Though Lebanese real estate has always carried its weight as a prime investment tool and a win-win sector for both suppliers and end-users —even during the uncertainty of the civil war years — the cracks are finally beginning to show as both internal and external factors are affecting (former) market strongholds.
Banks, the middle-men who keep the property market in swing, are now in an unfamiliar situation and may be left with little option but to rein-in loan offerings to the real estate sector; its profit harvest has diminished compared to healthier years and its expected contribution to gross domestic product has weakened. The trickle-down effects of the financial crisis on Arab wallets (residential salesto foreigners plunged 31 percent this quarter), combined with sticky top-dollar prices that stem from the high cost of (limited) land, have come into play simultaneously, with the result a whopping 21 percent fall in transaction volume in the first quarter, compared to this period last year.
According to Hani Haddad, managing director at A&H Construction and Development, although the debt-to-equity ratio “has definitely decreased due to banks being more conservative given the weak performance of the real estate sector in the past year,” tightness of lending is expected to only have an effect on the financing of new projects. However, this likely won’t hit end-users, as banks are remaining aggressive in providing home loans to households.
At the end of 2010, loans to the sector reached $13.6 billion when taking into consideration loans to contractors and developers to build projects, to businesses to rent real estate and to individuals for home loans. Thus, lending to the sector made up nearly 35 percent of total lending, but the percentage is closer to 16 percent ($6.3 billion) if one only considers loans for construction, according to data from Banque du Liban (BDL), Lebanon’s central bank.
Though the number reflects a steady, mutually beneficial relationship between banks and real estate professionals (following a period of growth whereby loans to real estate increased 59 percent from the beginning of 2008 to February 2010), it can be attributed to what many say was the culmination of a real estate high note that saw an unprecedented wave of mega-launchings such as District S, the Landmark, Beirut Terraces and Damac Tower in Beirut’s central district last year.
Freeze over funds
According to Samer Kahil, vice president of finance and administration at MENA Capital, “definitely more than three” alpha banks have already frozen funding to developers in the last three to four months. “It could [last] a year, it could be a couple of months… it depends on their risk management department, their allocation of funds to real estate and the developer’s track record and location” of their upcoming projects.
“If you are talking about lending to projects, we have less than 10 percent [relative to total] lending,” said Saad Azhari, chairman and general manager of BLOM Bank. “We have about another 8 or 9 percent for housing loans for those with domiciled salaries. So in total… it comes out to 16 or 17 percent [of total loans that go towards the real estate sector].”
But Kahil said that banks were still funding nearly 50 percent of the equity in MENA Capital’s developments, due to the company’s strong reputation in the market. The company is expecting approval on financing for an upcoming residential tower. “They are providing more than $20 million, out of $45 million of total equity for the project [because] we had a good feasibility study, prime Ashrafieh location and they have the allocation,” said Kahil, though he declined to name which alpha bank.
Indeed, Hani Haddad of A&H affirmed that, “Banks are more concerned about who to lend to rather than which project to lend to,” placing a magnifying glass over developers’ financial statements.
Of course, banks are also betting on builders outside the country. With the unprecedented public infrastructure spending in Saudi Arabia, and the slew of projects lined up to build Qatar into a world-class destination fit for hosting the FIFA 2022 World Cup, the strategy makes for a strong game plan. Walid Raphael, general manager of Banque Libano-Francaise (BLF), added that financing contractors, even outside of Lebanon, remains a large part of the business. “We have three large markets [for contracting]: Saudi Arabia, Qatar and Algeria. And then wealso have the Emirates.”
We the people
Unless you’re one of the big players, it seems the tide has receded and bank loans to developers have reached a steady drift that mirrors the current sales volume in Lebanon.
“I don’t think that we are going to see real estate lending increasing but I see that housing loans [to individuals] are still healthy… and are going to increase,” said BLOM Bank’s Azhari.
“Banks still seem to have a big appetite for home loans,” added Haddad, as evidenced by an increase in housing loans from $2.8 billion in December 2009 to $4.5 billion in December 2010, according to the Central Bank. And since banks and developers had to get creative in order for individual households to afford homes when prices leapt in the last two years, providing home loans to residences still under construction created a new definition of risk. When a physical home cannot be secured as collateral, banks secure a simultaneous agreement with a project’s developer (or contractor) and end-user to diminish risk.
“So we know whether the funding is available to finish the house… In a way you are guaranteeing [its completion] because you are financing the building,” said Azhari. It is only to be expected that banks ask for additional security and hold the land as a mortgage, with all sales proceeds funneled to their accounts first in order to pay off the principal and interest.
“When you are financing the promoter, you’re already taking the risk of the project and you’re going to make sure that the project will be achieved and delivered, so you have less risk,” said BLF’s Raphael. However, many banks have buckled under pressure and frozen subsidized loans to individuals, according to MENA Capital’s Kahil, a move that acutely impacts developers building mid-range residential projects.
But the real risk hovering over our rooftops needs to be viewed from a regional perspective — not only does uncertainty plague the MENA region but Lebanon remains without a government and thus contributes to a wait-and-see stance from buyers.