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.”

0 comments
0 FacebookTwitterPinterestEmail
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

0 comments
0 FacebookTwitterPinterestEmail
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

 

0 comments
0 FacebookTwitterPinterestEmail
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.

0 comments
0 FacebookTwitterPinterestEmail
Real estate

For your information

by Executive Editors
written by Executive Editors

Political tensions, market volatility hit Solidere

It has been a roller coaster ride for Solidere so far this year, mostly due to a shaky security situation in Lebanon, but also because of a sector-wide drop in sales. The property developer’s A and B shares dropped of 3.1 percent and 4.19 percent, respectively, in the third week of May on the Beirut Stock Exchange after violent clashes across the country. However, share prices climbed back up to $12.5 and $12.34 by the end of trading on May 25. As Executive went to press at the end of May, the developer’s global depository receipts listed on the London Stock Exchange were down 29.6 percent since anti-government protests began in Syria last spring. Many local analysts predict that if Solidere shares remain in free fall, major shareholders Bank Audi and BankMed would initiate a buyback scheme to boost prices, as they have done in the past.

Construction down, again

According to figures released by the Order of Engineers in Beirut and Tripoli, construction in the first four months of this year is down 10.5 percent from the same time last year. The most significant drop was in April, which saw a 26.5 percent dip in the number of new building permits over the same period in 2011. The Order of Engineers attributed much of the decline to the worsening situation in Syria and its effect on Lebanon. These figures follow a general downward trend over the last year for the entire sector. A Citi Research report, MENA Construction Project Tracker, showed in April a regional drop of 30 percent in the number of new projects awarded across the Middle East and North Africa.

Cityscape award goes to Abu Dhabi’s Sorouh

Sorouh Real Estate Company won the 2012 Cityscape Abu Dhabi award for the best mixed-use project in the region for its Sun & Sky Towers development in Abu Dhabi. Sorouh Chief Operating Officer Gurjit Singh said the development had attracted “over 900 families” after the award announcement. The Sky Tower stands at 74 floors, and the Sun Tower is 65 floors, making them the tallest buildings in Abu Dhabi. The company broke ground on the towers in 2007 and the first tenants were able to move in last year.

Beirut Property Fair

The annual three-day Beirut International Property Fair took place at the Conference Center of Hilton Beirut Habtoor Grand Hotel at the end of May. The event featured talks on attracting foreign investors to Lebanon, social media marketing strategies, investment in green technologies, and construction site safety. A general theme of smaller, more affordable apartments highlighted this year’s conference as Lebanese property developers slowly adjust to the realities of a general downturn in the local real estate market. Beirut-based investment firm MENA Capital used the event to launch its new 10,000-square-meter Bella Casa gated community in Beirut (see page 88).

UAE property agency welcomes criticism

Emirates-based property agency Better Homes is attempting to take the lead in a transparency drive for the sector, by creating an online rating system where customers can rank the performance of individual real estate agents directly on its website. The idea is to enable prospective buyers, and those who have already purchased property, a chance to rate and discuss their experiences in a public forum. “Honest and open customer reviews will enable new customers to find the best agents,” Ryan Mahoney, chief executive of Better Homes, told the Abu Dhabi-based newspaper The National shortly after the rating system was launched last month.

Palm Jumeirah courts young buyers

Emirates property developer Nakheel will soon expand its residential offerings on the Palm Jumeirah after it said financing had been secured for 192 studio apartments. The new development, Palm Views, “will appeal to young, vibrant individuals and couples who want a prestigious address at a price they can afford,” Nakheel chairman Ali Rashid Lootah said at a press conference. Studio apartments are 150 square meters, and start at AED1 million ($272,000). Palm Views will be split into two towers, each with 96 residential units. Construction is slated to begin by the end of this year, with first delivery expected in the first quarter of 2014. Palm Views will follow a regional trend that has new developments moving away from the higher end of the market to focus on first-time buyers.

Awards handed out at Cityscape Qatar 2012

Cityscape Qatar 2012 awards were announced on the last weekend of May. Notables included Best Sustainable Development Award, which went to Msheireb Properties for its Msheireb Downtown Doha project, and the Residential Project Award, given to Qatar-based United Development Company for its offering, The Pearl Qatar, which won for Mixed-Use Project. Other winners included Hamad Medical Corporation, Barwa Real Estate, and Qatar National Hotels Company. A number of large deals were also announced at Cityscape Qatar, and Barwa Real Estate Group used the conference to officially launch its Lusail Golf Residential Development. “The number of agreements signed at the event are themselves a testament to the leading role Barwa continues to play in Qatar’s development,” Barwa’s chief executive officer Abdulla Abdulaziz Al Subaie told reporters after the launch.

Bahrain property sold ‘at a loss’

According to a report by international real estate consultancy CBRE, Bahrain’s residential property market has taken a serious beating since anti-government protests began there last year. The report noted that: “Several middle-income housing projects have been launched in Bahrain in the last three months, and sales have reportedly been brisk to date.” But things are so bad that “that some of these projects are effectively being sold at a loss, or at best, cost price, in order to stimulate the market and raise the profile of the ongoing master-planned projects of which they are merely [at] a very early phase,” the report said. CBRE offered little hope for the immediate future as Bahrain’s public image remains tarnished by a brutal government crackdown on dissidents in the Gulf country.

0 comments
0 FacebookTwitterPinterestEmail
Economics & Policy

The devil’s details

by Malek Takieddine
written by Malek Takieddine

In its drive to become an oil and/or gas producing country, Lebanon currently faces the challenges of establishing and implementing a sound regulatory framework and an effective Petroleum Administration, the sector’s (supposedly) independent regulatory body.

Some of the most crucial aspects of the required system include creating farsighted mechanisms that will first prevent the occurrence of a number of problems that are commonly encountered in hydrocarbon producing provinces, and second, equip the Lebanese government with sufficient powers to address such problems swiftly and efficiently as they arise throughout the development of the upstream oil and/or gas industry in the country.

National vs. IOC interests

Arguably one of the worst oversights that can be committed by the early drafters of oil and gas legislation is the assumption that International Oil Companies (IOCs) would be always seeking to diligently explore their acreages in search of hydrocarbons, and that once they have found oil and/or gas, they would be eager to exploit it effectively and quickly.

Experience around the world shows that not long after licenses are granted or discoveries are made, some areas are often left to lay fallow and national governments discover that they do not have adequate powers to impose work obligations on the IOCs. As a prominent observer of the United Kingdom offshore licensing regime once noted, “the idea that licensees might make significant discoveries but then not develop them does not appear to have occurred to those who first drafted the offshore licensing arrangements in 1964/1965”.

In the UK, for example, rigorous state action was needed to address this problem and the government had to undergo the complexities of enforcing a “voluntary” scheme in order to rectify the situation of fallow areas and discoveries. The result was a shy governmental process that raised some concerns about the legality of such measures.

The efforts undertaken so far by the Lebanese government in drafting the offshore hydrocarbon legal framework suggests that the country is slowly making steady progress in the right direction. It is imperative to continue along this positive trajectory by appointing a Petroleum Administration that can play an effective role in monitoring, at a close distance, the petroleum operations to be undertaken by the IOCs.

Foresight needed

It can be also predicted that, in light of the current position of the Lebanese economy, the mere discovery of commercial oil and/or gas reserves would  understandably be interpreted as a promising sign of future wealth, regardless of the quantities that would actually be produced.

Yet, once the initial joy of the first few barrels fades away, the Lebanese government must be well prepared to monitor the efficiency of its production and to make sure that its licensees are conducting their operations using the best practicable standards and methods to ensure acceptable recovery levels out of each reservoir.

The technical expertise and skills of the licensees (the operators) usually play a crucial role in determining the levels of recovery (i.e. how much oil and/or gas could be practicably produced).

For instance, a 70 percent oil recovery from an oil reservoir is considered to be a high percentage as it is almost impossible to extract entire reserves of any particular reservoir due to the constant reduction of pressure and the interference of other factors, such as oil density and depth of the reservoir, amongst others.

Countries such as Saudi Arabia are constantly aiming to increase their investments in enhanced recovery technologies, as they recognize how vital this is in order to boost recovery rates at their reservoirs from around 50 percent to 70 percent.

Once again, the Lebanese regulator must ensure that the government’s powers under any exploration and production agreement offer useful mechanisms for pushing the licensees towards more efficient recoveries, that is to say better stewardship.

In due course the government must put in place adequate mechanisms whereby field activities would be surveyed (preferably on a yearly basis) to determine the performance of each licensee (operator).

A process to deal with underperforming fields must also be decided. Such a process could, for example, include an initial consultation exercise between the government and the licensee (operator) to study possible ways to enhance stewardship. A set of targets could thereafter be agreed in conjunction with a clear and firm set of sanctions.

Failure to address certain crucial issues in the initial text of petroleum regulations and agreements could have disastrous consequences on the national interest and result in huge resources being lost or at least deferred. 

Effective revenue management

In addition to operational efficiency, an important matter that Lebanon must consider is the efficient management of its hydrocarbon revenues. Hydrocarbon resources are known to inject considerable financial revenues into state accounts. These revenues would usually have two main characteristics: one, they are likely to constitute a large percentage of the total yearly revenues of the state; and two, they are temporary. As a result, several unfavorable consequences could be noticed in the national economy:

(i) Inflation due to the sudden increase in money supply.

(ii) An occurrence of the Dutch Disease, meaning the depreciation of the productive sectors as they becomes less competitive due to the oil-related increases in exchange rates.

(iii) An unstable budget balance due to the volatility of oil prices.

(iv) A decrease in income when the resources of the province begin to decline.

As part of the economic strategies that governments undertake to surmount the above challenges, national oil funds are often created by governments to accumulate and manage part of, or the entirety of, the state’s oil and gas revenues. In total, close to 20 petroleum-producing countries are known to have established national oil funds.

The specific purposes of such funds varies between countries; for instance, Norway’s aim is to use its fund to stabilize of the economy and to secure a steady income for future generations, even after the resources dry-up. Russia, however, does not give priority to saving for future generations and the purpose of its oil fund is, according to Vasily Astrov, an economist at the Vienna Institute for International Economic Studies: “reduce the vulnerability of the state budget to the volatility of world oil prices,” and to sterilize “the impact of oil-related foreign exchange inflows on the money supply and inflation.”

To Lebanon’s credit, the Lebanese Offshore Hydrocarbon Resources Law provides a clear provision that state hydrocarbon proceeds shall be injected into a sovereign fund.

The strategy shall be to keep the capital and part of the proceeds in an “investment fund for future generations”, while using the remaining funds to “guarantee the rights of the state and avoid serious, short or long-term negative economic consequences”.

In theory this is an excellent provision, however, the practical benefits thereof shall be largely affected by the seriousness of the special law that needs to be enacted by the Lebanese parliament to define the management structure of the sovereign wealth fund, and its investment principles, not to mention the effective implementation of such law. A close eye should be kept at how the Lebanese authorities will perform in the coming years in this respect.

Worthless oil and gas?

Indeed, some critics may argue that Lebanon’s oil and gas resources would be worthless to the country if they are badly managed and exploited. As the coming decades will show, the true worth of these ‘valuable’ resources will come down to the ability of the Lebanese authorities to manage this industry with high technical capabilities, foresight and transparency.

MALEK TAKIEDDINE is a legal consultant in the oil and gas sector and managing director at Al Jad legal firm

0 comments
0 FacebookTwitterPinterestEmail
Economics & Policy

For your information

by Executive Editors
written by Executive Editors

NSSF raises coverage costs

The National Social Security Fund (NSSF) has increased its rate to cover an overnight stay in private hospitals from LL30,000 to LL90,000. The move came after private hospitals threatened to stop taking NSSF patients because the rate was too low in the face of increasing costs of care. This increase in coverage will be met with a rise in the ceiling of employees’ monthly contributions to the sickness and maternity category from LL30,000 ($20) to LL50,000 ($33). In this category, employers pay 2 percent from an employees’ salary, but this was previously capped at LL30,000 for salaries over LL1.5 million ($1,000). Under the new agreement the maximum contribution has been increased to LL50,000 by raising the salary cap to LL2.5 million ($1,666). The NSSF suffers from serious problems relating to underfunding and understaffing, with 45 percent of its positions vacant and the average age of employees exceeding 51 years old. According to the fund, the government’s accumulated obligations at the end of 2011 amounted to LL829 billion ($550 million), while they only received some LL120 billion ($80 million) from the state’s coffers that same year.

Spending in uncertainty

The Lebanese are continuing to spend, with private consumption for the first quarter of 2012 up on the same period in 2011. Investment spending is also up but at a markedly lower pace. Total spending, measured by the aggregation of cleared checks, point of sale and ATM transactions, edged up by 3.1 percent year-on-year in the first quarter of 2012, reaching $19.2 billion. This compares to the 1.5 percent increase in spending registered in the same period in 2011. The total cash withdrawals from ATMs by Lebanese residents increased by 7.9 percent annually, while point of sale purchases increased by 24.6 percent on a yearly basis. The figures show the Lebanese are continuing to increase expenditures despite the fragile economic and political environment that has prevailed, locally and regionally, since early 2011. The investment component was up at a comparatively lower pace due to uncertainty over the Lebanese and Syrian security situation. Imports of investment products went up a mere 2.3 percent year-on-year in the first quarter of 2012.

Logistical failure

Lebanon has crossed the finish line in 96th place in a global survey on logistics, slipping from its place at number 33 in the same survey in 2010.  The World Bank’s Logistics Performance Index (LPI) assesses the logistics gap among 155 countries and reflects perceptions of the logistics environment of trading partner countries. Lebanon also fell from 4th place to 26th from 2010 to 2012 among the upper-middle income countries category. The results are based on a survey of operators across the world who give feedback on the logistics of “friendliness” of the countries in which they work. It assesses customs procedures, logistics costs, infrastructure quality, the ability to track and trace shipments and timeliness in reaching destinations.

Upping industry, outing taxes

The Ministry of Industry has signed a deal with the American University of Beirut (AUB), the National Council for Scientific Research and the Lebanese Industrial Research Achievements program (ILRA) to improve the quality of industrial research in Lebanon. It is hoped the agreement will contribute to helping Lebanon generate industrial high value-added products for the economy while enabling AUB students to conduct academic research relevant to industry. Elsewhere, the Ministry of Industry said that a long sought-after law to reduce taxes on industrial exports by 50 percent was approved by the cabinet but was awaiting ratification from Parliament. Industrial exports amounted to $527.1 million in the first two months of 2012, up 10.6 percent from the same period in 2011. The sector as a whole constitutes 7 percent of gross domestic product according to the most recent figures. In 2002 the sector constituted around 11.5 percent of GDP.

MEA profits crash

The nation’s flag carrier Middle East Airlines (MEA) announced a 55.9 percent drop in operating profits between 2010 and 2011. It is not possible to verify the actual financial statement of MEA as it does not publish a detailed balance sheet or income statement, but the company’s chairman Mohammad Hout said the operating profits had dropped from $90.6 million in 2010 to $40 million in 2011. He blamed rising fuel prices, increases in wages and turmoil in the Arab region. Lebanon entered into the top bracket of the open skies policy in 2002, which liberalized aviation and increased competition in and out of the country, but Hout has complained that not all countries in the region are abiding by the agreement’s rules. The ex-head of Lebanon’s civil aviation authority, Hamdi Shawk, claims the Minister of Transport and Public Works, Ghazi Aridi, and MEA are retreating from the policy of liberalization. Neither the minister nor MEA responded to Executive’s repeated requests for comment. The company is more than 99 percent owned by Lebanon’s central bank and previously mooted plans to partly privatize the carrier by listing on the Beirut Stock Exchange appear to have been shelved.

Electrified employees

The government-owned electricity provider Electricite du Liban (EDL) was wracked by open-ended strikes, protests and sit-ins by part-time and contract workers last month. As workers protested against the cabinet’s failure to endorse their full-time employment draft law. The workers have been pushing for permanent employment with full benefits, voicing fears that they will lose their work to service providers. The EDL employees association claims that there are only 1,700 full-time employees at the company while it needs more than 5,000. The Minister of Energy and Water, Gebran Bassil, told reporters that “the company cannot contain more [permanent employees] than it can bear.”

Gray days ahead

Lebanese youth have a more downbeat view of their economic prospects than their Arab counterparts, according to a new report. The ASDA’A Burston-Marsteller 2012 Arab youth survey indicated that 63 percent of Lebanese youth are very concerned about the rising cost of living, 63 percent are worried about the economy and 60 percent are worried about unemployment. While the same proportion of Arab youth are concerned about the rising cost of living, only 48 percent are worried about the economy, and 44 percent are worried about unemployment. More than half of the respondents said that they had fewer opportunities than they did 12 months earlier. The survey covered the United Arab Emirates, Oman, Qatar, Bahrain, Saudi Arabia, Kuwait, Egypt, Jordan, Lebanon, Iraq, Tunisia and Libya.

Typically below potential

Lebanon’s projected real gross domestic product growth (GDP) of 3 percent in 2012 is well below the economy’s potential, according to the International Monetary Fund (IMF). It identified the implementation of strong domestic policies as essential to stimulating confidence, which requires good fiscal discipline to reduce the debt-to-GDP ratio downwards from its current standing somewhere around 140 percent. The IMF identified the need for reforms in infrastructure, as well as improvements in the business climate to help create a dynamic economy and boost job creation. This comes on the heels of a UN study that highlights that the labor-intensive productive sectors have been marginalized in Lebanon, contributing to lower productivity, higher unemployment and the exodus of much of the nation’s young talent.

0 comments
0 FacebookTwitterPinterestEmail