Economics & Policy

How prices have hit the moon

by Zak Brophy
written by Zak Brophy

Fuel is expensive. Food is expensive. Rent is expensive. Everything, it would seem, has become expensive. Over recent years trips to the gas station, the supermarket and the landlord have morphed into a recurring nightmare of increasing prices, draining the pockets of the Lebanese. Add to this the sluggish growth in the economy and people are feeling the squeeze.

“Everything has become so expensive recently it is completely crazy,” says Nayla Otrakji. Although she lives in a comfortable middle-class neighborhood in the Beirut district of Ashrafieh and her husband runs a successful engineering company, the rising cost of living is still felt in the home. “The amount we spend on food has increased so much. I have noticed the highest increase in the prices of dairy products,” she says before adding, “Now I make my own labneh and laban.”

Priced from abroad

While dairy products are largely produced locally, many of the inputs needed to stack a bottle of milk on a supermarket shelf (feed for cows, fuel for transport, and even the cows themselves) come from abroad. Lebanon to a large extent is vulnerable to the vagaries of international markets as it imports over half of what it consumes in any given year, and that is not set to change any time soon. As of February this year the balance of trade — the difference between how much Lebanon buys from and sells to the rest of the world — has reached its highest level in recent memory at a $15.9 billion deficit. That means the country’s reliance on international imports is increasing, making Lebanon more susceptible to rising international prices.

In this context, much of the increases in food and drink prices can be understood. The cost of food commodities on the world markets declined substantially from the 1960s till the early 2000s, but then the tide turned and prices surged from 2006 to mid-2008, turning sharply north once again in 2010. Prices have since held relatively steady, according to the United Nations Food and Agriculture Organization. The receipt received at the end of the weekly shopping in Lebanon reflected these rising trends.

There are two main indices measuring inflation in Lebanon, one from the offi- cial Central Administration of Statistics (CAS) and one from the private Consultation and Research Institute (CRI). Yet while they provide good insight into the trends there are discrepancies between the two and many believe they both understate the rates of change. According to CAS, since its base year of December 2007 until April 2012, prices have risen by just 20 percent. The CRI’s base year is 2004 and its accumulative year-on-year inflation rates suggest prices have risen by 28.1 percent from January 2008 to March 2012.

Rima Turk Ariss, Associate Professor of Finance at the Lebanese American University, has led a two-year-long study into inflation measurement in Lebanon and she says that, “people feel there is a gap between the inflation measurements and the reality of the increase in prices. There is cleavage between the two.”

However, in the case of food, Ariss and her colleagues found that the calculations for food and drinks were pretty close to the mark. So the 132 percent increase in sugar and confectionaries between 2004 and 2011 recorded by the CRI may well explain Mrs Otrakji’s complaints that, “My husband and I, we like dark chocolate. It was LL4,500 [$3] and suddenly it has become around LL6,000 [$4] in less than two years.”

 

Impact on businesses

Rising prices strike not just the consumers but also the nation’s businesses and enterprises.

“In 2010 I was making a plan in my head that if I bring in $30,000 to $37,000 every month to pay all my expenses, salaries, rent, interest, telecoms and fuel, I would be fine. Now if I make $60,000 every month I won’t make anything,” says Barakat Chalhoub, who runs his own customs clearing company, adding that he worries the spiraling cost of running his business is simply unsustainable.

As well as increasing wages in recent years, Chalhoub has taken on some of the increased living expenses for his staff by giving them additional support. “I have three children but now I make plans as if I have 25 children because I am responsible for my staff,” he says. Recently, he has started to pay LL100,000 ($66) to all his staff for their fuel costs and LL150,000 ($100) for their telecoms.

In the CRI statistics transport costs, which consist of the costs of new cars, gasoline prices, tire prices, certain repairs and price of taxis and public transport, have increased 55 percent from 2004 to 2011. The rising cost of transport is intrinsically linked to global fuel prices and therefore, as with food and beverages, the rate of inflation in this sector is predominantly imported. However, Ariss’ study found that Lebanon’s inflation rates within transport costs were less volatile than global trends in fuel prices. The price of a liter of gasoline in Lebanon is now 95 percent of the average daily income of one person within Lebanon, based on the prices of gasoline between April 2 and April 11 2012 according to research by Byblos Bank.

As well as chipping in for their petrol, Chalhoub also supports his staff with the burden of their telephone bills. The Lebanese penchant for a good chinwag, coupled with the unreasonably high cost of telephone credit means that rarely a day passes without hearing someone complain about their phone bill.

However, this sector is perhaps one of the few areas where prices have actually fallen in re- cent years. According to the CRI, tele-coms prices have?fallen by 23 per-cent from 2004 ?to 2011 and Firas Abi?Nassif, advisor to the Minister? of Telecommunications and Post Nicolas Sehnoui, cites a number of achievements during his tenure, such as long-overdue decreases in Internet prices to subscribers by 80 percent and decreased BlackBerry prices by 40 percent.

Yet, despite all of these welcome advance- ments that often go unnoticed, Lebanon still has comparatively high telecoms rates for what are in many cases substandard services. What is more, the room to push prices down is constrained by Lebanon’s huge public debt of some $53 billion dollars, some 140 percent of Gross Domestic Product (GDP) depending on which statistics are used.

The two major telephone providers, mtc and Alfa, are publicly owned and last year raked in some $2 billion for the government’s piggy bank, pretty much covering the servicing of the country’s debt. Further significant drops in telecoms prices would make a serious dent in the country’s coffers if subscriptions do not increase in tandem.

Paying for a pad

One significant cost that is not factored into the nation’s inflation statistics is the cost of property or rent, but this is perhaps where people are feeling the pinch the most. Business owner Chalhoub complains, “For my office’s rent I pay around $15,000 per year, but when I started five years ago it was around $4,000 to $6,000 per year.”

There is no national real estate index in Lebanon so it is unknown exactly to what degree real estate prices have increased in recent years. However, bemoaning the crippling rise in land, property and rent prices, especially in Beirut, has become something of a national pastime. Karim Makarem, director of real estate advisory company Ramco, calculates, “If you bought a flat in 2005 for $300,000 with a yearly average increase of around 25 percent you could be paying at least 3 times that now.” Rents in Lebanon tend to provide a yield of around 3 percent on the property price, so the significant rise in the latter helps explain the predicament Chalhoub now finds himself in.

The balloon in property prices in Leba- non, especially up until 2010, was par- tially fuelled by optimism after the Syrian withdrawal in 2005. Then followed huge inflows of money after the signing of the Doha Agreement to end the civil conflict in May 2008, and investors seeking safe havens in Lebanon’s real estate after the global financial crisis hit, and property prices crashed in the Gulf and later that same year. However, there is also a structural nuance in the Lebanese economy that can go a long way to explaining the inflationary pressures in real estate and all of the non-productive service sectors.

 

Lebanon's economic oddity

Lebanon enjoys huge inflows of capital, such as remittances from expatriate Lebanese and oil money from the Gulf which, along with easy credit from the banks, boost the local money supply. As Lebanon is such a small player on the global stage, both in terms of consumption and production, prices for nearly all things tradable are determined externally, as we saw in the case of food and drinks. However, for any non-tradable goods or services these large inflows of capital drive up prices.

“I used to park for LL500 10 years ago and now I pay LL10,000,” says Abi Nassif from the telecoms ministry. “The workers who come to do maintenance at your place used to be cheaper than most places in the world, now, many services are more expensive than New York City.”

Restaurants and bars are another area of non-tradable goods and services where inflation has been pronounced. While filling the fridge has become expensive, it is fair to say going out for dinner has become an overpriced novelty. “It is now very seldom that we go out to restaurants,” says Otrakja. “It is so expensive now. There is nothing below $30 per person. Only recently you could easily go out for less than $20. If we want togo for a meal we will now only take the family perhaps once every two months.”

The implications of this nuance in Leba- non’s economy go beyond having to pay through the roof just to have a plumber fix a leaky pipe or to enjoy a romantic dinner with your loved one. The rising prices for real estate and locally sourced services raise the costs of production, eroding the competitiveness of productive sectors such as manufacturing, technology and agriculture. In 2002, agriculture and industry made up around 17 percent of GDP — 5.7 percent and 11.5 percent, respectively. In 2010, the latest figures available, they made up less than 12 percent collectively. Conversely, trade and services made up around 54 percent in 2002 and in 2010 comprised 61 percent of total GDP.

As sure as night follows day, where money goes people follow. With the huge inflows of capital into the non-tradable goods and services sector this is also where Lebanon’s workforce is being directed. However, Abi Nassif, both an engineer and economist by training with extensive experience in finance, warns, “People are flocking into these very low skilled kinds of jobs in which we can be out competed by cheap foreign labor in any case. So this only adds to unemployment.” Alternatively, scores of talented Lebanese youth flee to economies that offer them real potential from where they send back a chunk of their earnings to the homeland. The vicious cycle is completed once again.

Pricey education

With a state education system that many complain is ill equipped to educate, those who can send their children to a private school do. However, the fees for these centers of learning often amount to several thousand dollars a year per student, and they are also on the up.

“My three children go to one of the best schools in Lebanon, Notre Dame de Jamhour. They recently increased the school fees by $1,000 [on average],” says housewife Nayla Otrakgi. “It has become $4,500 [on average]. When we began it was around $2,000, then $3000, then $3,500 and now $1,000 extra in one go.” The school confirmed to Executive that it had indeed raised fees by “eight to 10 percent” on average this academic year. Another leading private school, International College, increased fees by 9 percent from 2008 to 2009, 7 percent from 2009 to 2010, 8 percent from 2010 to 2011 and 8.9 percent from 2011 to 2012. That is an accumulative increase of 37.2 percent over a four-year period.

 

Purchasing power

While the rising cost of living in Lebanon is patently clear to everyone in the country, what is less discernible is how this translates into the individuals’ purchasing power. That is to say how the rising prices relate to levels of income. “As for the change in the purchasing power of the consumer, it is not really captured by the inflation rates as they are currently computed,” says economist Ariss.
However, while certain strata of society may be riding above the tide of surging living costs many Lebanese are struggling to keep afloat. Simon Neaime, professor and chair at the American University of Beirut’s Department of Economics, says “We don’t know by how much exactly but purchasing power is decreasing, and it fair to say the middle class is getting wiped out. The middle classes in the 70s and 80s used to be about 60 percent of the population and now I think it is little more than 20 percent of the population.”

It is also uncertain who bears the majority of the burden from rising prices, the consumer or the producer. There is still no producer price index for Lebanon to measure changes in production costs, although CAS say they have the methodology in place but just need a political commitment to collect the data.

Chalhoub complains that while his costs are rising, business is not following suit. “As costs have risen I am struggling to bring in even the same revenues as before,” he says. With the International Monetary Fund predicting growth this year at a modest 3 to 4 percent—an assumption based on “strong domestic policies and an improved regional environment,” neither of which have been forthcoming this year—his qualms are likely shared by many more of Lebanon’s entrepreneurs.

And while it is not exactly clear on whose shoulders the greatest burden of rising costs falls, it is fair to say that no one escapes unscathed. The seemingly inexorable rise in prices, coupled with a frail economy offers no break anytime soon for homeowner or businessman alike.

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Business

Schooled in success

by Sami Halabi
written by Sami Halabi

There was a time during the civil war when the Lebanese American University (LAU) did not know if it would have enough money to pay its staff at the end of every month, according to its president Joseph Jabbra. That is hardly the case today.

For the past several years the university has been increasing its revenue base by some five to six percent every year (see table) and has not had a deficit for the past eight years, according to Jabbra. According to its president, the university’s assets are valued at $602 million between its Beirut and Byblos campuses.

Since LAU is a non-profit institution it spends exactly what it brings in. Thus in any given year, tuition makes up anywhere from 70 to 80 percent of the university’s revenues. However, unlike many other schools, tuition hikes have tailed behind increases in the university’s turnover (see table). The result is that LAU, traditionally seen as Lebanon’s most expensive university, now actually charges less on average than its main competitor, the American University of Beirut (AUB).

The difference, according to Jabbra, has come from a strategic decision to steer revenue growth away from higher fees and to concentrate on the fundraising element, something the university has had some success with. In 2005 the university set out to raise $40 million in five years. “People said you could not raise any money,” said Jabbra. Over a period of four years LAU had managed to raise some $67.1 million and is now in the “quiet phase” of their next five-year funding spree, which aims to raise another $50 million to support capital spending plans of $240 million over the same period, according to Jabbra. The president’s target for the university’s endowment in the next four years is $500 million. What is also worthy of note is that this increase in revenue comes at a time when the university is also expanding its operations and programs.

Acquiring a medical program

In 2009 the university started its medical program after acquiring the Rizk Hospital, something that took a considerable amount of back and forth between the board and the president’s office.

“When we wanted to establish the medical school the board said ‘you will not have a hospital.’ They didn't want the hospital to become an albatross on the neck of the institution,” said Jabbra. Eventually, he says, the board acquiesced after affiliation agreements with other hospitals fell through and on condition that they would have control over the finances. Jabbra revealed to Executive that the university acquired the hospital, now called University Medical Center-Rizk Hospital, for a previously undisclosed amount of $47.5 million through Medical Care Holding, in which LAU has a controlling stake. He also revealed that the university is planning to put up another $47.5 million to meet its expansion plans for the hospital after it completes a restructuring of the facilities.

“The hospital was controlled by one person and was French-based,” says Jabbra. “First we had to make it controlled by systems, and second, make sure that the doctors, nurses and staff were introduced to English, so taught them free of charge.” Plans include a new radiology center and a new operating theatre.

revenues


Gaining recognition

Another program that has recently reached fruition is having the university accredited by an American education board, something that cost them almost $1.5 million.

“The raison d’etre was not: because AUB has it we have to have it,” he says. “If it makes us a better competitor to AUB then so be it. But you can’t improve unless you have someone telling you what you are doing here is wrong, or what you are doing is absolutely terrific.”    

Even with accreditation now in tow, LAU has not yet reached the research capacity of its main competitor, which claims it produces more research in terms of publications and papers than any other institution in the Arab world. Jabbra acknowledges that LAU has a ways to go but explains the reason behind it is somewhat historical. “For a long time we were a college. The main function of a college was to teach,” he says. LAU changed from a college to a university in 1994 when it started offering graduate degrees. Before that decision LAU was known as the Beirut University College.

To address this the university started to transition its teaching load for assistant professors and above in 2005, from four courses per semester to three courses per semester. “Doing research takes time, training faculty takes time. It costs money as you need to give faculty release time,” Jabbra says.

tuition
Higher education shortfalls

Another area where LAU falls behind its main competitor is number of graduate students they maintain. At present 9.3 percent of LAU’s student body is comprised of graduate students, while AUB’s comes in at 24.4 percent. Jabbra says that he advises most parents to tell their children to get their undergrad in Lebanon and go abroad for a graduate degree. “Not everyone can travel, because it costs a lot of money,” Jabbra says. He also denies that the university is ignoring its graduate program, insisting that it focuses on a selected few areas such as its doctorate program in pharmacy, the only such program outside the United States that is accredited by the Chicago-based Accreditation Council for Pharmacy Education.

LAU’s recent rise has not been without indecent however. In the past several years, two physical altercations caused by political and sectarian tensions have occurred, with the latest in the last academic year as tensions in the country rose over the ongoing unrest in Syria. LAU’s response was to provide counseling to the students instead of showing them the door, and 18 out of 19 students were eventually re-admitted. “It happened again and we did the same thing. We said to the Shia students, we are going to place you with Sunni communities, and we said to the Sunnis we will put you with Shia communities,” Jabbra says. 

Looking ahead

Next year, Jabbra estimates that the university’s budget will hit $138 million, a rise of some 23 percent. That would be more than double the trend in recent years; this ambitious target could well be achieved, as long as Lebanon can coast through the conflict next door.

However, whether he expects incidents on LAU campus to occur with more frequency as the situation in Syria escalates, Jabbra gives an answer that seems to be on the lips of most businesses in Lebanon today: “I don't know.”

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Business

Sun rising on renewables

by Maya Sioufi
written by Maya Sioufi

The world’s first solar-lit tunnel will soon be built in Lebanon. The only other venture into solar tunnels was in Belgium last year, but this project was for powering high-speed trains and not for lighting. Based in Chekka, the 400-meter long tunnel will be solar equipped by the end of July. The solar panels placed at the entrance and exit of the tunnel will replace the diesel generators while standard electricity remains in place. Though the cost of the project was not disclosed as Executive went to print, Marwan Zantout, chief executive officer of Lebanon-based Solarleb, the company behind the project, says, “The total cost of the project amounts to the cost the municipality spends on diesel for the tunnel in two years.” Zantout adds that he is excited about the project, his company’s second large-scale solar development in Lebanon. He says he believes that awareness for solar energy will rise as more large-scale government projects are realized.

Solarleb’s first solar venture was in the area of Hermel this year. After lobbying for more than two years — which included placing four demonstration poles near the Ministry of Public Works in September 2010 — Solarleb was granted a government contract to set up 670 solar street light systems covering 18 kilometers in Hermel, at a cost of $1.74 million to the government. The area covered had no electric infrastructure and conventional street lighting would have cost $2.5 million, according to Zantout, so the government ended up saving 25 percent by adopting solar. Solarleb has to maintain the project for a year, after which it falls in the hands of the municipality, but Zantout said he believes that the maintenance contract will be granted to them as “the municipality will not take care of it and they don’t know how to do it.” 

Renewable fix for the shortfall

Lebanon produces 1,500 megawatts (MW) of electricity, though at peak times demand can exceed 2,500 MW. Zantout estimates these additional 1,000 MW could be filled with solar and wind energy, for a maximum cost of $2 billion (using an aggressive cost estimate of $2 per MW). “That is what Électricité du Liban (EDL) loses in a year,” he points out.

The ministry of finance transferred $1.7 billion to cover EDL’s deficit in 2011, representing 23 percent of the government’s total primary expenditures. As well, Zantout notes that the average cost per kilowatt hour (kwh) of solar energy he can produce is 12 to 14 cents, compared to EDL’s current cost of 17 cents per kwh and diesel generators’ cost of 23 cents per kwh, according to World Bank estimates.

Zantout points to several ways by which Lebanon could offload its electricity burden, highlighting three areas in Lebanon with significant potential of wind electricity production: Akkar, Marjayoun and Bekaa. “One could reasonably develop around 1,000 MW through wind farms in Lebanon,” says Zantout. As for solar, he advocates using micro installations: solar panels on rooftops of buildings.  With high electricity costs to start off with, Zantout says he does not see the need for tax breaks or incentives, such as those adopted in countries already well advanced in renewable energy, among them Germany and Japan. “I may sound like a very bad salesman, but I do not see the need,” he says.

Zantout says he is also a strong advocate for ‘net metering,’ which he calls “a must in Lebanon”. Net metering is an electricity policy through which consumers can feed their unused renewable electricity to the national grid, or take from the grid extra energy when needed, and then pay for the difference. EDL is the sole provider of electricity to the country by law, though not practice, and thus curtails private companies from supplying energy to the national grid. However, a milestone was reached in December 2011 when EDL launched the net-metering system in Lebanon, and EDL’s general director Kamal Hayek stated last month that 21 customers had so far signed the net metering contract. The central bank is also on board, providing subsidized loans with low interest rates of 0.6 percent and long repayment periods of up to 14 years to boost the installation of renewable energy systems.

With an ambitious target set at the Copenhagen Climate Summit to produce 12 percent of total electricity through renewable energy by 2020, Lebanon’s renewable energy “to do list” is extensive. Zantout has high prospects for Solarleb, which is engaged in wind and recycling too. He says the company generated $3 million in revenues last year, its third year of operation, and a net income of $600,000. He says he expects revenues to grow 50 percent over the next five years as many more projects — which he did not disclose — are in the pipeline. He believes the projects put in place this year will create awareness and Lebanon should eventually become more open to adopting solar energy.  

“Lebanese people are scared to try something new, they always feel there is a catch while there is no catch,” says Zantout. “When they see a solar street light always on, it will become reality, it will create awareness and it should work towards increasing the adoption of solar energy.”

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Real Estate

Bumpy road to reality

by Jeff Neumann
written by Jeff Neumann

In some ways, reality is finally settling in with real estate developers in Lebanon. After years of unprecedented growth, the sector is waking up to the harsh effects of a continuing global financial downturn. Political and humanitarian crises in Lebanon and Syria have had a direct effect on sales and have increased investor wariness. And the ever-shrinking availability of feasible land has compounded an already chronic shortage of it in such a tiny country.

With those factors in mind, two clear trends are emerging this year: a move toward what some developers are calling “affordable” housing — smaller homes in Beirut selling for under $500,000 per unit, by their measure — and the construction of gated communities on the periphery of Beirut.

Along with this, the continued demolition of many of Beirut’s cultural landmarks — from the classic French and Ottoman-style homes and storefronts to neglected ancient ruins — in favor of luxury towers continues at a rapid pace. Legal and political wrangling over the city’s Roman-era Hippodrome downtown is unlikely to reach a resolution anytime soon, while Beirut’s Phoenician port was torn down on June 28.

While the country is without reliable and comprehensive figures for the real estate industry, across the board indicators suggest construction has tailed off. In the first quarter of 2012, the number of construction permits issued across Lebanon was down 3.5 percent over the same time last year, according to figures from the Association of Engineers of Beirut and Tripoli. Also in the first quarter, cement deliveries were down 4.2 percent over 2011. Put simply, it has been a rough year for the sector.

A more affordable future?
While it has become more noticeable now, the rush to build smaller, less expensive residential flats in Beirut is not exactly a new endeavor for some developers. According to Ziad Karkaji, real estate development manager at Premium Projects, his firm was ahead of the curve. “We anticipated demand for small to medium sized apartments two years ago, before many others,” he says. Karkaji points to properties in Ashrafieh where, he says, “we offered apartments starting from 178 square meters (sqm) in a very prime location where other developers were still offering 400 sqm to 800 sqm units.”

A relative newcomer to this segment of the residential property market, Nabil Sawabini, chairman of MENA Capital says, “We started to notice just over a year ago that there was a shift towards medium to smaller-sized apartments, and the shift was principally because the price per square meter went up considerably and people simply could not afford the larger apartments anymore.” After years of catering strictly to the highest-end buyers, MENA Capital is looking to its new Bella Casa — a three-tower residential development — to broaden its portfolio of properties and, in turn, appeal to a bigger segment of potential homeowners.

According to the latest World Bank figures, Lebanon’s gross national income per capita as of 2010 was $8,228, which puts it around the regional average. But it should be noted that “affordable” property, at least in the terms that local developers commonly refer to, pertains to a relatively small portion of society and purchasing power in Lebanon is overwhelmingly skewed towards a small, and richer, segment of society.

Pascale Saad, chief executive of Elie Saad Luxury Apartments (ESLA), says that even though luxury apartments are where developers have traditionally made their largest profits, the reality is that many Lebanese are now looking to spend well under $250,000 on a primary residence. “Once we got to a point where we saw that apartments were not being sold, we had to really take a look at the demands of people,” she says, adding that “if developers do not move in this direction they are not going to be selling.”

And it is not only offering smaller living spaces that will keep the sector afloat during a downturn. Some developers, like Karim Bassil, founder of BREI Real Estate Investment, are looking at any way possible to reduce operating costs and overheads, and with good results. “We have reduced our prices considerably in order to sell, and we have reduced our margins drastically,” he says. “We have done this before other developers and now we are really selling fast.” There seems to be a reticence in the industry to admit the true extent of the problem as Bassil declined to give specific figures relating to falling margins, as did every other developer Executive spoke to for this special report.

However, Bassil says that despite these measures, “It is so difficult to find an opportunity that can fulfill the requirements of the market. I am looking and I can’t find them. People today are asking so much for their properties.”

Going gated 
This year has seen a steady stream of announcements for new, self-contained gated communities in areas surrounding Beirut. For MENA Capital it is Bella Casa near the Adlieh roundabout in Beirut. ESLA has also joined in, with its newly announced Boutchay Hills project, which will overlook Beirut. When completed, it will be a massive complex of 51 buildings with 550 apartments ranging from 80 to 300 sqm each, and an additional 7,000 sqm of green public areas for its residents’ communal use.

Demand for gated community living is high, too. In just the first two days of availability, ESLA sold roughly 70 percent of Boutchay Hills.

Gated communities are meant to provide respite from a crowded metropolis, usually with wide-open spaces, self-contained shopping areas and a feeling that one does not need to leave their immediate area for anything if they so choose. The appeal is clear. But is a move toward this kind of living necessarily a good thing? 

In a chapter on the Middle East in the book “Gated Communities: Social Sustainability in Contemporary and Historical Gated Developments”, Samer Bagaeen argues that gated communities are stifling real, urban neighborhoods in many of the region’s cities.

“Gated living is being advertised as offering the very best of city living, which is about connecting with family, friends, and a ‘life you’ve always dreamed about’, offering urban life with all the amenities of a metropolitan center, and the added comfort of security of an exclusive community,” Bagaeen writes. “Although privacy and exclusivity feature prominently in the material advertising of these sites, there is no mention of the older mechanisms, such as kinship and social solidarity, which gave rise to the form of traditional cities historically associated with the Middle East.”

For now at least, a full-blown exodus from urban Beirut has not taken shape. But a combination of marketers preying on people’s security concerns and selling an escape from congested city living,  in addition to exorbitant prices per square meter in Beirut, the future could be a different story.

 

In search of green
With the apparent sector-wide shift toward both sequestered and sensibly sized living spaces, nearly all developers are starting to push the use of “green” technology — everything from on-site renewable energy sources to waste composting — for their new projects. Most Lebanese developers are late to the “eco-friendly” game and are rushing to cash in on what has been a profitable global enterprise for some time. But Karim Makarem, director at Beirut-based Ramco real estate advisors, is skeptical of some companies’ claims. “There are developers who are genuine and care about the environment, but there are many others who don’t quite understand what it means and they are using the word ‘green’ to encompass a lot of things,” he says. “It is slightly misused as a word. There is very little appetite from end users for green projects which leads one to believe it is more of a [public relations] stunt than a real movement.”   Marwan Youssef, sales manager at Seven Invest, boasts of his company’s new 30-unit “One” community in Ain Saade — where villas sell for between $2 million and $3 million each — and its commitment to environmentally friendly practices, such outfitting homes with solar panels and rain water filters. Nearly half of the site’s original 1,000 or so native pine trees will be cut down during construction, but he says each fallen tree will be replaced by two more. It is an ambitious project that benefits from sitting at the higher-end of the market, making its commitment to eco-friendly standards a tangible and affordable asset.

No longer a Gulf haven
A key component of demand in Lebanon looks to be shying away as the conflict in Syria spills into Lebanon and a steady stream of warnings by governments in the Gulf urging their citizens to stay clear of the country have clearly hurt the tourism industry. These warnings, most notably by the United Arab Emirates, Bahrain and Qatar, may not have a direct effect on potential property buyers, but the overall political climate that spurred these warnings certainly does. A mid-June Bank Audi report on the real estate sector states that property sales to foreigners dropped by 20.3 percent last year, the first year of the Syrian uprising and a year that started off with Lebanon trudging along without a government. Five steady years of foreign property purchasing in Lebanon has finally dried up.

That leaves developers Executive spoke to with one main target market: the Lebanese diaspora, which has always played a huge role in the real estate market, and little seems to be changing.  “Our main target is Lebanese living abroad — people who have saved money for the last 10 years and want to keep a pied-à-terre [foot on the ground] here,” says Youssef of Seven Invest.

Dark days ahead
According to Lebanon’s Real Estate Registry, transactions across the country contracted 6.7 percent in total value last year, whereas in the previous five years annual growth registered at 32 percent on average. The first quarter of this year is looking somewhat better, with the number of transactions up 4.0 percent year-on-year. Like nearly every developer and analyst, researchers at Bank Audi attribute this slump largely to local political disputes and regional instability.

The effect on the sector is clear. As Pierre Bou Jaber, CEO and Partner at Ven Invest Holding says, “I am bearish for the next five years to come, at least.” And some are even more pessimistic about the current state, such as Bassil of BREI Real Estate Investment, who estimates that Lebanon is perhaps in just the second year of a 10-year long slump.

“Today Beirut is so difficult. I may be wrong, but with such an oversupply of flats that will be finished in maybe two years, Beirut is going to have an enormous amount of empty flats,” Bassil says.

On the whole, developers know that the glory days of unchecked growth are over and are adapting accordingly. But in the lean years ahead, those who are the quickest and most adept at change and forecasting trends will stand the best chance of sticking around for the next upswing, whenever that might come.

 

This article was published as part of a special report in Executive's July 2012 issue

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Real Estate

Rent a mob

by Zak Brophy
written by Zak Brophy
Under normal circumstances writing about public policy in the real estate sector in Lebanon is akin to writing about the intellectual value of a parliamentary debate — there is just not much of the former to talk about in the later. Currently, however, a new draft law being discussed in the government has the potential to reshape the playing field for tenants, landlords and developers. How far it gets toward implementation is, as always in Lebanon, the major question.
 
The property market until now
Politicians have tended to adopt a decidedly laissez-faire approach to this lucrative corner of the Lebanese economy and policies are somewhat thin. After all, many of the men sitting in parliament have built their own fortunes from bricks and mortar and are wary of government interference.  However, changes are afoot and all is not business as usual.
 
Lebanon is anomalous, in that while land and property prices have climbed steeply skyward over the past couple of decades and luxury apartment blocks have sprouted unrelentingly from the earth, there are tens of thousands of people paying virtually non-existent rents. These somewhat contradictory realities are the consequence of a series of laws stretching back to the end of World War II (as was discussed in detail in Executive’s March issue).
 
As a new world order was being forged out of the rubble of war, Lebanon enacted the ‘old rent law’ to protect tenants from unscrupulous landlords. The legislation stipulated extending the existing contracts, even if against the landlords’ will, at the same rent. This law served its purpose in the short term but as the months turned into years and the years into decades, inflation ravaged the real value of the rents. Tenants were left laughing and landlords were left seething. “For the past over 70 years we have been living under the tyrant rule of rent control,” says Joseph Zoghaib, head of the Association of Landlords in Lebanon.
 
With the end of Lebanon’s notorious fifteen-year civil war in 1991 began the gargantuan mission of rebuilding the nation, and in 1992 rent law 160 was enacted, which went someway to addressing the imbalance between tenants and landlords. The law liberalized the real estate rental markets and allowed landlords to negotiate new contracts, but the legislation only allowed cosmetic adjustments to the amounts paid by tenants on ‘old rents’ — that is, rents from before 1992. As such there are now thousands of tenants enjoying their old rents from before 1992 while others are struggling with soaring prices. As the debate about a grand solution has moved back and forth, the law has been extended no less than a dozen times, and last expired at the end of March this year.  
 
The potential new game
As such, the country’s landlords and residents are currently living in legal limbo, uncertain as to whether the law will be extended once again or if a new piece of legislation, which is currently under consideration, will be passed and realign the perennial quirk of Lebanon’s old rents. A member of parliament (MP) on the Justice and Administration Committee — the body fleshing out the details on the new law before it goes to a vote in parliament — told Executive on condition of anonymity that, “Up until now I really am not sure if there will be an agreement. It could go either way.”
 
While there is near unanimous agreement that the landlords are being done an injustice, the dispute concerns how this can be corrected without throwing tens of thousands of tenants onto the streets. How many people are on old rents is a matter of dispute; Zoghaib claims there are 81,000 of which only 13,000 are poor Lebanese who need support; the parliamentary source claims there are around 150,000 of which up to 50,000 would not manage at market rates and argues, “If there are 50,000 who cannot pay what are you going to do with them? Are you going to send the police to throw them on the street like in America? There will be a kind of revolution in Lebanon.  You simply cannot do that here.”
 
Executive obtained a copy of the draft law as presented to the Justice and Administration Committee and it incorporates a number of measures intended to protect the tenants during the process of the landlord’s property being liberated. The proposal is to have old rents increase over a 6-year period to an amount agreed by the landlord and tenant and overseen by government appointed experts. The landlords will increase rents by 15 percent annually for four years and then 20 percent for the final two years. The tenant also has the right to stay for an additional three years at market rates if they request it at least three months before the end of the six-year period. 
 
There are also clauses relating to the conditions if a landlord wants to buy a tenant out during the six-year period.  If the landlord wants the property for their family they must pay four years rent after four years of rent increases, and if they want to demolish the building they must pay six years rent at the increased rates.  If properties are deemed to be luxurious these amounts will be halved.
 
For low income households there will be a government fund established to assist them with the rents over the nine-year period. What’s more there is a parallel law, which encourages the development of affordable rent-to-own housing.  According to the source within the Justice and Administration the legislation stipulates, “If you make a building and you rent it on a rent-to-own basis over a long period the law will give benefits to you. It gives benefits such as tax breaks and allows developers to build 20 percent higher than what is permitted in the building code, which the developer can do with as he likes.”  
 
The developers’ push
While the landlords have reservations about the law, Zhogeib says, “We have to accept it as it has the liberation clause, which liberates our properties after nine years.” Zhogeib is adamant that the only opposition to the law comes from the “communists”, but in reality the debate is far more complex. 
 
The fact is that the politicians that are preparing the law to put it to the floor in parliament are at loggerheads over who should receive government support and by how much.
 
The unnamed MP says, “There is still conflict over how much a tenant will take from the landlord if he decides to leave in the first year to free it up for a landlord to do as he likes. Should it be six years or nine years [rent]? And also for the poor people who are unable to pay the rent, how do we determine the standard for who the government will support? Is the line households earning LL2 million per month, or LL3 million or LL4 million?”
 
If the politicians fail to reach a consensus on these details within the law in their next session then the old law will have to be extended once again. This is anathema to Zoghaib, who threatens: “We’re starting to make a list of the influential people in parliament and society who are tenants on the old rents and we are going to make a CV of them, on what they rent, where and for how much.  We are going to scandalize them. I don’t care.”
 
A universal benefit that would likely ensue from the passing of this law would be the money earned by landlords that could be put towards the maintenance of buildings — the importance of which was tragically highlighted with the collapse of a neglected old building in the Fassouh area of Beirut that killed 27 people in January. What is more, if landlords are able to start earning market rental rates then there will be more incentive to protect Lebanon’s heritage buildings.
 
Mona el-Hallak, architect and member of the Association for Protecting Natural Sites and Old Buildings (APSAD), says, “Landlords need to be able to make money on these properties if they are going to have an incentive to maintain them and not destroy them.” After years of campaigning for the preservation of Lebanon’s heritage, Hallak is despondent about the management of urban planning and concedes, “I have come to accept anything is better than nothing. Really it is in that desperate a state.”
 
 
Corruption destroying communities
In addition to the years of heritage protection legislation being watered down or just flagrantly abused, Lebanon also has no comprehensive urban planning code.
 
“The Director General of Urban Planning (DGU) should have developed an urban planning strategy for the whole country but they have done nothing,” says Hallak. “They do little jobs here and there but nothing that is applicable.”
 
The DGU did publish a national land use master plan in 2005, but by the admission of a senior employee — who spoke on condition of anonymity to protect his job — “It is schematic and not specific.” Moreover, it is not binding.
 
One only needs to look out of the window to witness the consequent haphazard and incongruous development that is engulfing Lebanon.
 
As to the rules governing the actual construction and development of buildings, Lebanon has a building code. The unnamed employee at the DGU explains, “The building code is written by the DGU in collaboration with certain specific people and the developers have a large influence on this code.” 
 
Referring to the code, examples were given as to how the exploitation rate — the amount of floor space that can be built per square meter of land — has been increased to increase developers profitability.
 
What’s more the code is full of nuances, such as allowing more floor space to be developed if underground parking is made public, but by the admission of the DGU employee this is then just made private and no one checks up on the issue. “There is something wrong in our regulation,” says the DGU employee. “It is so free that there are gaps that the developers can go through and do whatever they want.”
 
One of the most divisive trends in Lebanese real estate is the increasing predominance of high-rise towers shooting up around the city, and especially among heritage clusters. Any building that is more than 50 meters tall needs to get permission from the DGU, but as the DGU employee says: “Why do they always seem to get permission? Well, there are no criteria within the DGU to say when we can build 50 meters, or 100 meters.  At the end of the day these big buildings belong to the nation’s major developers and they are working with political backers.”
 
Due to the absence of any coherent urban planning policy, and with the powerful hand of the development companies and speculators reaching into the institutions and even the laws that govern the sector, there is no holistic approach to development and construction.
 
“The laws have not been outlined in the interest of the community, not after a study of the socio-economic areas, not after a study of the welfare of the communities, but they are a result of the pressure from the landowners and speculators for the maximum coefficient of land use irrespective of the damage it creates to the community,” says Assem Salem, former president of The Order of Architects and Engineers.
 
Shifting the focus back to the suits in parliament, all property owners in Lebanon — whether they are big fish or small fry — will have their eyes on Finance Minister Mohammad Safadi’s proposed budget for 2012, as it contains a proposal for a capital gains tax on all real estate transactions. The plan that has been put forward is a 4 percent tax on the sale of properties purchased before 2009, whereas real estate owned since 2009 would be subject to a 15 percent tax.
 
While the government could certainly use the extra dosh and some argue it will reduce real estate speculation, many industry insiders argue the timing is wrong for such a fiscal policy maneuver.
 
If it was going to be done it should have been a few years ago when the market was strong,” says Karim Makarem, director at Ramco Real Estate Advisors. “Now it is plateauing and needs support. This will not help.”
 
Whether parliament actually passes the law in its draft form or dilutes it into impotence, or passes the budget (which last happened last in 2005), is yet to be seen. And then, even if it is passed, it will have the hurdles of political duplicity and weak institutions to vault before implementation. Given this, the continued chaos amid Lebanon’s urban development likely has some time remaining to play.

This article was published as part of a special report in Executive's July 2012 issue

 

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Real Estate

The love is gone

by Maya Sioufi
written by Maya Sioufi

The happy marriage between Mr. Bank and Ms. Real Estate seems to have lost some of its luster of late, becoming more of a relationship that both parties are resigned to accept for the sake of keeping the house — Lebanon — together.

On the surface, if we do the math, there is no need for the couple to seek counseling over the current exposure of Lebanese banks to the real estate sector. Out of the $44 billion which was lent to the private sector by Lebanese banks last year, a total of $13 billion was handed to the real estate sector in the form of housing loans or construction loans — that is around 30 percent of the total private sector loan book of banks and 19 percent of the total loan book. By comparison, the Spanish real estate and housing market, which is under severe pressure, accounts for 54 percent of the total loans of their local banks, forcing the banking sector to ask for a hefty bailout. Demand in Lebanon, according to experts Executive spoke with, is also primarily based on end users as opposed to speculation; given this, the banking sector’s exposure may not be worth rattling about. Of the $6 billion the construction sector added to economy last year, according to Bank Audi estimates, developers received $1 billion from banks and had to fund the rest themselves either through presales of flats or their own capital. “The real estate sector relies on around 80 percent of their own financing so it is not highly leveraged and it is not pressured to sell,” says Marwan Barakat, chief economist at Bank Audi. “That’s why there isn’t much pressure on [housing] prices.”

Omar Shantouf, general manager at FFA Real Estate, concurs: “Developers are not that highly leveraged and they can afford to sit on projects. They might sell one or two apartments at lower prices but they won’t advertise this, there is no such thing as a fire sale in Lebanon.”

As for housing loans, 36 percent of total property sales were funded by loans from the banking sector in 2011, up from 9 percent in 2007, and the remainder was funded by homeowners’ capital according to Bank Audi research. “That’s a moderate level even though it increased in past years,” says Barakat. 

The honeymoon is over

Many heated debates at the dinner table, however, have centered on whether Lebanon’s lady of real estate has gotten a little big for her britches in recent years. Indicators of activity within the real estate sector are starting to paint a gloomier picture. Cement deliveries, an indicator of current construction activity, dropped 4 percent in the first quarter of 2012 after increasing 6 percent in 2011. Construction permits, an indicator of future supply, dropped 4 percent in the first quarter after dropping more than 6 percent in 2011.

Economists and financial experts Executive spoke with played down any concerns: “95 percent of our projects are sold to end users, people buying to live in it and not to speculate,” says Ziad Maalouf, chief executive of Capstone, a private investment firm. “Today, there is no risk of seeing a bubble in the market explode.”  In the construction sector, banks have handed out a total of $7 billion in loans, which represents 16 percent of total lending to the private sector. “The share of the construction sector to total loans is similar to the one of the construction sector to GDP so we didn’t over lend to [real estate]” adds Barakat, given that the share of the construction sector to the country’s gross domestic product stood at 15 percent, according to the 2010 National Accounts of Lebanon, the latest official breakdown of figures for GDP available.

While banks may lend according to the economic logic they devise, they are now faced with developers who are finding it more challenging to offload flats, which a few years ago were selling like hotcakes. “Banks are becoming more selective because of the situation in the real estate market today. They are worried about demand and supply,” says Maalouf.  As banks become pickier, they look for trendier projects. Demand has shifted from large-sized apartments, over 200 square meters, to medium-sized apartments, between 100 and 200 square meters, and from Beirut to the suburbs according to Bank Audi research.  “If you go to the bank and ask for financing for a project with flats of 600 square meters in size, no one gives you a loan. You have to go with the right project and the right sizes,” adds Maalouf.  With land prices still increasing and flat prices in tow — albeit at lower levels than in previous years — homebuyers are finding it more and more difficult to pay for a roof over their heads. “Homebuyers can’t afford to buy houses anymore because the prices of land have gone up in the lift and our income is going up the stairs,” says Antoine Chamoun, general manager at Bank of Beirut Invest. 

Competition on the rise

Homebuyers have also been visiting bankers more regularly in recent years. Housing loans leapt by 33 percent last year — receiving the bulk of the increase in private claims — to reach $6 billion. The central bank had a significant role to play in giving banks incentive to lend their liquidity and in helping the Lebanese folk fund their pads. The central bank’s circular of May 2009 provided an incentive for banks to lend in Lebanese lira by reducing their reserve requirements as long as rates applied to clients are within a certain limit — 40 percent of a one year Lebanese Treasury bill plus 3 percent. “It created a boost in terms of supply and demand,” says Basil Karam, head of retail at BankMed.

“The central bank helped us developers by helping home owners buy flats, helping banks to lend and helping activity in the country,” adds Maalouf. “It is the best thing that happened to the sector.” This has fueled the development of a love-hate relationship between homeowners and bankers. For bankers, it became a lucrative business. Struggling to deploy their excess liquidity — deposits stood at $120 billion, or around three times GDP, in the end of the first quarter — with interest rates globally at record low levels and a dearth of investment opportunities within Lebanon and in the shaken region, extending loans to the housing sector became a thriving business and everyone jumped on the bandwagon. Yet what that also meant was that the central bank indirectly propped up a housing market, where prices were continuously rising and thus impacting the affordability of housing in the country.

“Banks have been under pressure on their interest margins in the past few years because their liquidity is not yielding [returns] anymore both outside and inside Lebanon, so they are having to lend more,” says Barakat. As banks increase their offering for home loans, competition is getting fiercer and along with it, the advertising wings of the banks are becoming more active to lure clients their way. Billboards for home loans seem to be popping up on almost every corner. 

With rates on loans in Lebanese lira being controlled by the central bank, the competition is now on the dollar loans. “Some banks are reaching their allowable limits in extending subsidized loans in Lebanese pounds,” says BankMed’s Karam. “They will have to focus more on dollar-based loans and cut prices to attract more loans. In dollars, there is price competition, big time.” 

Chamoun agrees, saying that, “The competition on loans in Lebanese pounds [subsidized loans with the central bank and with the Public Corporation for Housing] is low because the features of the loan are imposed and there is very little difference among banks on these loans, but on the dollar, banks are putting their own features.”

While there is room to increase lending further to the housing sector, growth is unlikely to be as significant as in previous years given that it was coming off a low base, according to Barakat.  This could lead to continued competition in the sector and “it should be like this and the best offer should win,” adds Chamoun.

Increasing competition would be a welcome respite for homebuyers struggling to keep up with the elevated real estate prices. As for developers who have funded their current projects with low leverage, they are largely sitting on their pile of stock, putting  upcoming projects on hold and staying firm on prices. For developers quick to adapt to the changing dynamics, projects outside Beirut with smaller flat sizes are being developed, and thus those selling homes will likely have to do with transactions that were not as large as they previously enjoyed. 

As BankMed’s Karam points out: “Lebanese will continue to borrow to buy homes but the average ticket size wont be the same.”

 

This article was published as part of a special report in Executive’s July 2012 issue

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Finance

INSEAD’s Professor Theo Vermaele

by Executive Staff
written by Executive Staff

Professor Theo Vermaelen, the Schroders Chaired Professor of International Finance and Asset Management at the INSEAD business school discusses with Executive how the ‘small people’ caused the 2008 financial crises, Facebook’s IPO flop and Lebanon’s conservative stance on derivatives trading on the sidelines of a recent conference titled ‘Challenges of the New World Economy: Are we in a Post Globalization Era?, at the Phoenicia in Beirut.

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