreigners and the continuing violence in the north.
These factors and the [Gulf] Arab travel warnings, led to the almost complete absence of Arab tourist. Also, Lebanese expatriates have not come back for the summer in the expected numbers. Add to that the slim purchasing power of those residing in Lebanon and you have a recipe for an economic disaster.

How much has the trade activity fallen from the beginning of the year?

So far, we have dropped a good 15 percent compared to 2011 as the third quarter accounts for about 50 percent of our annual sales and when it is hit, our entire year suffers.

What is your forecast for the rest of year?

Though Q3 has not ended, if you extrapolate and assume all things remain equal, I foresee a drop in the commercial activity of around 20 percent for the year 2012 (as compared to 2011). This is a disaster because trade constitutes about one third of the total gross domestic product (GDP) of Lebanon.

Your forecasts are based on 2011 numbers, which was already a bad year…

We have been going downhill since 2010; 2009 and 2010 witnessed a growth rate of 9 percent, which benefited the trade sector a lot. Unfortunately, we got the wrong cues and traders spent hundreds of millions of dollars on luxury retail expecting good times to come. Then the events in Syria happened, and now traders are in a debt trap; they borrowed huge amounts of money and now the cash flow is severely restricted and our expenses have skyrocketed.

So you forecast bankruptcies going forward?

Definitely. The operational costs have risen so much and at the same time the top line has dropped in a dangerous way. Either you incur more debt, which is poisonous in the long run, or you have to increase your equity or you liquidate. They are all bad solutions and there are no good options.

How much do you believe the raise in minimum wage has contributed to speeding up the pace toward bankruptcy?

Very much so, as we have stated plainly in past negotiations with the Ministry of Labor when all was well. Back then, we agreed that there is an imported inflation due to the high exchange rate of the euro versus the United States dollar and the expensiveness of raw materials like oil — raising wages only lead to home grown inflation.

Last time you spoke to Executive, you were asking the government for subsidized loans for the retail sector, which they have done for other sectors. Where do you stand on this now? Is it likely it will still occur?

We are very much in need of this and are even more strident about it as we are facing difficulties with outstanding loans, and need to renew the loan base with more favorable conditions. But, I don’t see it happening now as the government’s budget carries a huge deficit and they are unable to figure out ways to pay their dues.

What is the LTA doing to help support the sector in these challenging times?

We are a strong voice within the economic organizations of the country and we often take the lead in negotiating with the government on issues that affect the sector. In the end, 80 percent of our problems are due to security issues and the lack of law enforcement in the country, so we cannot do much more than give advice and be persistent about representing our demands.

Regarding social security, the National Social Security Fund (NSSF) is requesting that the salary ceiling for contributions to the end-of-service indemnity funds be increased from LL1.5 million to LL2.5 million. This would represent an additional burden on the private sector. What would you be rooting for in this case?

Our position has been adopted by all the economic organizations. Early on, we refused to move the ceiling, but we were outnumbered on the board of directors of the social security fund. [The NSSF board is made up of 10 representatives of employers, 10 for employees and six from the government.] The issue went to the government who stopped it because they realized it was unfair to the employers. As a concession, we agreed to take the ceiling up from LL1.5 million to LL2 million.

With the economic crisis we are facing, what sectors in your opinion are the most heavily impacted?

The most exposed sector is obviously tourism. We cannot expect hotels to fill up when there are no tourists in Lebanon. Directly after that, restaurants have been suffering and then it comes to us, the traders. We had increased our capacity in the wake of 2009-2010 to accommodate for the demands coming from abroad and now there is an increase in supply and hardly any demand.
Manufactures are also suffering and while they are selling abroad, they are facing logistic problems when it comes to shipping over Syria. The banks will be the last to suffer because they deal with us and there will be a leap time before they start to suffer. As for real estate and construction, they hit a plateau in 2011 because of increased capacity and no demand and a bubble was created, but it will take a while to pop and even then, it won’t be as drastic as it was in other countries, such as the US.

Do you think there are any economic opportunities for Lebanese companies from the increased inability of Syrian companies to meet their domestic demands?

We have noticed that imports of merchandise into Lebanon have increased 11 percent year-on-year (for the first three quarters of the year) and this is not explained by domestic consumption. So, part of it is explained by the Syrian [impact] on Lebanon.

You are threatening civil disobedience. Who are you going to strike against and what are your demands?

This is the last resort for us. We will first try to keep the discussions with government officials open and convince them of the danger of the situation we are in to reach a common ground. Then, we are willing to symbolically close down for one hour or a day, followed by an open-ended strike. For us, it is an issue of survival, so if we have to go on strike, we will. The key demands are the basic demands of order, a state of law and security.

Do you believe the situation is a cycle the Lebanese will eventually overcome, like the ones before, or is it more severe this time?

I have mixed feelings about this. Speaking about the long run, Lebanon has seen and overcome worse. But this is not just another obstacle, it is extremely painful and no one would have imagined the extent of the economic chaos due to the situation in Syria. So far we have shed five percentage points of growth in 2011 and 2012, which means billions of dollars lost that cannot be made up for.

October 3, 2012 0 comments

The Buzz

Morning briefing: 3 Oct 2012

by Executive Staff October 3, 2012

written by Executive Staff

Politics

Two car bombs exploded on a main square in a government controlled central district of Syria's second city Aleppo on Wednesday morning, a pro-government television channel said.

Al-Ikhbariya TV said the bombs detonated in Saadallah al-Jabari Square in western Aleppo, Syria's largest city which has now been split in two with forces loyal to President Bashar al-Assad mainly in the west and rebel fighters in the east.

Fighting only with light weaponry, rebels have resorted to bomb attacks in areas still controlled by Assad. Several large protests in support of the president have been held in Saadallah al-Jabari square.

Retail and the economic crisis

by Nabila Rahhal October 3, 2012

written by Nabila Rahhal

After the hotels and restaurants, it is the retail industry that is feeling the effects of the current economic strain,” says Nicholas Chammas, head of the Lebanese Traders Association.

The retail industry in Lebanon depends heavily on Arab tourists and has suffered the effect of their decreased numbers this summer.

“During the good summers, we used to have an average of five Arabs daily entering our shop. This year we are lucky if we see five a month,” says a salesperson in Nine West’s Verdun branch. Walking through downtown Beirut, one quickly notices the unusual quietness relative to previous summers, and though there are a few shoppers strolling around, it appears no one is buying.

Numbers obtained from the tax free shopping services company Global Blue show there was an overall decrease in visitor refunds between the first quarter of 2012 and the second. Syria was one of the few countries whose percentage of spending evolution went up in the second quarter of 2012, which is likely the result of the increased number of Syrians fleeing the violence in their country.

While there was an undeniable economic setback this summer, major retail companies declined from commenting on difficulties they might be facing. Small shop owners in Hamra and Fern El Shebak, traditionally busy shopping areas especially during the summer, spoke freely of the lack of activity in the market, the decline in their sales and of the extended discount periods they hoped would encourage shoppers to spend, but to no avail.

“There are no tourists to buy, and we cannot depend on the Lebanese residing in the country as they barely have enough money to eat, let alone shop. There is basically no way forward until the political situation improves,” said one shop owner in Hamra, summing up the feelings of many in the industry.

October 3, 2012 0 comments

Economics & Policy Industry

Q&A: Vrej Sbounjian

by Paul Cochrane October 2, 2012

written by Paul Cochrane

Lebanon’s productive sectors are often short-changed in favor of tourism, real estate and banking. What’s more, Minister of Industry Vrej Sbounjian commands a paltry budget of LL7.71 billion ($5.14 million). In such an environment the nation’s industrialists need a well-informed fighter holding their corner in the Cabinet. Executive met with the minister to see if he has been up to the task.

The 2012 budget lacked any tangible or creative initiatives to boost Lebanon’s productive sectors. Was this not a failure on your behalf?

We can’t forget previous governments in the past six or seven years couldn’t even pass a budget, so I want to congratulate this government on even having passed a budget. With regards to industry, it is fine, we don’t have any complaints concerning the economy or industry.

Where are we at with the draft law to slash export taxes?

That law has been approved in the Cabinet and I met with [Speaker] Nabih Berri and he promised me it will be in the first parliamentary meeting. That law will mean taxes on all Lebanese products that are exported will be reduced by 50 percent. We pay 15 percent on income tax and profits, but that will be reduced to 7.5 percent.

Can the government afford to lose that revenue?

We don’t look at it from that perspective but rather at how many more jobs we will create and how many more opportunities and investments will come to the country.

One of the biggest disincentives to invest in Lebanon is bad infrastructure. What has happened to the plans to develop industrial zones in Lebanon?

There are lots of industrial zones in Lebanon that you can use. If you want to build a factory or a warehouse to produce or assemble a product you don’t need to go to an industrial zone.

In this government’s mission statement it said new industrial zones would be created…

I’m not saying I don’t want to do it. These are for places where there is no industry in Lebanon. But in a lot of areas there are factories that have been there for years. We cannot ask them to move.

It’s not about moving existing factories but providing the infrastructure to attract investment for new industries…

We are not looking to heavy industries. We are interested in service industries and assembly industries for export to other Arab countries. The investor will take advantage of the 7.5 percent tax rate, plus…

It’s not 7.5 percent yet…

It is 15 percent but it will be 7.5. There is nobody against this law.

If you are not focusing on heavy industry, what efforts are you making to develop high-skilled, light industry within Lebanon?

First of all we have great education and great schools and I would like to encourage…

The problem is that the well-educated and skilled workforce leaves to work elsewhere.

I think the reason of leaving is because the opportunities available in a large economy are more than in a small economy. This is not new. Look at Spain and Italy now and how many people are leaving.

They are going through an economic crisis and there are huge levels of unemployment.

And we are having an economic downturn. It happens.

But once intelligent and skilled young people finish their education, what strategy is there to keep them in Lebanon to help develop its industries?

We have to create the right environment and laws and then leave everyone to be creative themselves.

In your last interview with Executive you said more bilateral agreements were in the pipeline once those with Armenia and Sudan were signed. Are they?

Absolutely, we are looking to have agreements signed with Tunisia and Cyprus very soon.

Why is there no progress on Lebanon’s plans to join the World Trade Organization?

I want to ask you, is the WTO doing well for other countries?

Are you insinuating you are against Lebanon joining the WTO?

I didn’t say I don’t think it is a good idea. With my experience I have learned we have to take into consideration the size of the country and the size of the population. I don’t know all of the details of the WTO but I think that those two issues must be taken into consideration.

What have been the major impacts on Lebanese industry from the Syrian crisis and how has the government responded?

I think the major impact is the fear. People from any country that had a neighbor at war would be worried. People are seeing what is going on and are understandably worried. This is the only major worry so far.

But what about tangible impacts such as increased costs of overland freight?

We have found some ways, such as getting to Iraq going through Tripoli in the north to Turkey and overland from there. As for other countries, for some we are shipping from the Port of Beirut but in many cases the overland route is still fine.

Could the Qlaiaat airport be opened up for the freight of Lebanese produce to foreign markets?

This is one of many ideas people have…

But is it an idea you support?

Would it work? Would it be sustainable? Or would it just be another cost for the government? We are just speculating. Everything is working so far. Everybody is able to export fine from land via Syria and imports are coming in.

Lebanon’s industrialists have asked for faster reimbursement of the value added tax (VAT). What is being done in this regard?

I want to ask what are they doing in other countries? Some are doing well but all the rest are in financial trouble.

VAT reimbursements is a local bureaucratic issue; how is that related to the Eurozone crisis?

In some countries they raised VAT to say 21 percent. We are at 10. They are reimbursing but taking the money back in another way. The Lebanese enjoy very low taxes.

What is your stance on article 59, which allows industrialists to reclaim their VAT on industrial machinery and mineral materials?

If you are importing a product that you want to use to manufacture items and then you want to resell it, that should be excluded from VAT. Secondly, industrial machines that are imported should be excluded. Also whenever a product is being sold to the army we are putting VAT on it. This should be excluded.

Is this up for discussion in the Cabinet?

I need to discuss with my friend the Minister of Finance, but this is the right thing to do…

I would like to add a comment about the economy here. There is a lot of complaining but I don’t think it’s justified. There was great growth from 2006 to 2011, but in economies there is growth and then recession. Without the discipline of recession, continuous growth would bring us to a larger fall into recession.

But the lack of development of Lebanon’s productive sectors makes it more susceptible to external shocks and undermines long-term sustainable growth.

Where are the Lebanese? We are innovative, we had vision, where are these people? Why are we always complaining now? We need to be creative and have a long-term vision.

You need electricity, you need Internet, you need good roads…

We have some drawbacks, but we also have many advantages. We had six years of great expansion with an incredibly strong real estate market. We may be in a recession but that is a discipline we need to go through. We need to be more realistic and enjoy life a little bit. We don’t have to make money every year; there are many nice things to be done in the country.

October 2, 2012 0 comments

Business

Where Europe and the Middle East meet

by Maya Sioufi October 2, 2012

written by Maya Sioufi

Ongoing political instability in the Arab world’s most populated country has not scared off at least one private equity (PE) fund from making major investments. Beirut-based Euromena recently deployed $20 million in an Egyptian oil and gas company, Sakson Petroleum Services, after having invested $13.5 million in an optometry hospital, Al Oyoun Al Dawli, earlier this year.

“It’s a country that had already a lot of potential and revolution gives it more potential,” says Romen Mathieu, managing director of the Euromena funds. “There are 80 million people looking to live, get medication, wear clothes and if you select well, you can make a lot of money.”

Since the launch of Euromena’s first fund in 2006, a total of approximately $100 million has been invested by the two Euromena funds in 14 companies in four countries in the region [see chart]. With an average ticket size of $8 million per company, these funds also offer co-investment opportunities in specific names, bringing the total amount invested to $175 million.

Seeds of the idea

Armed with PE experience from investment bank Lazard and accounting firms Arthur Anderson and Ernst & Young, Mathieu saw an opportunity in 2004 to invest in medium-sized companies in the Middle East. While certainly aware of the lack of transparency, stability and infrastructure in the region, Mathieu saw this as outweighed by the opportunity and decided to launch a PE fund dedicated to the Middle East. His strategy was to start off by attracting European public institutions to provide credibility to the fund and eventually attract private Gulf investors reassured that it would abide by the book. His goal was to create a Euro-Arab partnership. As he needed a platform and a solid partner to launch his fund, he went to United Kingdom-based private equity firm Capital Trust, which had previously tried but failed to venture into this region and was keen to give it another go. With Capital Trust on board, the European Investment Bank (EIB), the first European institution to deploy capital into Mathieu’s venture, soon followed.

“By creating opportunities for work, Arabs can educate their children and instead of holding the Bible and the Koran and running with it, they can think of a better life,” says Mathieu. “If the Gulf and Europe understand this, they will face the enemy of fundamentalism and illiteracy.” That’s how he says he succeeded in gathering interest from three European public institutions — the EIB, Proparco, a Paris-based development institution and Averroes Finance, a fund of funds — accounting for 30 percent of the committed capital. Equipped with European public money, he raised the remaining capital from 45 private investors in the Middle East.

There are also bigger plans for 2013, despite the European sovereign debt crisis and the uncertainty in several countries in the Arab world. Mathieu’s next aim is to raise a minimum of $200 million starting next year for Euromena’s third fund, and he is keen on adding companies in Libya, Iraq and Sudan to the Euromena portfolio. The final composition of the investments, however, depends on the final makeup of investors of the funds — with major targets including the International Finance Corporation, the private sector lending arm of the World Bank, and Germany’s DEG, one of Europe’s largest development finance institutions — as they may put restrictions on where their money goes.
For this third fund, he will also be seeking to tap private European wealth from families such as the Rothschilds and institutions such as Paris-based PE Quilvest, in addition to Arab public investors such as sovereign wealth funds (SWFs). Mathieu seems more confident on attracting European private investors, given the previous funds’ track record. The first fund’s three exits generated an average return of 2.5 times the investments, and one of the exits was completed through the sale to French building materials leader Saint Gobain and another one to London-based international pharmaceutical company Hikma.

“We are getting appetite from European private investors,” adds Mathieu. As for Arab public investors, he is less confident and laments that “one can never understand why they would or would not give you a penny; it’s not a transparent process.” Despite this, he has not given up and will pitch to Arab SWFs again next year.

For now, the focus is on investing in two additional companies already on Mathieu’s radar — one in Morocco, still untapped by Euromena, and another in Egypt — which would complete the investments of the second fund, as well as exiting two additional companies by year-end, which Mathieu is confident will be completed despite the challenges in the region. He says the exits will be done through sales to professional investors and high net-worth individuals in the region, as strategic international investors are less willing to deploy money due to the given uncertainty in the region and the European economic crisis. With lack of visibility on prospects in the Arab world, Euromena exits its investments when it has the chance to make at least two times the investment.

“Especially in times like today; if I wait one more year, I might make three times [the investment] if the ‘Arab Spring’ turns into an ‘Arab Summer’ but I would definitely sell today because there is a big question mark on tomorrow” says Mathieu.

October 2, 2012 0 comments

Real Estate

Q&A: Ziad el-Chaar

by Thomas Schellen October 2, 2012

written by Thomas Schellen

After seeing some delays in expansion beyond the Gulf Cooperation Council countries, Dubai-based luxury developer Damac Properties is moving closer to completion of regional projects. These include a residential tower in Beirut where interiors from the lobby to the last apartment will bear the identity of fashion brand, Versace Home. Executive inquired with Damac General Manager Ziad el-Chaar on the company’s strategy.

What can you tell us about the state of the Damac Beirut project?

This project has reached an important construction milestone. We finished the last foundation [at the end of July] and reaching this in downtown Beirut took some time, because we had some challenging excavation [working] next to the tunnel connecting the InterContinental Hotel area to Ashrafieh.

When are you planning final delivery of the project?

We are hoping to finish the entire project within 30 months from January 2013.

When the Damac Tower project was first presented in 2010, there was talk of a starting price for a unit at $700,000. How have things developed on the pricing?

The pricing has definitely progressed since we have launched and most of the units that this talk was about were units on the third, fourth and fifth floors. Those units are depleted now and we are now selling units on higher floors with superb sea views. The prices of those units differ from the prices of the units that we started with.

How much has pricing gone up?

Our prices have progressed since the launch in excess of 20 percent. A price growth of approximately 10 percent per annum is huge in the real estate market. This is not usual. It is a strong market that grows at 10 percent.

Lebanese real estate developers saw strong price increases from 2005 to 2010, but since then things have slowed for them and market indicators point to weakening of demand for large, high-end units. Was that also your experience?

When we launched this project, we came in at a totally independent section of the market because we launched with interior design by Versace Home.

So you do not see yourself competing with the other developers of high-end towers down at the sea front?

We are in a category of our own. The fashion branding that we have provided with that project has taken it to a totally different level [than other projects in central Beirut].

Does that mean you are not planning other projects in Lebanon?

We are always on the lookout for new projects but we are not planning a second project by Versace, because this project is very exclusive for a long time for the current buyers.

So whoever buys a unit in the project today knows that there will be no Versace 2, 3 or 4 towers coming up anywhere nearby in the near future?

Not in the near future at all.

But you do have a second Versace project?

In Saudi Arabia, but they are in totally different markets. One is in Solidere in Beirut and the other is on the Corniche in Jeddah. The attraction of the project in Solidere is mainly for the many Lebanese expats and many GCC buyers, but in Saudi Arabia only Saudis can buy.

Saudi buyers play a role in Lebanon. Does what you say imply that there is no overlap between your clients in Saudi Arabia and buyers of the project here?

On the contrary, we see many of our Saudi investors invest with us in Dubai, investing with us in Saudi and investing with us in Beirut. It was one of the main drivers for us to launch a project in Beirut, that many of our current investors wanted a project in Beirut.

One of the topics in high-end real estate is a developer’s branding. Is Damac as well known in the Lebanese market as you are in the United Arab Emirates and GCC?

We entered Lebanon aggressively two years ago while we have been in the GCC market for the past 10 years. This is an eight-year difference and perhaps you see us not advertising the brand so much in Lebanon because most of our buyers are living outside Lebanon. This is where we put heavy advertising for the Lebanese product, to invite investors from outside Lebanon to invest here.

In regional expansion, you were addressing Egypt and Jordan besides Lebanon. Has the unrest of the ‘Arab Spring’ and the civil war in Syria affected your strategic expansion?

We are still aggressively building our project in downtown Amman, in Abdali. We are going to start handover definitely next year of this 35-story tower, the highest residential project in Jordan. In Cairo we are aggressively finishing our Park Avenue mall in the 6th of October [City] area and handover started last March.

When will the mall be opening?

Based on the programs of the shop owners’ fit-out, we hope to be open by the end of 2013.

Is this a solitary project or do you plan more mall ventures?

The mall project was a successful venture for us. That mall is not a shoebox mall. It is a retail strip of shops where you can enjoy indoor and outdoor walkways throughout the year. We are on the lookout to replicate that elsewhere; the challenge is to find a suitable plot of land.

You were also engaged in a resort project on the Red Sea in Egypt but there were allegations of impropriety in the deal for this land, issued by the Egyptian government after the fall of the Mubarak administration. Is there still ambiguity about the resort project or has it been buried?

This is now a subject of international arbitration.

How do you see supply and demand factors in the luxury and super-luxury segments go together with the mood of the ‘Arab Spring’?

I don’t think I can reply to that question in regard to the ‘Arab Spring’. What I can tell you is that demand for luxury real estate is still growing and in Dubai, we recently introduced a new category, which is the luxury serviced apartment. We aspire to be the number one operator of luxury serviced apartments in four years from today. Our aspiration is to manage 4,000 units.

In Dubai or anywhere?

In the areas where we are present today, which is Dubai, Abu Dhabi, Doha, Jeddah, Beirut, Amman and Cairo.

Your track record as developer began in 2002. Is it correct that you have delivered more high-end units as a luxury, private developer in the Middle East than anybody else? And how many units have you delivered to date?

We say we have delivered approximately 7,500 units in 36 buildings and currently have approximately 10,000 units under construction in 50 buildings.

What was the worst delay that you suffered in any of the projects during the UAE downturn?

We had some acceptable delays in some of the projects but these were mostly due to challenges in the new [Dubai] master plan.

How long is acceptable?

It depends, it usually is in months.

You mean in months and not in years?

Yes.

It appears that you are venturing into two new areas: the development and operation of luxury serviced apartments, and the mall business. Are you then moving toward services more than build and deliver?

We are moving more and more into the hospitality business, yes. Our new offering will include the sale of luxury serviced apartments and the operations of those units in the hospitality sector.

Does this mean you have to reinvent the company in structural terms by building new capacities and expanding human resources?

We are building a massive hospitality division in our company.

Can you tell us how much you are investing in financial terms into building these capacities?

I don’t have that number now. I will let you know once we deliver that budget.

Returning to the Damac Tower in Beirut, we would of course like to know what the tower’s top floor will see as price per square meter.

We have not reached the top floor yet. We are still selling [units] in the middle of the project and the prices are, on average, between $10,000 and $12,000 per square meter.

October 2, 2012 0 comments

Real Estate

Fractured but not fretting

by Thomas Schellen October 2, 2012

written by Thomas Schellen

For a country facing economic turmoil and new business risk at every turn in the road this year, Lebanon sports an alarmingly content real estate sector.

Intermediaries whose livelihoods depend directly on commissions from arranging sales and rental contracts are not frantically waving red flags as many other of the country’s economic agencies are.

“The [sales] market is in slow motion since the beginning of 2011 until today, but there is still a market and it is not down,” said Walid Moussa, chief executive of PBM, a real estate brokerage and facilities management company, as well as secretary of the board of the Real Estate Association of Lebanon (REAL). “I always say the market is sleeping. When you sleep you wake up and just continue.”

Over at Ramco, one of the oldest intermediaries and consultancies in the Lebanese real estate sector, Director Karim Makarem agreed that both demand and prices are in a trough since the end of 2010, but he too would not talk of a crisis. “The word crisis entails too many negativities. I don’t believe the market is anywhere near that,” he told Executive.

Any analyst probing the market’s numbers without being very familiar with the peculiarities of Lebanese property might be excused for asking if that “sleep” is restful and if the denial of a crisis is just that — desperate denial. By the numbers, business in the primary brokerage activity of property sales is down again in 2012 to date, regressing for the second year in a row.

“According to the latest numbers, we are down 10, 12 percent on 2011, but 2011 was not such a good year either, it was about 12 percent behind on 2010,” said Elie Harb, president of Coldwell Banker real estate brokerage in Lebanon. That doesn’t sound too healthy, he acknowledged: “Two continuous cycles in the negative are not a good sign.”

A “staircase” market

Most brokers and research analysts at large local banks Executive queried said they see no crisis lurking in the lull of the local real estate market because they view market functions like a staircase, where prices go up and stabilize or freeze but not retreat. Phrasing it in a hands-on way, Christian Baz, owner and general manager of brokerage and facilities management company Baz Real Estate, said, “The price for properties in Lebanon will never go down. It always is stable or goes up.”

The staircase scenario is based on a threefold specificity which Moussa described as “the small size of the Lebanese market, non-debt financing of projects and high demand by expats and foreigners from the region.” According to Makarem, normal population dynamics of marriages and divorces and demand from regional buyers make local real estate an obligingly safe bet.

“There are still people who are getting married or move into their home and this demand will always exist regardless of external factors. Lebanese expatriates are still a market for buying at home; Arabs still believe in Lebanon and provide demand,” he said.

This is despite the fact that increased land prices and construction costs are making newly built apartments in Beirut less and less affordable, a trend that is not only hard to bear for newlyweds and new labor market entrants but also has led brokers to focus their efforts on marketing smaller units, just as it put developers of the traditional large units into a squeeze.

For Moussa, the disparity between growing real estate prices and local incomes is explained easily enough by the origin of demand: well-salaried Lebanese working abroad. “It is a supply and demand market and prices for real estate in the Lebanese market are related to the purchasing power of Lebanese expatriates. Many Lebanese expats are holding out on buying now but the minute things change, the Lebanese market will be alright.”

Adding in cultural factors such as attachment to neighborhood and community — which narrow the desirable locations that Lebanese buyers seek and thus supposedly increase the scarcity factor and resultant value retention of properties — the ruling perception is that the Lebanese real estate sector is not in, and is not going to enter, a crisis of property values or ever experience a real estate bubble. This is precious news for a country whose real estate sector, according to Coldwell Banker’s Harb, is worth about $12 billion in transactions annually. The huge caveat is that the reported real estate transaction figures can be both understated and late. Relative to gross domestic product, there is significant turnover in the real estate market, but that doesn’t mean there are no pockets of inefficiency and downside risks. Take the case of Mark Sleiman, an entrepreneur [interviewed by Executive in summer 2010] who started the company Creative Solution For Housing (CSH) in 2009, with the idea to provide a progressive home financing scheme for young career starters with good credit profiles but still low incomes.

The concept was to create “demand loyalty of young Lebanese to their country” by facilitating home loans with increasing payments. “I want the expatriates who work outside to buy at home, and I don’t want the young professionals to leave, by giving them a way how they can afford a home,” Sleiman said, but admitted that the company had done very badly over the past two years because of depressed demand for real estate and some creative differences with banks. In short, CSH is today in a state of dormancy with Sleiman voicing some — but by no means exuberant — hope that a pickup in demand from young Lebanese expatriates will give the company a second wind.

Syrian neighbors

When asked if the influx of Syrians driven from their country by the civil war there has brought new vigor to the Lebanese real estate market, brokers did not widely agree. “There is a lot of talk about Syrian families moving to Lebanon,” Makarem said. “This perhaps had a slight impact on the rental market. We have seen a little bit of it at Ramco, other people claim to see a lot of it. Some people claim to see none of it. It is open to debate.”

According to Moussa, the Lebanese who want to rent out apartments seek long-term tenants who will sign a contract for a minimum of one year. The Syrians who can afford apartments in Lebanon have so far largely asked for shorter-term solutions, one-month, three-month or six-month contracts. In this segment of short-term rentals, the market is delineated by vacation homes or ‘chalets’ and renters might have taken spaces that were not filled by Gulf Arab vacationers this summer. “There is high demand on short rentals but very weak supply,” he said.

Coldwell Banker, which has one of the largest networks of real estate operators in Lebanon, records the strongest rental demand in Ashrafieh, where broking of rental contracts accounts for 50 percent of the office’s revenue. “Other offices do not experience so much rental business. However, in the past month there were more rental activities due to the Syrian influx,” Harb said.

Schooling, safety and affordability are decisive for Syrian clients that have been looking for furnished apartments, said Baz, whose business is concentrated in Beirut’s Ashrafieh district. He explained that he observed an increase in demand for rentals as soon as the Syrian conflict engulfed the city of Aleppo with its large Christian population. “The war on Aleppo created a boom in demand for furnished apartments.”

According to Baz both rich and not-so-rich Syrians have been knocking on his door in search for apartments but the latter group mainly seeking to find places in Beirut’s northern hinterland where the rents are lower. In his view, the main difference why he saw demand grow substantially in 2012, from a very bad 2011, was that visibility has improved, in the sense that the Syrian conflict is not abating but also not spreading to Lebanon. “I think the situation in Syria is clear now,” he said. “Clients have visibility today — they rent and while they don’t buy like they used to, they buy small-size [apartments] and they invest.” The greater clarity about the Syrian civil war and its likely persistence meant for Baz that 2012 was his best year in rental brokering, and enabled his company to generate as much income in the first seven months of 2012 as he did in all of 2011. For Moussa, demand indications from Syrian customers could be realigned in September and point to where trends might be going into this winter and next year. “September in my opinion is a very important period to test the market for rentals, because the schools will start and people will have to take a decision. If people put their children to school, they will rent on yearly basis.”

Fundamentally, however, the limited impact of the Syrian demand correlates with the realities that most refugees cannot afford to rent in areas and price segments that the professional real estate intermediaries cover. According to Makarem, the situation in the low end of the real estate sector — also affecting the majority of Syrian refugees — is a mixture of consistent under supply and total deficiency of building quality. “The problem is that the lower end is particularly low-end,” he said.

Brokers do not dabble in this part of the Lebanese landscape, except perhaps in carrying out property valuation studies for projects that involve buying up decrepit properties for later demolition and development of the lands. In this context, the increased need for homes, or at least decent shelter, by Syrian refugees ties in with the permanent Lebanese housing crisis and its components of insufficient infrastructure, insufficient supply of socially adequate building stock and insufficient public and private sector management of mass housing needs.

The fuse of future crisis

This crisis, known and lamented but ignored in all practical terms, could come back to haunt the Lebanese real estate sector even in those housing segments where developers, brokers and buyers have a common market. This is because the housing crisis has a large infrastructure component that spans physical, social and administrative infrastructure, from roads and utilities to public transport and inefficient permit, registration and taxation processes for real estate.

In Harb’s assessment, a continuation of the Syrian conflict over several years could move demand by Syrian expatriates in Lebanon from rentals to apartment purchases, and he said it would be very conceivable that 20,000 requests for property purchases in Lebanon could originate annually from migrants — equal to the annual demand of Lebanese in a country where approximately 20,000 to 25,000 new units can be delivered per year.

Under the capacity restraints caused by insufficiency of hard and soft infrastructures, it would not be possible to drastically expand the supply of new units, Harb said, with overall negative effects. “This will put the Lebanese buyers into direct competition with these requests. The developer has no loyalty anywhere. These [Syrian people] will be paying in hard-core cash more often and make higher down payments,” Harb cautioned. “It could lead to an explosion in demand for real estate in Lebanon.”

October 2, 2012 0 comments