Real Estate

Executive Insight – European investors look to Lebanese real estate

by Ziad Maalouf
written by Ziad Maalouf

In August this year, Capstone Investment Group was trying to conclude the acquisition of a prime piece of land on Abdel Wahab El Inglizi Street in Ashrafieh. As part of our private equity activities, we invite a select group of high-net-worth individuals to join us in each investment, and allow them up to two weeks to send us their indications of interest. In that specific deal, and since everyone perceived the real estate market in Lebanon to be bearish, we gave investors one month to get back to us. However, within only a week, the deals were two and a half times oversubscribed; demand came from Lebanon and the Middle East as well as Europe, not only from Lebanese or Lebanese expatriates but European individuals and institutions.

Of course, we were only able to accommodate a limited number of investors, but the unusual interest from Europe was baffling. After all, the political situation in Lebanon leaves much to be desired; economic growth has slowed down, the real estate sector is going through a perceived period of stagnation and the region in general is in the process of upheaval. So why would Europeans want to invest in Lebanese real estate at this time?

Simply because Europe’s economic woes are no better and the venues for viable investments are drying up. Inflationary pressures are rising, stock markets are sluggish and cash at the bank has been losing value. Furthermore, the exponential spike in public debt in many countries, without a feasible plan in sight to reduce it, has put the whole fundamentals of the Eurozone in question. As a result, some are saying that the developed world is heading towards Japan-style stagnation.

In contrast, the real estate sector in Lebanon has traditionally been one of the country’s most successful after banking and tourism. Given the scarcity of land and the steady demand from both residents and expatriates, Lebanon’s real estate has always been considered an attractive low-risk investment, which over the years, and despite the chronic political instabilities, has generated decent returns.

Furthermore, reduced interest rates, low taxes, high liquidity and the availability of long-term financing from Lebanese banks, considered fiscally conservative by international standards, are contributing to the fundamentals and resilience of the market. In addition, foreign investments remain robust and are expected to reach over $5 billion in 2011, with more than 60 percent allocated to real estate. According to the International Monetary Fund, the attractiveness of Lebanon as an investment destination has been, to a large extent, boosted by the faith in its real estate sector. 

While regional peers from Dubai to Morocco suffer, demand for properties in Lebanon continues unabated and prices in general remain stable, despite certain predictions to the contrary. It is true that the market experienced a period of unusual growth between 2005 and 2009, but all indicators today point to normal growth rates, supported by the unwavering demand from Lebanese expatriates who buy real estate in their homeland as a long-term investment and not for speculative purposes. In fact, it is estimated that more than 80 percent of the market is driven by end-users and not by speculators.

There is no doubt that a significant amount of capital is sitting idle in Europe looking for viable investment opportunities. If Lebanon is to attract international institutional investors, real estate development has to be transformed into a more sophisticated and professionally run business that abides by international norms of design, luxury and quality.

Most importantly, local developers will need to sharpen up their management skills and be able to set up the right financial and legal structures that optimize fiscal benefits and maximize returns, which in normal circumstances should not be less than 20 percent per annum. In my view, such returns can be achieved today by carefully investing in the right opportunities in smaller residential units, Grade A offices (which are in short supply in Beirut today) and retail, in addition to resorts, hotels and furnished apartments, as tourism continues to be an important pillar of the economy.

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Deciphering Turkey’s foreign policy

by Peter Grimsditch
written by Peter Grimsditch

In theory, not to mention in several hundred acres of newsprint, 2011 was the year Turkey’s foreign policy fell apart. The tabloid version of the ‘zero problems with the neighbors’ policy postulates that Turkey happily ignores the political shortcomings of a broad expanse of thugs, from Syria to Libya, Iran to Israel. By being diplomatically and commercially close to the unsavory leaders in each of these places, Turkey would gain influence, make money and help maintain an uneasy and fragile stability.

So when, by invading Gaza in 2009, Israel effectively sabotaged the Turkey-sponsored proximity peace talks with Syria, the foreign policy crafted by Ankara’s philosopher-politician Ahmet Davutoglu suffered its first punch in the midriff. This year, by cozying up to the regularly lamented Muammar Qadhafi while much of the rest of the world was plotting a bombing campaign in the name of protecting civilians, Turkey appeared recklessly out of line. However, it has emerged that Ankara was almost certainly looking both ways, by partly financing and supplying military training to the “rebels” from a fairly early stage.

Switching to the immediate next door neighbors and the continuing Syrian conflict, the easy narrative taken by most in the media is that Turkish Premier Recep Tayyip Erdogan hung in there with a bunch of murderers for far too long. His valiant efforts to act as regional bigwig urging reform were never likely to succeed and Ankara’s prestige was dealt a humiliating blow. Turkey’s ability to put forward a consistent policy was again in tatters when Erdogan inevitably flipped and announced that enough was enough and the whole unsavory Bashar al-Assad gang had to go.

Then there is the continued retreat from a cuddly diplomatic and military love affair with Israel, the increasing unlikelihood of implementing the theatrically staged signing of protocols with Armenia and the bold threat to dispatch warships to the Eastern Mediterranean to singe an Israeli beard if necessary — just how much unraveling can one foreign policy take?
Viewing the wood and not the trees throws up another perspective. The dynamic duo, the Batman and Robin of Turkish foreign policy — Erdogan and Davutoglu — are not stupid, short-sighted nor fickle. The chain of events inspired by the self-immolation of a Tunisian fruit-seller has had a profound effect on Turkey’s standing in the region and augurs well for an even more profound diplomatic and commercial marriage with the neighbors.

The Arab Spring has transformed Erdogan into the idol of many on the Arab street. The prime minister’s popularity at home is such that it would take a political earthquake to oust him and his party at the next elections. For his people the Qadhafis and Assads are irrelevancies, reminders only of the stoic attempts by Erdogan to spread peace, democracy and prosperity throughout the region. Just as a puppy is not just for Christmas, so foreign policy is not for a year or so, nor are banalities like zero problems with the neighbors the stuff of election manifestos. There is one succinct summary of foreign policy from 30 years ago that illustrates its peculiar characteristics. Told of Britain’s intentions toward the Falkland Islands around the time of the Argentinean invasion, then United States Secretary of State Alexander Haig characterized his British opposite number, Lord Carrington, as a “duplicitous bastard.”

It would be churlish to apply Haig’s crudities to other countries but the observation that all may not be as it appears is equally true. This rule applies also to Turkey, Israel and the US. The popular picture has Turkey and Israel in near open war but this doesn’t bear scrutiny. Despite Barack Obama’s disdain for the Israeli prime minister, though not as crude as Nicolas Sarkozy’s characterization of Benjamin Netanyahu as a liar, the US president is too shrewd to continue to openly embrace Turkey if they were as deeply hostile to Israel as the headlines would have it.

Ankara’s announced ambition as a regional broker and its pursuit of zero problems with the neighbors remains. The obstacles — having the neighbors infested with the wrong sort of leaders — are slowly being removed. Even the recalcitrant Israeli leadership may have to adapt to the changing world.

Peter Grimsditch is Executive's Turkey correspondent

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Palestine’s resurgent authority

by Ahmed Moor
written by Ahmed Moor

The year 2011 began with a great deal of uncertainty — perhaps even promise — for the Palestinians. Much of that had to do with the revolutionary fervor that had taken hold in the region. The ousting of Tunisia’s Zine el-Abidine Ben Ali and Egypt’s Hosni Mubarak were regarded by many young Palestinians as an opening — an opportunity to force open their own binds.

The March 15 Palestinian youth movement successfully captured and focused the energy of the Arab uprisings on the need for rapprochement between the Hamas and Fatah parties. After a period of stiff resistance by both political leaderships, efforts were made to the end to the rift that has bedeviled the Palestinians since 2007.

Not all progress on reconciliation in the first part of the year can be linked to the agitations of young Palestinians. Much of the impetus for the renewed political process was tied to the fact that Mahmoud Abbas was politically weaker after losing his main Arab sponsor, President Mubarak, while Hamas took account of Syrian President Bashar al-Assad’s increasingly isolated position — as Damascus had worked to counterbalance Cairo — and sought to buttress their legitimacy by engaging with the Palestinian Authority (PA), though for several months the deal that had been inked went nowhere.

That began to change as autumn approached. In 2009, September 2011 had been set as the deadline for the realization of Palestinian statehood by Salaam Fayyad, prime minister of the PA. In September 2010, United States President Barack Obama affirmed such aspirations by declaring that a Palestinian state would come to be in the next year.

As September 2011 approached and it became clear the claims would be pursued, Benjamin Netanyahu’s government began to issue hysterical statements about the potential consequences. Obama had long since walked back from his pledge, and his administration stated that any Palestinian moves at the UN would be vetoed.

Officially, the Americans and Israelis claimed that the only way to resolve the occupation was through bilateral negotiations. But in fact the Israelis were more concerned about the implications that recognition of the Palestinian bid would have for them in the International Criminal Court, International Court of Justice, and other international bodies that would become more accessible to the Palestinians. And the Americans, for their part, continue to cave in to the desires of the Israel lobby.

As part of their statehood development track, the Palestinian Authority also approached UNESCO, the education, science and culture promotion wing of the United Nations, for membership. Their approval prompted the Americans and Israelis to withhold their funding contributions from the organization.

The push for statehood had two very important consequences for both Hamas and Israel as the moves taken by the Palestinian Authority comparatively weakened both of the PA’s adversaries. For Hamas, a surge in Abbas’ popularity meant a corresponding dip in theirs. And for Israel, the Palestinian attempt to highlight Israeli intransigence succeeded magnificently on a global stage.

It was in this context that the Hamas-Israel prisoner swap was conducted. After more than five years of fruitless negotiations, the two sides agreed to exchange 1,027 Palestinians for one Israeli prisoner. While roughly 7,000 to 10,000 Palestinian prisoners remain incarcerated in Israel, the release of even a fraction of them greatly enhanced Hamas’ prestige. For Israel’s embattled prime minister, the move meant a temporary boost in his poll ratings as well.

But despite the political uproar, in the end the statehood bid that was submitted to the UN did not gain enough support for a vote, ostensibly, said Security Council members, because the Palestinians remained politically divided. In that way, the bid inadvertently created an added incentive for Hamas and Fatah to genuinely mend their rift. Khaled Meshaal — Hamas’ political leader — and Mahmoud Abbas met in November to discuss when elections could be held. Crucially, Salaam Fayyad agreed not to join the next government, a major point of contention for reconciliation.

As things stand it is difficult to foresee the future in Palestine and, given the symbolic nature of the UN bid, to assess 2011’s gains. But it appears that the drive to join international institutions is a sustainable one and, more importantly, elections for a national unity government are on track for May of next year. But, as ever, nothing is certain in Palestine. 


Ahmed Moor is a contributor to Al Jazeera English and is a Master in Public policy candidate at Harvard University's Kennedy School of Government

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Finance

Executive Insight – The foray into frontier markets and emerging economies

by Nadim Kabbara
written by Nadim Kabbara

For market participants and observers alike, 2011 brought about the sense that varying asset classes, which traditionally are not so closely linked to one another, had suddenly moved together in lockstep. This possibly shook some people’s belief in the benefits of diversification, attributed in modern times to Harry Markowitz under the Modern Portfolio Theory.

Riskier asset classes — from equities to high-yield fixed income and from real estate to currencies to commodities — have reacted in a similar fashion to the ebbs and flows of global headlines. Concerns of slowing economic growth from the two largest economies, the United States and China, uncertainty regarding the viability of the European Union and fears of a sovereign debt crisis in its southern members brought heightened nervousness and volatility to global markets.

Some market participants suggest that during times of market distress assets tend to move closer to, or to correlate with, one another. Looking at the severe stock market correction in 2009, correlation reached almost 0.9, according to MSCI index data (the maximum being 1 when securities move in perfect lockstep).

However, when markets are more volatile and risky — typically the time when investors cut back on perceived riskier assets and focus on safer holdings and domestic markets — the case for diversification across assets and markets should remain. One area where longer-term investors can capture higher risk-adjusted returns, while also benefiting from lower correlations to global markets, remains in emerging and frontier markets. The latter are economies with investable stock markets that have not reached the level of development found in emerging markets.

Within the context of weaker global economic growth, the International Monetary Fund has recently outlined the uneven two-stage recovery whereby emerging markets are leading economic growth, with 6 percent in real gross domestic product growth expected in 2012, compared to developed markets at 1.5 percent growth. Emerging markets boast growing populations, rising middle classes and current account surpluses, in contrast to developed markets that face aging populations and real sector issues in employment and housing, as well as required fiscal consolidation.

The MSCI Frontier Markets Index comprises the following countries from the Middle East and North Africa region: Bahrain, Jordan, Kuwait, Lebanon, Oman, Qatar, United Arab Emirates (UAE) and Tunisia. Qatar and the UAE are awaiting a decision by MSCI in December 2011 to be upgraded to emerging markets status, which would bode favorably for incumbents in these markets. Despite the higher risks in frontier economies, which consist of greater political uncertainty coupled with less developed economic, legal, financial and corporate governance frameworks, they have benefited from economic progress. While GDP per capita in frontier markets is low, at $4,200 on a purchasing parity basis in 2009, they achieved an average annual GDP growth of 4.4 percent between 2000 and 2009, slightly below emerging markets at 4.5 percent and double the rate of developed markets at 2.2 percent. In fact, 17 of the 20 fastest growing economies were from frontier markets over the same period, according to The Research Foundation of CFA Institute.

The relatively superior stock market performance of emerging markets is outlined using the latest MSCI index data. The MSCI Emerging Markets Index returned 6.8 percent on an annual basis over the past five years, as compared to 0.2 percent for the MSCI All Country World Index, and -5.2 percent for the MSCI Frontier Markets Index. While the MSCI Frontier Markets Index has relatively underperformed, the countries that comprise it represent more than 20 percent of the global population, 6 percent of global nominal GDP and 3 percent of global market capitalization, which suggests opportunities for investors as their economies and their stock markets reach the size and maturity of their more developed counterparts.

Longer-term investors should not overlook emerging and frontier markets as an area through which they can diversify their equity allocations and benefit from growing economies and markets less correlated to global developments. Despite the added volatility, equities have proven their place as an asset class that provides risk-adjusted growth to investor assets over longer periods of time.

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Juggling discontent in Jordan

by Peter Speetjens
written by Peter Speetjens

Jordan likes to promote itself as an island of stability in a region in turmoil, and in 2011 the country largely lived up to that reputation. While elsewhere the winds of change shook or toppled one regime after another, Jordan’s King Abdullah II managed to weather the storm and today sits as firmly as ever on his Hashemite throne. That is not to say his rule was not challenged. Encouraged by events in Tunisia and Egypt, thousands of Jordanians hit the streets in the first weeks of 2011 to demand reform. In contrast to his Arab counterparts, however, Abdullah did not opt for a violent response. Instead, he proved himself a skillful juggler of (empty) promises, while playing give and take with the country’s domestic forces, always careful not to upset his foreign allies.

Demonstrations are officially banned in Jordan, yet Abdullah allowed people to gather and vent their frustrations, albeit under the watchful eye of an overwhelming police force. Standing among the protesters one day in February, it was impressive to see the finesse with which the regime managed to mold and manipulate the crowds. Friday had become the “day of rage” in Jordan and, after prayer, some 5,000 people would gather with flags and banners in front of the Al Husseini Mosque in downtown Amman. They would then march in a straight line of about a kilometer to the edge of the Municipality Square. The street between mosque and square, however, as well as the square itself, were hermetically sealed off by a sea of blue uniforms and the rally was preceded by a small, yet loud group of pro-Abdullah demonstrators.

Abdullah furthermore pleased the crowds by axing then Prime Minister Samir Rifai, who was widely disliked for pushing through a free market agenda. In addition, Abdullah reinstated subsidies, raised government salaries and established a parliamentary committee to formulate a set of democratic reforms. As opposition leaders were invited to partake in closed door sessions, the Friday demonstrations gradually lost momentum. By May, few objections were raised when Jordan — though hundreds of miles from the Persian Gulf — filed a request to become a member of the Gulf Cooperation Council (perhaps not the region’s leading pro-democracy club). The move was warmly welcomed by Saudi Arabia, which rewarded its backyard neighbor with a $400 million grant.

A similar calm reigned this summer when the parliamentary committee’s proposed amendments were made public. They rather modestly called for an independent constitutional court, an independent electoral commission and the enhancement of civil liberties, including a ban on all forms of torture. Within the reforms the king maintains most of his considerable powers. He retains the right to appoint and dismiss the country’s prime minister and upper house of parliament, though he can no longer do so twice in a row for the same reason. Big deal. In October, he exercised his prerogative once again, sending home his second prime minister in a year. Out went newly appointed former general Marouf Suleiman al-Bakhit and in came lawyer Awn Shawkat al-Khasawneh. Once again Abdullah knew how to please the crowds.

Bakhit had done his job. Just weeks earlier, the lower chamber of parliament had passed “his” ironically named anti-corruption law, which actually targets accusations of corruption “without solid facts” with fines of up to $84,000. Bakhit had already showed his undemocratic colors when in May he had instigated a criminal defamation case against journalist Alaa al-Fazza, who had dared to publish an article about a Facebook group supporting the reinstatement of former Crown Prince Hamza over King Abdullah’s son Hussein. Fazza was jailed for “working to change the constitution by unlawful means.”

Today, Jordan’s “day of rage” still exists. Every Friday, the police routinely seal off the whole of downtown Amman, even though little actual rage remains. Up to a thousand people, nearly all members of the Muslim Brotherhood, still gather, shout and march. Most passersby, however, are more interested in shopping, while the few police who are there seem more relaxed. The pro-king choir still precedes the masses, yet even they shout less ferociously. Political reform in Jordan? Ah well, maybe next year.

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Stagnating in stability

by Nadim Houry
written by Nadim Houry

I never thought I would say it, but Lebanon was one of the most stable countries in the Middle East this past year. Many commentators and politicians expressed regret that Lebanon failed to capitalize on this to attract capital escaping the tumult of Cairo, Damascus and Tripoli. My regret is that Lebanon failed to use this opportunity to finally push forward reforms essential to make it a fairer and more transparent place.

2011 was a year of paralysis. The country had no government for the first six months, and while political life resumed in July following the formation of a new government, there was no progress on many draft laws — some that have been languishing in Parliament’s drawers for years — meant to prevent torture, improve the treatment of migrant domestic workers and protect women from domestic violence. The prisons are as crowded as ever. By the Ministry of Interior’s own account, the country’s main prison in Roumieh — a facility built for 1,500 inmates — held 3,700 in April of this year. Most troubling, 2,757 were awaiting trial. Faced with multiple inmate riots, Parliament finally approved the building of additional prisons in September but failed to tackle the real reasons behind the overcrowding: rampant overuse of pretrial detention and lengthy trials.

Lebanon’s military and security forces may be less intrusive than their Arab counterparts but there are worrying signs of increased harassment of activists and artists who criticize the army and certain high-ranking officials. In July, military intelligence summoned Saadeddine Shatila, of the international human rights group Alkarama, for his work documenting torture at the Ministry of Defense, and detained him for seven hours. Lebanese judicial authorities detained musician Zeid Hamdan — who toiled for years to promote Lebanon’s underground music scene — in July for several hours based on an accusation that he had defamed the Lebanese president in a song calling on him to “go home.”

The semi-naked images of women adorn our overcrowded highways, but when it comes to politics, women seem to have no place. Politicians spent months haggling with the Council of Ministers to ensure that all religious groups were adequately represented, but failed to include a single woman in the 30-person group. Dar Al Fatwa, the country’s highest Sunni Muslim authority, and the Higher Shia Islamic Council, are opposing a law that would protect women from domestic violence for fear that prosecuting husbands who beat their wives would affect the family unity.

Frankly, what harms the family in Lebanon are personal status laws that differentiate between citizens based on the religion into which they were born. These laws discriminate against women in matters like divorce, child custody and inheritance, forcing many of them to stay in abusive marriages. It is no wonder that an increasing number of Lebanese travel to Cyprus to get married.

Instead of finally shedding light on those who disappeared in Lebanon’s turbulent past, the authorities watched impassibly as more politically motivated kidnappings took place in 2011. The February kidnapping of three Syrian brothers from the Jasem family — one of whom had been detained for distributing flyers in Lebanon denouncing the Syrian regime — and the disappearance in May of Shibli Aisamy, an 86-year-old Syrian dissident, are painful reminders of the ongoing risk of politically motivated kidnappings. But even more troubling is what the Jasem case reveals about the state of Lebanon’s judiciary: a leaked police report contained evidence linking the kidnapping to a member of the Lebanese security forces in charge of the Syrian embassy’s security. Yet the judiciary has not investigated the accusations, proving yet again that it is incapable of resolving politically motivated crimes.

So “where do we go now?”, to quote Nadine Labaki’s recent blockbuster movie about the dilemmas facing a divided Lebanese village. Change in Lebanon will not be easy. There is no dictator to topple, no common enemy to rally the country’s youths. It is doubtful that the current political elite can truly reform the system which keeps them in power. But short of systemic reform, they could at least open up the drawers in Parliament and in the ministries and start adopting and implementing many of the laws and decrees that have been left there to rot.

 

NADIM HOURY is director of the Beruit office of Human Rights Watch

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Real Estate

Back to basics

by Executive Staff
written by Executive Staff

Following Lebanon’s skyrocketing success in 2010, this year saw a much calmed real estate sector. Though many buyers have been carefully shopping around and looking for the best deals, most industry representatives contend that prices will not fall any time soon.

Because of the limited availability of land plots in prime areas, the price of land remains high while developers have little reason to sell quickly as many have relatively small debts. Therefore, prices have remained stagnant this year, while sales across mid to high-end units have slowed.

Yet, one market that has continued to grow is small-size homes, 250 square meters or less, in proximity to the central business district.

Contrary to last year’s record-breaking sales,  the statistics covering the first nine months of 2011 paint a downward slope in revenues, largely due to a 26 percent drop in sales to foreigners. In the words of Karim Makarem, director of real estate firm Ramco, “The market for foreign buyers is almost nonexistent today.”

The Directorate of Land Registry and Cadastre recorded $6.84 billion in total property sales during the first ten months of the year, a 10.78 percent drop compared to the same period last year; property transactions decreased by 14.5 percent to 66,143 throughout the same period.

Supply side figures are not much rosier. The Order of Engineers of Beirut and Tripoli reported that construction permits covered an area of 12.4 million square meters during the first nine months, down by 5.4 percent year-on-year. However, cement deliveries actually increased by 7.7 percent during the period.

For the Ministry of Finance, the slowdown means a 6.8 percent drop in property taxes, down from $453 million in the first nine months of 2010 to $422 million this year.

Slow sales

“A couple of years ago, half of the project would have been sold by the time excavation was complete… The absorption rate would have been 80 percent by the time it was delivered, now it is about 60 percent,” said Makarem, who insists there is still demand for in the right areas.

Slow sales may be attributed to the fact that rents in Beirut are still relatively cheap, with residential yields only 3.3 percent of the value, the lowest in years. Conversely property prices are over-inflated, leaving increasing numbers of people happy to remain in the rental market.

The September 2011 Global Property Guide rated Beirut 36th in terms of most expensive cities to have property in, with average prices pegged at $4,258 per square meter, and average rents at $2,342.

Secondary market

Not only have foreigners stopped buying in abundance, but some have also started to sell up and put their money into other regions where they feel there are gains to be made.

“There is a surge in the secondary market,” says Zina Dajani, managing director at Benchmark, the developer behind Beirut Terraces and other residential projects in Beirut. “Some owners who had bought their apartments at the early stages of some projects during the years 2007, 2008 and 2009, and that have now come to completion, are offering them at prices that are slightly lower than developer’s prices, making an acceptable profit but not necessarily doubling their money.”

“In our project (Venus Towers), we expect maybe 20 percent [of buyers] to resell,” said Salah Karameh, sales and marketing manager at Venus Real Estate development, asserting that prices have never dropped in Lebanon.

Especially in Beirut, real estate players expect prices to be stable for a few years and then rise again.

However, others are reluctant to resell. Capstone Investment Group’s Trabaud 1804 high-rise in Ashrafieh is 70 percent sold; it launched in mid-2010. Capstone Chairman Ziad Maalouf claims that though there is a waiting list for the small size apartments “no one who bought wants to resell for profit.”

Investment and financing

In 2010, $4.9 billion in foreign direct investment was funneled into real estate. Chairman of the Investment Development Authority of Lebanon (IDAL) Nabil Itani says 2011 saw less investment in real estate and tourism than previous years. Given the double effect of the financial crisis and political instability in the region, it is investment from Lebanese diaspora, rather than Europeans or Arabs buying second homes, which is keeping the market afloat.

Though there is still a residual oversupply of luxury apartments in Beirut that continue to struggle to attract serious buyers, developers have realized there is huge potential demand in the undersupplied middle segment, especially in the capital. As such, developers are focusing much more on lower quality apartments in peripheral areas to fit demand. It is this segment that is most efficiently supported by bank loans and subsidized lending through the Banque du Liban (BDL), Lebanon’s central bank.

Though developer borrowing to finance a project is capped at 50 percent by law, many Lebanese real estate firms have continued to use pre-sales as a buffer, so that debt financing is far below 50 percent. Some developers have priced their apartments at below market prices in order to sell all of their units in days, while others have used a private equity model to spur financing (see page 150). Still, leverage is limited so developers can afford to go one, two or three years without selling.

“If you look at all the unsold apartments, developers have already paid back their investment by selling 30, 40 or 50 percent of their buildings,” said Freddie Baz, chief financial officer at Bank Audi.

Banking loans to the housing sector grew by 61 percent in 2010 up to $4.5 billion, while bank loans to construction totaled $6.3 billion, up about 30 percent, according to BDL’s most recent figures. Yet Jean Riachi, chairman of FFA bank, sees little reason for optimism that current trends will continue.

“I think the banks will be more conservative with regard to lending to real estate, be it housing loans or loans to developers, because obviously the market is slowing down so they have to be careful.”

Priced out of pocket

While budgets haven’t changed much in the past few years, property prices have increased tremendously, particularly in Beirut, pricing many locals out of the central market.

The suburban area of Hazmieh has experienced increased construction activity in the last year, with the biggest Spinney’s super market in the country, a new airport link and the upcoming Hazmieh City Center only likely to increase demand. Two developments there plan to ask for Ashrafieh-level prices, according to Ramco.

In addition, areas like Baabda and Metn have experienced a revived interest in real estate activity in the past few years, while other areas like Fanar, Horch Tabet and Aramoun have rising potential.

The Mechref suburb of Beirut will soon see large investment, with Zardman real estate planning to build an ‘affordable’ housing community there. Yarze, however, “is facing a bit of a downturn because it was over -reaching and I think certain brokers there played a part in that, evidenced by [the fact that] property there that has been on the market for a while and hasn’t sold,” says Makarem.

Developers have also realized that there is greater potential in some underdeveloped areas where land is cheaper. Ramco stated in its third quarter report that developers have turned to areas such as Corniche El Nahr (in Ashrafieh) and Jnah to build housing, where the cost of land is under $1,500 per square meter, whereas Beirut’s prime land can cost up to $5,000 per sqm of built up area (see chart above).

As there are few empty plots left in prime locations such as Ashrafieh, many heritage buildings and landmarks are being torn down by developers to build more profitable towers, a phenomena many consider a crime against Lebanon’s cultural and social history. Though Beirut’s Mayor Bilal Hamad told CNN in August that developers have to get a permit from the Ministry of Culture before they can build on site of old buildings, so far less than 300 classified heritage buildings remain from around 1,000 that were documented in 1995.

Predictions

In November 2010, the director general of the Ministry of Economics and Trade predicted that Lebanon’s real estate market would grow by up to 15 percent in the next three years. With this year’s stagnation in sales and downward statistics across both supply and demand indicators, and with most experts predicting that prices won’t budge and sales may remain slow for the next two years, it seems his prediction was highly ambitious.

It can, however, be applied to underdeveloped regions around the periphery of Beirut where developers are able to buy and construct projects that cater to the undersupplied, middle-income housing market. A prime example is the success of FFA Real Estate’s first development project in Badaro, where apartments ranging from 75 to 214 square meters sold out within five days in May.

With 15,000 additional homes required each year to keep up with rising local demand, a sound real estate market remains on the horizon — as long as developers shift focus to a more reasonable, middle class segment.

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The year since Mubarak

by Jonathan Wright
written by Jonathan Wright

The year began in Egypt with a sudden but thankfully short-lived rash of self-immolations by aggrieved Egyptians following the example of Mohamed Bouazizi, the young street vendor who set himself ablaze in a solitary protest in southern Tunisia, December 2010. Tongue in cheek, commentator Issandr el-Amrani predicted “a year of spontaneous combustion” and imagined the authorities grappling with an epidemic of suicides across the oppressed nation. But millions of Egyptians, inspired by the Tunisians who drove out President Zine al-Abidine Ben Ali, had other ideas about how best to express their grievances. Less than a month after the first Egyptian doused himself with petrol and lit the match, President Hosni Mubarak had been toppled from the throne he had held for almost 30 years, pushed out of office by the largest street demonstrations the Middle East has seen since the Iranian revolution of 1979.

As the sun set on February 11, Vice President Omar Suleiman appeared on television to announce that Mubarak had ceded power to the Supreme Council of the Armed Forces, a group of some 20 generals who remain in power as the year draws to a close. Egyptians went home to rest, declaring themselves confident that their revolution was in safe hands and the generals would oversee a speedy transition to democratic and civilian government.
But the next 10 months have not been easy for almost anyone in Egypt. Many of the revolutionaries, especially the liberals and the leftists, say the military council has betrayed their revolution; the generals have sent more civilians to military trial than Mubarak ever did and have failed to purge the security forces and bureaucracy of the brutal and corrupt officials who thrived under Mubarak. The generals themselves soon learned that managing civilians was not the same as barking orders at conscripts in boot camp and that there were limits to the goodwill Egyptians showed them when they took power. Ordinary Egyptians lamented the lawlessness in outlying areas, the rising unemployment and the higher prices. Egypt's Coptic Christians, said to make up some 10 percent of the population, saw four of their churches set ablaze or demolished and then scores of young Christians massacred outside the state television building on October 9, in an incident that the military shows no willingness to investigate.

Hundreds of thousands of workers and civil servants, no longer deterred by state security and the riot police, have staged strikes, sit-ins and protests for better conditions; strapped for cash, the government cannot possibly meet all their demands. The upper echelons of the old regime have had it rough, but not as rough as many thought they deserved. Mubarak himself appeared in court lying on a gurney, charged with giving orders to shoot the demonstrators who brought him down in January and February; his sons and senior ministers are in detention, some convicted of financial crimes, others still on trial. The Islamists appeared to be the most obvious beneficiaries. Free to campaign for imminent parliamentary elections without fear of harassment, they have made hay while the sun shines. But their politics is fragmented across a broad ideological spectrum — from the hard-line and literalist Salafis to urbane intellectuals for whom Islam is the cultural backdrop to liberal democratic politics.

What happened in Egypt was not quite, or is not yet, a revolution. State structures have survived, though much weakened and vulnerable to contestation by competing political forces. The ruling military council has been cautious and conservative to a fault, taking no bold initiatives and usually acting only in response to street protests. The police force collapsed in the first few days of the uprising but is slowly finding its feet, without any fundamental change in its authoritarian mentality. The social and economic systems remain in place, and there is little popular demand for dramatic changes that go beyond eliminating corruption, favoritism, inefficiency and other vices.    

The euphoria of the uprising has dissipated, along with the sense of unity and purpose that opposition to the Mubarak regime generated. But for the moment Egypt is a place where people can breathe more freely and can cast their votes with some confidence that they are choosing their own leaders.       

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Society

Q&A – Nicolas Chammas

by Executive Staff
written by Executive Staff

As chairman of the Beirut Traders Association, Nicolas Chammas oversees study and research into Lebanon’s commercial sector and lobbies the Lebanese government on behalf of traders. In a chat with Executive he spoke about the contracting economy and the need for policymakers to cut retailers some slack through more supportive legislation.

E  Where has 2011’s poor economic performance left Lebanon’s retailers?
The year 2011 started very weakly because we had a hangover from 2010. The political bickering really dragged the entire economy down. And then in the very early days of January the government collapsed. So all in all, with the absence of government and no decision makers at all and the troubles in Syria, in the first semester of 2011 the [commercial sector] activity collapsed by about 30 percent. There has been a correction upwards in the third quarter… there was a slight increase in the number of tourists and number of visitors and on the retail scene as well. So I would say that we are looking overall at a 20 percent decrease in 2011. The first semester was terrible, and we were able to get some breathing room in the second part of 2011. Lebanon is a resilient country — the economy goes through terrible cycles, very deep troughs and very high peaks. But our problem now is a macroeconomic one, because we have fallen down from an 8 percent to a 1 percent growth rate and now you need some momentum in order to go back up.

E  How exactly has the regional unrest affected the economic performance of the retail sector?
You have to bear in mind that the situation in Beirut is different to the situation in other regions. [In Lebanon] you have two types of interactions with Syria — you have the interactions at the borders in Tripoli and in Zahlé, whereby you have a daily exchange between the Lebanese and the Syrians. In Beirut, you have the final customer coming to shop from the retailers and you have the retailers of Syria coming to buy from the wholesalers, so all these have been affected.

E  Have some consumer sectors been disproportionately affected?
You have three segments of consumers in Lebanon. You have the Lebanese residents who constitute perhaps, depending on the sectors, at least two thirds of the consumers, you have the Lebanese expatriates and you have the Arab residents. When you talk about the luxury segment, you have perhaps 40–30–30 [distribution across these segments], because the purchasing power of the visiting Lebanese is much higher than the local residents. We have estimated that the revenues of a typical Lebanese residing abroad are four to five times higher than his counterpart here in Lebanon, so this directly affects the luxury sector.

The medium level [of the retail sector] has been really affected because of the melting purchasing power of the population. The luxury items and international brands have not been suffering because of the constant flow of visitors and expatriates. The number of tourists coming by land has drastically decreased, and it’s true that visitors from the Gulf states have decreased in number, but if you look at the purchasing ticket,  it has stayed strong, which at the end of the day makes for a good sales volume in luxury products. The problem is the down periods are measured in months and the up periods are measured in days or at best in weeks.

E  Are some shopping areas within Lebanon succeeding more than others?
Malls are becoming more and more important, and they are taking away some business from the traditional markets. You have typical streets in Beirut — I would say Hamra, Verdun, Ashrafieh [and] lesser-known areas like Mar Elias and Barbour. These areas are suffering because malls are one-stop shops. Parking is a terrible thing, so you are in a tough spot if you are a middle-of-the-road retailer on one of the streets of Beirut. On the contrary, you are in a sweet spot if you have a strong international brand and [are] located either in one of the known malls or in one or two streets in Downtown Beirut. So you have a matrix in terms of positioning and location.

E  What does the Beirut Traders Association envision for Lebanon’s retail sector?
Our aim is to make Lebanon the showcase of the Arab world and the meeting point of trade currents between East and West. We believe that in the past, in the ‘60s and ‘70s, Lebanon actually played that role. So we see it as our responsibility to replicate this — trade is a traditional sector, but its interests have been overlooked, unfortunately.

E  What specific legislation are you lobbying for to try and support retailers?
Subsidized loans have been awarded to the tourism, IT and agriculture industries. [Retailers] did not benefit from this at all. There was a misconception because [the government] thought that as traders our balance sheets mostly consist of current assets, which is not the case. We need to get subsidized loans on commercial investments. The cheapest boutique costs $3 million to $4 million. This is our single most important demand from the government. They bet on laissez-faire whenever it makes their case easier, but it will not happen spontaneously this time. You need to inject either some liquidity or maybe remove some constraints; give the economy more degrees of freedom. And it seems they are taking us the wrong way, because now we are negotiating the minimum wage and so on.

E  Is it not difficult to get the numbers to back up your campaigns?
Data is very scarce. [The Beirut Traders Association] analyses the data, we do the number crunching and we face the government on behalf of the entire business community. As far as micro data is concerned… companies are not listed; most companies are family businesses and they don’t have any obligation whatsoever to publish their results. And then you have a banking secrecy law, which makes things even more difficult, so our aim is to try to find some proxies or some alternative ways. We need the data rather than the individual traders because… when we are bargaining with the government we need stronger data.

E  What unique strengths does Lebanon have as a retail destination going forward?
The strong demand. [International shoppers] will keep coming because Lebanon has traditionally been the showcase for the Arab world. So even if it is small compared to Dubai and elsewhere, it is an elegant and sophisticated market. It is also perhaps a testing ground for the large companies, so they cannot afford not to be in Lebanon — not so much for the volume they will achieve here, but for the image. Being in Lebanon is important because Lebanon also is a trendsetter. As long as you have political stability, they will keep coming. We would like Lebanon to be a shopping destination for all seasons, and we will work hard toward achieving this goal.

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Finance

Executive Insight – Corporate governance in the Middle East

by Alissa Amico
written by Alissa Amico

One year ago, I argued that the second wave of corporate governance had arrived at the shores of the Middle East and North Africa. Put succinctly, the first wave was about the introduction of corporate governance frameworks and the second about their implementation.

It goes without saying that the events of the Arab uprisings have planted the governance debate firmly within public discourse in the region. In Egypt, criticism of the privatization process has, for better or worse, drawn attention to the governance of state-owned enterprises (SOEs). In Tunisia, the confiscation of private ownership stakes of the Ben Ali and Trabelsi families has required a reflection on how these enterprises should be governed. Across the region stock markets have tumbled and some, such as the Egyptian Stock Exchange (EGX), remained closed for over a month to prevent a drastic capital outflow.

This outflow of capital might be a reflection of the political risk attributed by investors to Egyptian companies, but arguably also a reflection of the corporate governance risk. Speaking at the meeting of the “Organisation for Economic Co-operation and Development (OECD) Taskforce of Stock Exchanges for Corporate Governance” earlier this year, Chairman of the EGX Mohamed Omran argued that good governance of listed companies has played an essential role in allowing the stock market to re-open in March. Due to the separation of ownership and executives in many listed companies, in cases where controlling shareholders were subject to legal proceedings listed companies were able to continue their operations.

It is important to consider what has been the impact of the Arab uprisings on corporate governance in the region, beyond anecdotal evidence. First, it is indisputable that the link between good corporate governance and anti-corruption, especially in the banking sector, is increasingly being drawn. There is a growing interest in how good governance can help preserve the integrity of Arab banks, beyond anti-money laundering or anti-fraud provisions. Risk management and related lending in the banking sector is likely to remain a priority for some time.

Political lessons

Beyond this anti-corruption angle, the connection between sound economic governance and good corporate governance is evoked less frequently. This is curious considering that the events that transpired earlier this year in Egypt and Tunisia were arguably rooted to a certain degree in economic governance perceived as unjust. And yet, when pressed to speak about the impact of recent events on the evolution of corporate governance practices, experts either hide in the comfort of national corporate governance regulations in place before the events of this year or point to the need to engage with citizens in making corporations more accountable.

Neither of these approaches enables us to gauge the implications of political transitions on corporate governance in Egypt or Tunisia, or to draw lessons for the wider region. Instead, we should focus on the actual changes on the ground such as the swift modifications to corporate governance frameworks during the past year. For instance, in Tunisia, the transitional government just a few months after the revolution introduced new guidelines for corporate governance of banks. New guidelines for banks, effective next year, have also been introduced in Egypt, in significant part as a response to the anti-corruption concerns.

Attention is also being paid to corporate governance of state-owned enterprises (SOEs), an area which until about two years ago was a no-man’s land in the corporate governance debate in the region. Egypt was the first Arab country to introduce corporate governance guidelines for state-owned enterprises in 2006, and the Egyptian Institute of Directors has made considerable awareness raising efforts to encourage their implementation. Since then, governance of SOEs has been a matter that was allegedly of interest to everyone but which few policymakers or state-owned companies would address publicly. This appears to be changing.

The Moroccan government in October of this year released a comply-or-explain code for its SOEs, modeled on the “OECD Guidelines for Corporate Governance of State-Owned Enterprises”. Weeks later, the government of Dubai issued a decree addressing the governance of its own state-owned companies, which have been under the spotlight, not least due to the Dubai Holding restructuring. Prior to the issuance of this decree, SOEs in the United Arab Emirates were not subject to many corporate governance requirements and even listed SOEs were exempt from corporate governance guidelines issued by the Emirates Securities and Commodities Authority in 2009.

A number of governments in the region have adopted more than two or three codes for specific sectors, notably banking (Jordan, Tunisia, Egypt, etc.), but more recently also real estate (Dubai), as well as for small and medium and unlisted companies (Morocco, Lebanon, etc). It is difficult and perhaps too early to judge the effectiveness of this more extensive code drafting effort. But It ought to be emphasized that codes and guidelines are important but not sufficient for fostering good governance.

Deeds beyond words

All too often in the region, corporate governance is referred to as a practice with a finite outcome, as opposed to an ongoing process. In the public debate, the question seems to be posted in terms of having or not having “corporate governance” as opposed to having effective governance. This is a risky way of framing the question because the answer is then often given with reference to having a code or a guideline, either at the company or national level. In this view, the issuance of corporate governance code regulations is the final destination, a happy status quo.

This approach confuses a patient who has been diagnosed with one who has been cured. And yet, the difference between the two may be one of life and death. Many companies in the region, especially listed ones, have made serious progress in improving their disclosure practices, introducing board committees and establishing investor relations departments. Fortunately, some of these companies publish corporate governance reports that demonstrate with startling clarity the problems of this binary view of governance as something that can be introduced overnight like new software, without changing the hardware.

Consider, for example, one Gulf-based bank that boasts all the right policies, including specialized committees, a chief risk officer reporting to the board and standards for a number of board and committee meetings per annum. There is only one problem with the governance of the said bank — half of its board has been in place for over 30 years. In addition, some of these board members are considered to be independent since they do not hold any executive posts. But it is doubtful whether board members who have presided for that length of time can continue to exercise independent judgment.

This example underlies the dangers in the current corporate governance debate in the MENA region, whereby governance is considered as fait accompli after the boxes required by the national code have been checked. It also highlights that the risk of complacency by regulators and companies is not negligible. After all, stocks of Arab companies do not feature prominently in the portfolios of international fund managers not due to a lack of corporate governance codes or ESG guidelines but due to failings in developing implementation and enforcement cultures.

Another issue is that practices meant to be inspired by these codes are often not publicly disclosed even where there is a positive story to tell. The latter is an important point if Arab markets wish to position themselves as hubs for international capital. A dialogue between regulators, companies, investors, proxy advisers and corporate governance advisory firms may help to project Arab companies onto the international arena.

The Arab uprisings may have in the short term been detrimental to the performance of capital markets in the region, but perhaps we should remember that there is nothing better than a crisis to bring out an opportunity. The opportunity is to leverage the corporate governance debate to raise international interest in Arab markets and to attract more stable investment in the region. Liquidity and listings, the two preoccupations of stock exchanges and securities regulators in the region, will follow.

 

ALISSA AMICO is program manager for the Middle East and North Africa, Corporate Affairs Division, of the Organization for Economic Cooperation and Development (OECD). The opinions expressed in this article do not reflect the official views of the OECD or its member countries

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