Comment

Bludgeoning Syria’s economy

by Jihad Yazigi
written by Jihad Yazigi

The past 12 months have been devastating for Syria’s economy. Gross Domestic Product (GDP) has contracted by several percentage points (possibly by as much as 20 percent), the foreign currency reserves accumulated during the country’s short oil boom have been seriously depleted, the fiscal deficit has at least doubled, the national currency has lost some 15 percent of its value and the confidence the country was starting to gain from international investors has been shaken.

The prospects do not look any better for next year, with western sanctions on the country’s oil and banking sectors gradually starting to impact broader sectors of the economy and the Arab League likely to adopt similar measures.

One of the most frustrating aspects of the last year has been the confusion created by the government over its policies. After decades during which the economy was centrally planned the country adopted in 2005 a “social market” development model, in which the state was expected to limit its intervention to “social services” and to give the private sector more freedom to operate.

The debate over the role and size of the state in the economy seemed to have been finally settled, and until early this year the government had applied this relatively clear road map in spite of its shortcomings and justified criticisms.

Within days of the beginning of protests in the southern city of Daraa in mid-March, however, priorities changed entirely. Subsidies paid on energy products that were deemed “unsustainable” until a few weeks earlier were increased by some 25 percent, civil servants’ salaries rose 30 percent and free trade agreements that had been in place since 2005 were now to be renegotiated.

The moves unsettled analysts and investors and appeared to have been made out of panic rather than on the basis of any rational analysis.

Then, as the year was coming to a close, more confusion came. Minister of Economy Mohammad Nidal al-Shaar, realizing the extent of the damage, said that the decision to raise subsidies and salaries announced in March was “unsustainable” and that the government could not subsidize the economy forever.

The lesson to be drawn from all this is straightforward: You do not solve political problems with economic measures. To protesters chanting “we want freedom,” the government responded by saying “we will pay you better salaries”. The protesters continued to take to the streets because their demands were not met and, as the government was spending above its means, an economic challenge was added to the political problems that remained unanswered.

How dark are the prospects for the Syrian economy?

In the short-term one should not expect miracles. Investment and spending will continue to decline next year, and as foreign currency earnings decrease renewed pressure on the value of the Syrian pound should be expected, with all that entails for inflation and loss of purchasing power.

In the longer term, however, the dramatic political changes that are likely to result from the current unrest carry significant opportunities.

Liberalization alone has not been enough to revitalize the economy and it has in fact highlighted its weaknesses. The country has one of the most diversified economies in the Middle East with four different sectors each generating more than 10 percent of GDP (agriculture, oil and gas, tourism and trade) and three others making up more than 5 percent (manufacturing, finance and real estate). It also benefits from a relatively large market, a well-educated workforce and an extraordinary geographic location.

However, in spite of all these comparative advantages, and years of reforms, Syria attracts less foreign direct investment than its much smaller and resource-poor neighbors, Lebanon and Jordan. And it regularly ranks among the worst performing economies in most global surveys; 14 out of 17 countries in the Middle East in the Doing Business Index of the World Bank and 15 out of 16 countries on the Competitiveness Index of the World Economic Forum.

The underlying reason for this lacklustre performance is a business environment plagued by an overwhelming and corrupted bureaucracy, a judicial system mastered by the well-connected few and a broad sense of unaccountability and lack of responsibility across the state and its institutions.

These are challenges that cannot be solved through economic measures; rather they require deep changes in governance that are unlikely to ever take place under the current political system.

 

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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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Banking & Finance

Investment guide MENA stock tips

by Executive Editors
written by Executive Editors

Despite the release of third-quarter corporate earnings last month, the markets remained fixated on macroeconomic news coming out of Europe. With the European sovereign debt crisis still unresolved, the markets remained jittery with investors sitting on the sidelines. For recommendations on where to invest in such volatile markets,

Executive spoke to Georges Abboud, head of private banking at BLOM Bank, Nadim Kabbara, head of research at FFA Private Bank and Haitham Arabi, chief executive of Gulfmena Investments.

Georges Abboud

Bullish or bearish?

According to Abboud, most fund managers are sitting on a lot of cash at the moment as, at least in Europe and the United States, markets seem to be heading back into recession. “You can start building some positions now but you need to be careful,” says Abboud. He recommends investing in companies with solid cash flows, as Warren Buffett did when his investment vehicle, Berkshire Hathaway, acquired Burlington Northern Santa Fe in November 2009. “Buffett is intelligent, he saw what was coming, so he bought a company with secure cash flows for the long term.”

Favorite asset classes?

“Now is not the easiest time to ask me where to put my money,” admits Abboud, though he still recommends investing in companies with high dividend yields, low price-to-earnings (P/E) ratios and a vision for growth for the next five years. He believes that the high rates on deposits in Lebanon allow him to buy time and identify stocks to invest in. He would not invest in gold as it has “no transparency, we don’t know what we are buying, we don’t know who the market players are, we don’t know what the leverage is and the speculators are everywhere.”

Thoughts on the Middle East and North Africa, Lebanon and top picks?

Abboud would invest in the MENA region as well as the Lebanese market. His two favorite countries are Saudi Arabia, which has deep pockets and is diversifying away from oil through large infrastructure projects, and Qatar, which has strong development prospects, abundant gas and solid dividend yields. His top pick in the MENA region is Orascom Telecom, but he warns that it is a risky trade. Being a telecommunications company, it is defensive but it carries political risk. As for Lebanon, he does not believe Solidere is expensive but as there is no visibility within the current environment he prefers the local banks, which are cheap, diversified in terms of activities and offer solid dividend yields.

Other interesting ideas outside the MENA region?

 1) Indian government bonds —current yield is around 8 to 9 percent with potential currency appreciation, as he expects India to continue enjoying solid gross domestic product growth. 2) General Motors — recently unseated Toyota as the world’s number one automaker, maybe the most compelling turnaround story in this sector. 3) Eurotunnel Group — operator of the Channel Tunnel between Britain and France. It is now profitable (started paying dividends two years ago) and should benefit from a significant cash flow boost through 2014.

Nadim Kabbara

Bullish or bearish?

 Kabbara is cautious but optimistic. He is concerned by the recent reports coming out of the US, Europe and Asia which show that the global economy is slowing. He is also concerned that we have not yet seen companies materially increase their revenues.

Favorite asset classes?

Kabbara highlights the disconnect between dividend yields on equities and coupons on 10-year treasuries. He believes that “Once we move out of this fear situation, there will be a return to fundamentals,” and investors will start buying equities again. He recommends owning stocks in defensive sectors — such as telecommunication, utilities and staples — but says “If you think we are going to go back into recession, then invest in fixed income and hold cash instead.”

Thoughts on the MENA, Lebanon and top picks?

 According to Kabbara, MENA markets are moving in the right direction but one must be careful when looking at individual names, “as there remains a lack of corporate governance, transparency and regulatory apparatus.” He likes Saudi Arabia, Qatar and the United Arab Emirates. For Saudi Arabia, it is because of increasing investment in the social framework of the country. As for Qatar and the UAE, they are sheltered from the regional turmoil, are increasing infrastructure spending and might be upgraded to MSCI emerging market status from their current frontier-market ranking. Mobily, telecom operator in Saudi Arabia, and Industries Qatar, producer of petrochemicals, steel and fertilizers, are Kabbara’s top picks in the MENA. BLOM Bank is his top pick in Lebanon due to what he calls their risk averse culture, solid operating metrics and capacity for growth. He would remain cautious this year as local banks have, prudently so, put growth projects on hold due to the turmoil in some parts of the MENA.

Top pick globally?

Barrick Gold, the world’s largest gold producer, as Kabbara believes investors have not paid enough attention to gold miners as compared to the physical (gold).

Haitham Arabi

Bullish or bearish?

Arabi is slightly bearish in the short term as “the European crisis is not entirely over and the Eurozone’s GDP is around 27 percent of the world economy, the numbers in the US are looking anaemic and we keep hearing that China’s figures are exaggerated, and that we might see a hard landing. All of which clearly indicate a slowing global economy.” Arabi, however, recommends being selective and gradually building positions on valuation grounds.

Thoughts on the MENA and top picks?

Arabi is cautiously optimistic about the region as, “from a markets perspective, Middle Eastern equity markets have stronger embedded fundamentals.” However, he is concerned that the global macro-environment will impact investor sentiment in the MENA markets. He believes that “in general, it’s time for stock picking, with a 6 to 12-month horizon before markets start to perform again.” Arabi likes Saudi Arabia and Qatar, which are in an expansionary fiscal policy mode. On Saudi Arabia, he adds, “it has around $21 trillion of oil reserves and its total debt to GDP ratio is only about 10 percent while some countries now have debt to GDP ratios in the region of 160 percent to 170 percent, so if anything Saudi is a great hedge for investors if they can read its fundamentals.” As for stock picks, Arabi likes Saudi Basic Industries Corporation as he believes “it is way undervalued”, trading at a P/E ratio of 8.5 times earnings for the first time in several years compared to a usual ratio of 18. It is one of his largest holdings. He also recommends the banking sector in Saudi Arabia and Qatar. In Saudi Arabia, he recommends Rajhi Bank, Riyadh Bank and Saudi British Bank. In Qatar, he likes Qatar National Bank, Commercial Bank of Qatar and Doha Bank.

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