Economics & Policy

Pipe Dreams?

by Executive Editors
written by Executive Editors

Politics and economics have always had an abusive relationship in Lebanon, with the latter habitually falling victim to the former’s unpredictable behavior. Like any odd couple, there are times when they get along, if only to fall back into a vicious cycle that consumes them both.

As 2010 began there was optimism in the air; the country had just emerged with a new government after Lebanon’s power brokers finished their long and drawn-out game of musical chairs over who would take which cabinet posts.

The new cabinet of “national unity” effectively meant, however, that basic national issues could not be decided upon without unanimous approval. Even without this inherent impediment to the kind of streamlined decision-making Lebanon desperately needed after years of (at best) ineffective government, results were going to take time. Many of the problems facing the country, from electricity shortages to water supply, require long-term solutions rather than quick fixes.

At the start of 2010, the cabinet approved a new ministerial statement that has since remained the only wide-ranging plan to address the country’s problems, with the stated goal: “to help all Lebanese benefit from economic growth in a proportional way that will allow all categories of society and all the Lebanese regions to profit.” The final part of the statement contains the priorities of each ministry, though most are vague enough to allow the ministers to evade accountability for tangible results.

While no one expected all elements of the ministerial statement to be fulfilled in the first year of operation, the pace of most reform in 2010 has been glacial.

“They didn’t do anything. Really, nothing happened,” says Jad Chaaban, acting president of the Lebanese Economic Association in November. “There are people who don’t want to rule with others on both sides. There are huge differences on how reform should be carried out and there is no real debate on these issues, from traffic, to electricity to water.”

The lack of action is even more unfortunate given that the new government was regarded by many as the first that could actually make some headway in terms of public policy, after previous post-Hariri assassination governments were plagued by political debacles that brought policy to a grinding halt.

Electricity

To be fair, some progress has been made this year, even if it was only at the planning level. Perhaps Lebanon’s most glaring policy deficiency is the abysmal state of the electricity sector, and in June the cabinet approved a comprehensive plan for an overhaul, which aims to provide 24-hour power throughout the country by 2015. It is not the country’s first electricity overhaul plan, though it may the most substantial to date.

Much of its success banks on the private sector, which will be asked to contribute $2.32 billion, or 58 percent of the total cost, to take part in the production and distribution of electricity, while the public sector will retain the infrastructure and control the transmission of electricity from plants to local districts. This collaboration, however, will require a Public Private Partnership (PPP) law to be passed by Lebanon’s parliament, which has barely managed to meet since being elected in June 2009, much less pass essential legislation.

“Clearly there is an interest from the private sector, given a proper PPP law that preserves the interests of the private parties involved, but the key aspect is a transparent, clear and implementable law that has to be very clear on how to solve issues between the private sector and the government,” says Nassib Ghobril, head of economic research and analysis at Byblos Bank.

With the draft law still swirling around parliament, and the latest draft viewed by Executive only referring to “the principles of transparency and equality among competitors,” rather than any mechanism for resolving conflicts, the Lebanese could be waiting some time for a resolution to their chronic energy problems. 

With the draft law still swirling around parliament the Lebanese could be waiting some time for a resolution to their chronic energy problems 

Water

Another sector that needs a substantial overhaul is water. A draft strategy is currently being compiled by the Ministry of Energy and Water, which is expected to be ready for submission to cabinet by the end of the year. A supply/demand forecast was completed and presented to domestic and international stakeholders in November, giving some idea of the amount of money that will need to be spent to close the gap in the coming 25 years. New storage alone, mostly in the form of dams and artificial lakes, will require around $2.65 billion in capital expenditures and then some $96 million each year in operating costs. Capital expenditures on transmission and distribution are projected to cost $875 million by the end of 2015, with associated operating costs at $249 million over the same period. New irrigation networks are expected to cost a further $1 billion over the next decade and beyond. Wastewater clocks in at another $1.6 billion by 2020.

“I am part of a large governmental block, so don’t talk to me about when to apply the law” – Charbel Nahas

Telecommunications

Lebanon’s government-owned telecoms sector is also in need of radical reform. Theoretically, the sector already has a framework that should be implemented in the form of Law 431, which calls for the creation of a corporatized, but not necessarily privatized, entity called Liban Telecom. Under the law, the telecom ministry’s assets would be transitioned to the company, which would be regulated by the existing Telecom Regulatory Authority that presently regulates around 5 percent of the market under its legal mandate. The liberalization of the sector is also called for in the ministerial statement, but when Executive asked Telecom Minister Charbel Nahas why no action has been taken on this front he replied: “I am part of a large governmental block, so don’t talk to me about when to apply the law.”

Nahas had also promised to publish his policy for the sector within one year of taking office in November 2009, but has failed to do so.

“The ministry’s policy is not a matter of a statement, it is a matter of practice,” said Nahas when asked when he expected to issue his policy for the sector.

Official policy or not, some progress may be in the works. The Ministry of Finance recently advanced $66.3 million to the Ministry of Telecoms to begin its proposed project to lay a new fiber-optic ‘backbone’ across the country. At the end of November, the telecom minister said the project would begin “within a few days or weeks.”

The project was awarded to Alcatel and the local civil engineering firm Consolidated Engineering and Trading, budgeted at $40 million; the telecom ministry has announced that the project should be ready by March 2012. According to Nahas, 4 to 6 percent of gross domestic product comes from the telecom sector surplus, adding that “it is the least of our duties to give back to the population and to the economy this very small part of this huge rent extortion that we inherited from the past period.”

Improved Internet access will require that the $45 million international IMEWE3 cable becomes operational. It was planned for March 2010, but Egypt has not opened up access on its end in Alexandria (where the cable connects to the rest of the world), due to reluctance on the part of the Egyptian security services, according to Riad Bahsoun, telecom expert at the International Telecommunications Union (ITU).

“We are now at a crossroads: to sustain high growth we must invest in infrastructure”

The debt

But perhaps the most pressing item on the government’s agenda is its largest source of expenditure: the public debt. It is projected to have cost the government $4 billion just to meet interest payments in 2010, with the principal reaching $50.85 billion, around one and a half times estimated economic output.

Finance Minister Raya Hassan admits that there is no foreseeable plan to reduce this principal in the absence of privatization of the telecoms sector, which she herself has said is undervalued on international markets.

Her debt strategy is to switch short-term debt for long-term debt now that Lebanon is enjoying better rates than it has before, and maintain a primary surplus as a “cushion” against debt obligations. “It’s a mixed blessing because even though the debt increase is going to be controlled, on the other side you are not going to have all the capital expenditures that would unleash the full potential of the Lebanese economy,” she says.

The lack of a government budget for the last half decade has created a situation where opening and closing accounts for the years ending 2005 and 2006 do not add up. The issue created a hubbub of accusations over mismanagement of public funds at the end of 2010.

“What they [the opposition] are trying to imply is that there are no accounts. That is totally untrue. There are accounts,” says Hassan. “What is lacking is the auditing. It’s not even auditing, it’s the control of the accounts by the Public Accounting Directorate (PAD),” she says, adding that, because public accounting laws are so old, the PAD has to cross-check around two million transactions a year with their supporting documents, which they are not able to do in any reasonable amount of time. “What we lack is a proper internal audit function — not a control function — and therefore at this point there should be a review of the laws themselves.”

Without modern laws or infrastructure spending on sectors such as telecom and electricity, Hassan and her ruling party’s platform — of relying on growth to spur jobs and keep the debt looking respectable as a decreasing proportion of GDP — look to be in serious danger of failing, especially as the economy has now started a natural downturn. “We are now at a crossroads; to sustain high growth we must invest in infrastructure,” says Mazen Soueid, head of research at BankMed, which is owned by the prime minister’s family. 

As Executive went to print in late November 2010, the cabinet had halted its weekly meetings because of political tensions over the Special Tribunal for Lebanon. Parliament had only managed to pass two piecemeal laws, one covering oil and gas exploration — without fleshing out the regulatory requirements or handling the touchy subject of a Sovereign Wealth Fund — and the other a reform of Palestinian refugee rights that maintains the ban on Palestinians owning property or being employed in some 30 professions.

All of this hardly encourages optimism. “Bottom line, I’m not happy with the way things are run as a tax payer,” says Chaaban. “We are still waiting for a push by those who are conscious of these issues to put them on the table.”

But are the country’s policy makers even aware of the gravity? “They don’t know and they don’t care,” concludes Chaaban. 

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Editorial

Good work but can do better

by Yasser Akkaoui
written by Yasser Akkaoui

Lebanon’s end-of-year report card shows it is the perennially underachieving student, full of promise but yet to live up to its full potential.

We end 2010 with a sense of achievement, uncertainty and hope. The achievements are there for all to see. Indeed, in early December, Merrill Lynch revised its forecast for Lebanon’s real GDP growth upwards to 8 percent in 2010 and 5.9 percent for 2011, from earlier forecasts of 6.5 percent and 5.1 percent for respectively.

These figures are even more remarkable when you consider that they have been achieved while the rest of the global economy was on its knees, a period when Lebanese growth went from strength to strength. For this, as usual, we have the private sector to thank, especially the banking, real estate and tourism industries.

But there is uncertainty. It is clear that when Lebanon suffers from acute political tension the idea of nation building and the economic development of other sectors, such as industry and agriculture, take a back seat. When people feel that their security — in all its many guises — is threatened, the thirst to create long-term growth initiatives dries up and people put their own wellbeing first. The Lebanese become survivalists.

It is the stop-start nature of life in Lebanon that is the virus in our economic software. The government, indeed the political class as a whole, must recognize that they can’t act out their regional drama in a vacuum. They must realize that the private sector, while it continues to carry the country as it has done for decades, is not immune to their bickering.

Finally, it is also with hope that we enter 2011. We hope that the state will create an environment in which the entrepreneur can focus on creating growth rather than one in which he is constantly looking over his shoulder, afraid that the country might collapse while his back is turned. We hope that the nation regains its long-lost self respect. Of course the challenges are many, but if they can be overcome then perhaps the raw energy that has come to define the Lebanese private sector will flourish.

All that leaves is to congratulate the many young entrepreneurs who have worked hard to take their businesses forward in 2010, creating jobs and bringing a sense of dynamism to the economy. It is they that Executive is proud to represent as a platform for their issues and concerns.

Wishing you all prosperous, but above all, a safe, healthy and happy 2011.

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Society

Kings of consumption

by Emma Cosgrove
written by Emma Cosgrove

Branding may be an elusive concept to define, plan and execute, but a successful brand is easy to spot. To determine which brands are winning the battle for Lebanon, Executive commissioned a study with IPSOS research firm to determine the top five brands in major categories of consumer life.

We polled 501 people of all ages, vocations and education levels from Beirut proper and its major suburbs and after hundreds of phone calls and door-to-door visits, the results are in.

Banks

Among all banks that operate in the Lebanese market, which is the top bank, in your opinion?

Fashion

Among all the fashion stores and clothing outlets that you are aware of in the Lebanese market, please name your favorite store.

Malls

Among all of the malls that you are aware of in Lebanon please name your favorite mall.

Groceries

Among all the supermarkets that you are aware of in Lebanon please name your favorite supermarket.

Confectionary

Which company sells the best confectionary products in Lebanon?

University

Among all the universities in Lebanon, which is the top university, in your opinion?

Wine

Which company offers the best wine in Lebanon?

Home

Among all of the furniture and appliances stores that you are aware of in the Lebanese market please name your favorite store.

Juice

Which company offers the best juice in Lebanon?

Dairy

Which company sells the best dairy products in Lebanon?

Water

Which company offers the best water in Lebanon?

Source: IPSOS, EXECUTIVE

Sample size: 501

Margin of error: ± 4.3%

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Society

A bright future?

by Paul Cochrane
written by Paul Cochrane

 

Lebanon’s industrial sector has overcome the odds stacked against it to have a surprisingly good 2010. Exports rose 32.6 percent to $2.56 billion as of the third quarter of 2010, up from $1.93 billion in the same period last year, according to figures from the Ministry of Industry. Imports of equipment and machinery were also up by 13.54 percent to $176 million, a healthy sign of cash being injected into one of Lebanon’s most neglected economic segments in terms of investment.

What was unusual about 2010 was that machinery and mechanical appliances topped the export list, at 21.21 percent, or $544 million, of the total, followed by exports of jewelry at 19.77 percent, or $507 million. In 2009, the country’s jewelers were the biggest exporters at 31.5 percent of the total.

“This year, Lebanese industrialists and entrepreneurs succeeded in overcoming internal instability, the global economic situation, the high cost of raw materials and unfavorable exchange rates,” said Charles Arbid, general manager of Rectangle Jaune and president of the Lebanese Franchise Association (LFA). “The rise in exports is also due to the development of certain markets and existing markets — the first destination is the Arab countries, but also toward Mediterranean countries, which have become an important target for exporters.”

Lebanon’s strong economic growth has also aided the sector, with domestic sales on the rise.

“Internal consumption is up, and there is demand for Lebanese products,” said Arbid. “It’s a maturity stage where on a technical level we’re strong enough and capable enough to produce the right products. There is definitely a lot of competition, but with production prices increasing in the Far East today, people are turning to easy-to-find products made here at a good price.” His company, Rectangle Jaune, experienced growth of 8 to 9 percent this year, “but it has been a huge effort to maintain this,” he conceded. Last year the clothing company had double-digit growth.

Attar Steel, which has an annual turnover of up to $5 million and is one of the top-10 Lebanese players in the industrial sector, recorded 25 percent growth this year in the Lebanese market, outdoing its typically buoyant business in Saudi Arabia.

“This year was better than 2009, and better than 2008. Lebanese sales were particularly good, as 2009 carried with it the terrible effects of [the political unrest of May] 2008,” said General Manager Hassan Attar. The company, which has a 12,000 square meter factory in the Bekaa with a staff of 40, produces 1,000 items, from light, perforated and embossed steel, to large steel doors and hangers for airports.

Evolution of industrial imports of equipment and machinery ($millions) and the evolution of industrial exports ($millions)

On-the-ground realities

At 9 percent of Lebanon’s gross domestic product, industry is an important employer and sector for the country, even if it is not living up to its full potential. “In general, Lebanese exports are getting better, and 2010 has been good for industry,” said Fadi Gemayel, chairman of Gemayel Freres and President of Libanpack. “That doesn’t mean we don’t have impediments, such as political instability, but we are growing and can grow more.”

Diana Menhem, a researcher on Lebanese industry, says the sector is being hindered by the high costs of labor, inputs and energy, and the “quasi-monopolistic behavior” of importers.  “What’s important in the end is that industrialists are not interested in developing their products — value-added is low and decreasing, as a World Bank World Development Indicators study shows,” she said. “Within that, what is more alarming is that the percentage of medium and high technology is really low. It’s because there is no incentive to improve their products and the government is not saying ‘we’ll help out and subsidize energy or exports.’”

While the World Bank study shows a gradual decline in value-added manufacturing as a percentage of GDP up to 2008, the LFA’s Arbid attributes the export increase in 2010 down to the industry having adopted value-added goods.

“There has been a definite increase in industrial exports, and that is due to the efforts of industrialists over the past decade to develop products and services with added value,” he said. “There has been a big effort in branding, something I’ve been fighting for with colleagues, for added value, and we are going toward specialized production.”

Pushing such value-added production is the LFA, whose membership has swelled by 50 over the past year to 120 companies, brands and concepts. “We have a powerful and influential association as many businesses are going towards the brand and franchise concept,” said Arbid.

Franchises include food producers, bakers, jewelers, services, beauty care and restaurants.

Libanpack is another example of adding value to Lebanese products, with its packaging facility set up two years ago as a non-profit organization to boost exports. Initially financed by the Swiss Development Agency, and given land facility by the Lebanese Industrialists Association, the facility now works with 50 companies.

“As industrialists we cannot narrow our competition on prices due to the cost structures in Lebanon, so we have to put forward our competence in other fields, such as value-added, packaging and design components,” said  Libanpack’s Gemayel. “Packaging is one of the contributing factors now to marketing goods, and Libanpack is a platform for those involved in packaging to add value to their exports. In that sense we have given small and medium-sized enterprises the tools to do this, to use the most advanced packaging material.”

The need for a plan

For Lebanese industry to push the proverbial envelope further, more action needs to come from the government.

“We need two things: a serious plan, as industry requires plans, and linkages between industry and human resources to carry out such plans,” said Menhem. “There are a lot of models we could use from countries such as Singapore, South Korea and China. In all these cases what these countries have is a large, well-funded industry ministry.”

Government investment could, in particular, be of great benefit to the agro-food industry; the Lebanese Farmers Syndicate reported that agriculture generated some $1.5 billion in gross revenues in 2009, but could generate $3.5 billion if there was sufficient cash pumped into infrastructure.

Attar Steel </p> </div> </div> <div class=

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Society

Investing in the name

by Emma Cosgrove
written by Emma Cosgrove

 

A company has a brand whether they want it or not” is a popular adage for explaining the importance of branding as a discipline. And, according to a recent survey conducted by local branding firm Brandcell entitled ‘The State of Brand Management in Lebanon,’ it is one that may need to be more explicitly communicated to Lebanese businesses, organizations and institutions.

“In Lebanon [branding] has become, by force, a need. But it hasn’t been easy and still it’s not easy. Branding is still largely misunderstood and unappreciated and very vague to the client,” said Abdo Saleh, executive design director at Brand Central. Brandcell’s survey polled 50 professionals — from marketing managers to chief executive officers to communications and public relations (PR) managers — to find out if they truly have a grasp of the illusive concept of branding and if it is properly integrated in both the perception and operations of their institutions.

City Mall - Lebanon

The study found that “although Lebanese marketers believe in the importance of branding and its influence on customer choice, they lack the full knowledge related to a brand’s economic value creation and to a brand’s relation to business strategy.”

Joumana Rizk, owner and managing director of Mirros Communication and Media Services, said that she was in the public relations (PR) game for over 10 years before she began recommending that her clients work with her company in addition to branding firms in order to create the best solutions and strategies.

“When we want to deal with PR or work on PR and communications we cannot take just one part and forget the other parts,” said Rizk. “PR has to be incorporated in a bigger strategy, which includes branding and communications and marketing. So of course when I discuss PR and communications with my clients, it has to be incorporated in a branding approach.”

Taanayel Dairy Brand - Lebanon 

In-house

There is only so much an outside PR professional or branding firm can do to make sure that a branding strategy permeates every level of an organization; something branding professionals insist is essential to ensuring the “authenticity” of a branding strategy. Though it is the job of the branding consultant to make sure that the brand identity and strategy chosen is organic to the institution, internal communication and the spreading of a branding philosophy throughout an organization ensure that the strategy is kept consistent and executed on every possible level.

“Its not a one way thing — it’s a chain. Everybody has to be involved,” said Rizk.

Only 31 percent of marketers in Lebanon think that their company’s employees have a good understanding of the core ideas of the brand identity, even though 73 percent of marketers survey their employees regarding their understanding of the brand, according to the Brandcell survey.

Branding Survey: Beirut, Lebanon

This indicates that 42 percent of marketers are aware that their branding strategies are not penetrating through the ranks, but have so far been unsuccessful in remedying the situation. 

The study notes that Lebanese marketers “need to devote more branding efforts especially to engage employees, have a more supportive management and have brands aligned with business strategy and operations.”

However, Saleh says that this disconnect is a common occurrence in organizations in highly developed markets as well.

“To be fair [this] can be found in developed markets — you would be surprised,” he said. “In very sophisticated markets and with very sophisticated companies you will still find those faults of understanding. That’s quite normal because it’s a very tricky discipline.”

Going into the metrics

One way to convince executives and even staff of the importance of an intimate knowledge of their own brand is by presenting it in terms of dollars and cents.

But this is yet another “tricky” task. While 80 percent of the marketers claim to measure the financial value of their brands and the return on brand equity generated by their efforts, only 40 percent of marketers claim to be aware of how brands create financial value for their organizations.

Supporting a theme of overconfidence, this paradox suggests that 40 percent of marketers are attempting to measure their brand’s financial value without truly grasping how this value is generated. This fact contributes to a widely acknowledged lack of standardization in return on brand equity and brand value metrics.

Branding survey cont...: Beirut, Lebanon

“Return on investment in branding is as elusive as the search in alchemy for the elixir of life,” said Saleh. “Every branding specialist worldwide and every marketing guru claims that they have formulated the right approach on how to financially prove the success or failure of branding… but you won’t find one standard today that most people are adopting. Everyone has their own and sometimes they are protected by a proprietary system claiming that they have the only answer.”

Yet another curious contradiction among marketers is their rock solid belief that their tactics are effective. Even though 92 percent of marketers say their branding is effective in influencing the choices customers make, only 71 percent of them claim to survey their customers about their brands. This leaves 21 percent of marketers believing that their efforts are working without bothering to be sure.

It is an issue of consistency and follow-through, which are the main roadblocks to truly effective branding and a particular problem in the local market. “Lebanese people are very good at creating concepts and ideas but they don’t sustain them properly. Our main problem is consistency,” said Albert Thoumy, head of communication strategy and development for Crepeaway. “We have good brands and good communication skills but we do not question ourselves enough to do something different, to apply high quality standards and to innovate,” he said in conjunction with Brandcell’s survey.

Important aspects of branding according to brand managers: Beirut, Lebanon

The evidence shows that this is not an industry at a crossroads, but simply a phase in a progression toward a mature branding market, though it may frustrate the experts waiting for their clients to catch up.

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Real Estate

Executive insight Sayfco Holding

by Chahe Yerevanian
written by Chahe Yerevanian

 

In light of the strong price performance of the Lebanese real estate market during the last three years, a popular topic of discussion across the country has been whether we are in the middle of a market bubble. Are prices destined to fall, or is there truth to the old Lebanese proverb that land in Lebanon is as precious as gold?

As with any product or service, real estate prices will always be governed by the laws of supply and demand. In addition to increasing local demand, the real estate market in Lebanon also attracts buyers from the Lebanese expatriate community (which some estimates peg at as much as 15 million), and from wealthy Arabs. In a region mostly dominated by desert plains, Lebanon’s temperate climate, lively nightlife and diverse geography stand out like an oasis in the sands.

However, in the first nine months of 2010, sales to foreigners actually dropped by 0.7 percent relative to the same period last year, according to Bank Audi.

Strong end-user demand from both residents and non-residents, coupled with a limited land area, has driven increases in real estate valuations. The average value of property sold in Lebanon increased 28 percent in the first nine months. Some areas of Beirut, such as Downtown, Verdun, and Achrafieh, are especially sought-out but also have relatively low land availability; consequently, these areas have experienced the highest increases in value.

Spreading out

Given the sharp increase in price, which starts around $6,000 per square meter in downtown, demand has shifted to the suburbs of Beirut (such as the Metn) where prices are comparatively more affordable.

Again, once fair value is reached in these suburbs, the trend and demand will shift further out into the outer suburbs (Keserwan/Jbeil from one side and Aley/Chouf from the other side). As in the development of any country, high prices in the city center will displace local demand farther out to the periphery of the city. A crucial factor for this continued growth is the development of an adequate transportation infrastructure for residents to easily commute from these suburbs to their area of employment.

Finally, from a financial perspective, the key ingredient in past real estate bubbles around the world — debt-fueled speculation — is for the most part missing in the local market due largely to wise governance from Banque du Liban, Lebanon’s Central Bank. Given the regulatory limits on debt extended by banks for real estate construction, most major developers fund a majority of a project’s cost with equity and, to a lesser extent, cash proceeds from the pre-sales of apartments. Even credit facilities to the buyers of a residence are typically only extended if a substantial percentage of equity has been injected into the transaction.

These positive factors do not mean that prices will forever increase at double-digit rates in all areas, or that a slowdown in sales activity will never occur. Even with positive market dynamics, the type of supply must follow changes in buyer requirements or desires. For example, as real estate prices rise in Beirut, demand is increasingly shifting to smaller apartments (below 200-250 square meters), the typical market demand of major European cities. Periodically, political or security fears may also sometimes cause a temporary drop in sales volume. However, the long-term fundamentals of the real estate sector in Lebanon are sound. 

Given its distinctive cultural heritage, geography and the resilience of its people, there will always be strong demand for real estate in Lebanon from residents and non-residents alike. This demand, coupled with a relative scarcity of supply, will support prices in the long run. Monetary authorities in the United States and Europe may have the power to run their printing presses and to create dollars and euros at will, as they have recently shown, but God stopped creating land in Lebanon a long time ago.

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Comment

Betting on the Blue Line

by Nicholas Blanford
written by Nicholas Blanford

You have to hand it to Khalil Abdullah, who must be the most optimistic businessman in Lebanon. He is currently putting the finishing touches on an extravagant Afro-Arabic style tourist resort on the bank of the Hasbani River, less than a mile upstream from the border with Israel.

This section of the Hasbani River cuts a narrow gorge through a grassy plain at the foot of the Shebaa Farms hills, flanked by dense oleander and eucalyptus trees. The Blue Line, the United Nations-demarcated boundary that corresponds to Lebanon’s southern border runs up the middle of the Hasbani at this point. If visitors to Abdullah’s resort swim to the far bank of the river, they will have entered Israeli-occupied Syria and risk being shot by Israeli troops. Indeed, when Abdullah began work on his project, Israeli troops would turn up on the cliff on the opposite bank and peer at him through binoculars.

Israel’s unease over Abdullah’s activities was probably due to concerns he was planning to pump water from the river. The Hasbani is one of three tributaries of the Jordan River that flows into the Sea of Galilee, Israel’s largest source of fresh water. Previous small-scale pumping schemes by the Lebanese government and local farmers have triggered uproars and even threats of war.

Furthermore, this section of the border is notoriously porous and a favorite location for cross-border smuggling, particularly narcotics. In 2007, two drug smugglers wearing Spanish United Nations Interim Force In Lebanon (UNIFIL) uniforms attempted to enter Israeli-occupied Syria near Abdullah’s resort by crawling through a storm drain. Unfortunately for them, Israeli troops had staked out one end and shot one of the two smugglers as he emerged.

The Alawite village of Ghajar, lying a mile north of Abdullah’s resort, has long been a conduit for cross-border smuggling. The Blue Line splits Ghajar so that the upper two-thirds fall inside Lebanon and the remainder in Israeli-occupied Syria. After Israel’s troop withdrawal from South Lebanon in 2000, Hezbollah set up a position in the northern part of the village from where they ran an intelligence operation inside Israel. Israeli troops occupied the area during the 2006 war and have remained there ever since to ensure Hezbollah cannot return.

In November, the Israeli government finally agreed to a UN-brokered compromise in which it will cease its military presence in northern Ghajar in exchange for UNIFIL and the Lebanese army maintaining a tight security cordon to prevent anyone from accessing the village from the northern side. There was an element of bloody-mindedness in Israel’s procrastination over Ghajar. The village is sealed off on the southern side anyway, with the only available access through a checkpoint manned by Israeli soldiers. Given the presence of the Lebanese army in the border district and UNIFIL’s cordon of fences, patrols and watchtowers, it is unlikely, if not impossible, for Hezbollah to return to the village as they did before 2006. 

However, there was a legal complication in that the residents, although Syrian nationals, have held Israeli citizenship since 1981. That meant that Israeli citizens technically would be living on Lebanese territory.

What would happen if one of them fell sick and needed an ambulance to take them to hospital, or if repairs needed to be conducted on a house in northern Ghajar? Could an Israeli doctor or electrician cross the Blue Line into Lebanon? The UN, Israel and, grudgingly, it seems, Lebanon, have agreed on a sensible compromise to return the situation to pre-2006 so that the residents can lead normal lives.  Ultimately, the curious case of Ghajar can only be fully resolved when the Israelis and Syrians strike a peace deal and Israel withdraws from Ghajar, the adjacent Shebaa Farms and the Golan Heights. However, Israel’s decision to finally adopt long-standing legislation mandating a national referendum to decide whether or not to end the occupation of Syrian territory and East Jerusalem has dimmed hopes of a resumption of peace talks and increased chances of war.

But the ever-optimistic Abdullah has an answer for that. A later phase of his project will see the construction of a 60-room hotel on the cliffs overlooking the Hasbani gorge and his resort: “Maybe they can hold future peace talks there. After all, it will be at the junction of the Lebanon, Syrian and Israeli borders.”

NICHOLAS BLANDFORD is the Beirut-based

correspondent for The Christian Science

Monitor and The Times of London

 

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Real Estate

Q&A Bassim Halaby

by Rayya Salem
written by Rayya Salem

 

 

This year saw the launching of Beirut Terraces in Minet el Hosn — developer Benchmark’s second high-end project in the capital, with one of the highest prices per square meter in Beirut starting at $7,200. With more than $1.4 billion invested in residential projects, both in Lebanon and the region, the four-year-old firm is one of the key players in Beirut’s luxury property market. Executive sat down with Chairman and Chief Executive Officer Bassim Halaby to chat about the current and future state of Beirut’s property market, with a special focus on the Beirut Central District (BCD).

E Were the rises in the price of property in Beirut over the last two years expected or even healthy?

Since the 2006 to 2008 period, the spike in prices made Lebanon seem brighter than it was. It’s the gap between the retraction in the world economy with the growth of Lebanon’s property market that made us look very good. But we all knew it was just a one or two-year phenomenon. Now, 2010 to 2012 is a time where solvency is expected to take place in the market. Most stock of housing should be absorbed by the market. If it [isn’t], it will take one additional year. Developers work on a pre-sale basis, so my sense is that in 2012 the market will stop witnessing mushrooming of new projects and there will be a major slowdown in the construction industry. Sell-offs will not happen at rock-bottom prices, but at good value for money.

E What about prices outside of Beirut?

The price of land doubled in the last five years in BCD and more than tripled around Beirut. So the BCD was already leading [the market] and hit a ceiling quickly. Beirut [areas outside of Solidere] has grown irrationally to the extent that prices around Beirut are very comparable to Solidere, without having the level of accessibility, the level of organized environment, control and zoning. It’s a fixed, regulated, predictable neighborhood. This is why people buy in BCD, because they know what they will view from their office or home. I would say prices have reached stabilization— a normalization of the market.

E Is infrastructure improving to be able to absorb the increase in construction?

Beirut infrastructure is a disaster in progress. The BCD has been planned on the basis of density, size of roads and anticipated traffic. But the moment the spillover of traffic of [greater] Beirut goes into BCD on the port roads, the BCD closes down.

E We have seen more demand for smaller apartments. How are developers responding?

Beirut’s property market is not homogenous; there are 17 micro markets each behaving differently. Small apartments — 90-150 square-meter (sqm) — are not a new trend in some of these markets, particularly on the outskirts of the city, but would definitely be a novelty in BCD.

People have been buying small apartments, crowding themselves into spaces they believe they can live in and then closing off balconies with glass, meaning that the indoor space was not enough for them. That’s why one of the concepts of Beirut Terraces was to create an indoor/outdoor living space. But in general, the smaller the apartments, the more a developer has to provide costly parking space. For a 300 sqm apartment I have to provide two spaces. If I build three 100 sqm apartments, I have to provide three. Outside Beirut, the municipal law is not as strict on amenities and services provided.

E From your building experience in the BCD, what are buyers’ preferences shifting toward?

Having tried Wadi Hills, where people wanted townhomes with gardens, we came to the conclusion that we could do the same concept of townhomes, yet stacked vertically. They feel private yet close to each other, like in a village.

E  More developers are claiming to build “green” projects. Are buyers more aware of environmentally-friendly construction?

Today, “green” is not a selling item. LEED certification [the United States Green Building Council certification system] is not a valid draw for a buyer. But buyers are becoming more and more concerned about long-term running costs of their unit. The reason to buy is still location, size and quality of life offered.

E What draws investors to Lebanon in spite of the political instability?

Politics, security and stability have never been a reason to stop Lebanese from investing in real estate. The market is led by at least 66 percent demand from [local] Lebanese, 20 percent from Lebanese expatriates and 14 percent from non-Lebanese demand. So Lebanese are always interested in having an apartment for themselves or their kids.

E Have developers’ profit margins changed over the last few years?

Today we don’t have a project in Beirut that exceeds $130 to $150 million in [construction] costs, unless it’s something like City Mall or a commercial project. A project value of $500 million [such as Beirut Terraces] means you’re talking about $150 to $170 million for the cost of land, $150 million on construction cost and the rest are revenues that you have to pay taxes on, so it’s not [all] profits. Developers are operating on profit costs ranging between 10 to 30 percent.

E How will the BCD area change in the near future?

The landfill area [reclaimed land on the seafront adjacent to Beirut International Exhibition and Leisure (BIEL) center] consists of available plots in BCD. BIEL is a temporary structure to be replaced by a tower, which might be 200 meters high, which Solidere is planning. Whereas the height of Wadi Hills is 110 meters, the height of towers on landfill plots is going to be around 180 meters.

E  Looking towards 2011 and beyond, what cost issues are developers facing?

Developers do ‘land banking’ and therefore buy land in anticipation of the next project and not because we hedge on whether there is stability or long-term peace. There is always a project in the pipeline. Construction cost fluctuates depending on demand, but it has stabilized due to the financial crisis. China is no longer building by the billions and thus increasing raw material prices. Gulf countries are no longer experiencing high growth potential. So we are working with a normal situation where construction cost is predictable. The value of real estate has normalized.

E What about the recent influx of “nonprofessionals” in the real estate market?

This is an unregulated business and anyone can become a developer. That’s why we saw so many entrants. People think that you can bring the architect and make him the project manager, architect, builder and everything. You [can] bring a contractor who would subcontract everything else. Some people get together, build a project, distribute shares or units among themselves and sell the remainder, which brings in some profits.

The problem is when these same people get into another project, but now they have to sell all of it off to market. Without the right calculations, they build the wrong product for the wrong market. In Beirut, approximately 30 percent of stock has been built with substandard quality and is wrongly priced. The market regulates itself so they will eventually close down their shop.

E Is choosing the right architect for a major project in BCD becoming more important because of the construction boom and subsequent competition?

We want Beirut Terraces to be an award-winning design at the global level. We want to put Beirut on the map of quality of architecture and quality of life and match what Solidere is trying to promote: ‘Beirut as a reborn city.’ By choosing Herzog & de Meuron [architects] we have been able to achieve, despite the market’s soft tendencies today, great interest and a demand that is resilient to market softness.

E What is the key ingredient that makes Beirut real estate vigorous?

Beirut has shown that cities are based on culture and not only services and economies. When I was doing my thesis back in the 1980s, I looked at cultural activities like jazz festivals that re-invigorated the economies of New York, Boston and cities in Canada. Beirut has all the ingredients of cultural activities, beyond the nightlife, beyond the food, beyond everything. The biggest ingredient is the people… this culture transcends to every single Lebanese, so big developers today are more or less targeting a diaspora that has the taste of globalization but has the real know-how of the local culture.

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Gold’s glorious 2010

by Paul Cochrane
written by Paul Cochrane

 

It’s been a glittering year for gold globally, with a Troy ounce (37.1 grams) rising $300 to a record $1,424.60 in November, before backing down slightly into the high $1,300s as Executive went to print. And it’s been just as bright a year for the precious metal in the Middle East. The Saudi Arabian Monetary Agency (SAMA) re-checked its accounts to find it had 180 tons more than it originally thought, Lebanon’s central bank reserves appreciated by more than $2 billion to close on $13 billion, and gold bugs in the United Arab Emirates were given the novel option to buy 24 karat bars from vending machines.

For individuals and governments alike, gold has been the go-to “alternative monetary asset,” as World Bank President Robert Zoellick put it in November.

Bullion took on a new allure as the United States dollar and the euro continued to weaken amid ongoing concerns about the financial markets, and central banks sought to hedge against inflationary pressure. Driving demand even higher was the inability of institutions and currency hawks to buy Chinese renminbi, as its exchange is restricted, leaving few options to hedge against further drops in the world’s two leading currencies. Gold’s surge has raised debate about whether the precious metal should have a monetary role four decades after the US ended the gold standard. A return to the gold standard is not likely, or indeed necessarily wanted, but any country that sold off a good chunk of its gold, like Britain did a decade ago, is today regretting not having hard assets tucked away in the vaults.

For dollar-pegged currencies, which includes Lebanon and most of the Gulf Cooperation Council (GCC) countries, holding sizeable gold reserves has been a real boon. Five Middle Eastern and North African (MENA) states are in the top 30 countries in the World Gold Council’s (WGC) World Official Gold Holdings rankings. But it is not the usual suspects of the oil-rich Gulf states taking the titles: Lebanon ranked 18th globally — just behind Britain and ahead of Spain — with 286.8 tons, equivalent to 25.2 percent of the central bank’s total reserves. Algeria, ranked 23rd, has 173.6 tons, Libya is right behind with 143.8 tons, and Turkey is in 29th place with 116.1 tons,

Out of the GCC nations, only Saudi Arabia makes it into the top ranking, leaping from 24th to 16th place in March when SAMA announced that, incredibly, due to “a difference in accounting” rather than new gold purchases, the kingdom had 322.9 tons instead of the earlier announced 143 tons. One can only wonder how much unaccounted-for gold there may be still hidden under the tiled floors of the Saudi central bank when such a staggering discrepancy is revealed. Furthermore, such holdings are only the reserves of SAMA, not the private stash of the estimated 7,000 members of the Saudi royal family, nor of Saudi citizens. Then there is the vast amount of gold ore lying under the kingdom’s sands, estimated at 20 million tons, according to Australian government statistics. The Saudi Arabian Mining Company (Ma’aden) has five operating gold mines, with proven gold ore deposits of 1.3 million ounces and current exploration suggests deposits of more than 8 million ounces elsewhere on its acreage. This year British and Australian gold mining companies obtained exploration licenses.

With gold production having peaked in 2011 at 2,645 tons, and the output of the four traditional producers — South Africa, the United States, Canada and Australia — on a downward curve, Saudi Arabia, in addition to its gushing black gold, appears to be experiencing a gold rush of the more traditional type.

The big question now is whether gold will continue to rally in 2011. Gold bugs are dreaming of an ounce hitting $2,000, while other pundits suggest the rally may be over and it is better to buy silver.

MENA central banks holding gold appear to have no desire to sell. As Riad Salameh, the governor of Lebanon’s central bank, told Reuters in October: “Lebanon will sit on its gold… In a world where you could see major crises, the payment instrument of last resort is gold — especially for a country like Lebanon that doesn’t have natural resources.” The same could be applied to individuals. Personally, as a gold bug myself, I’m hoping for another glittering year in 2011.

PAUL COCHRANE is the Middle East

correspondent for International News Services

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Real Estate

Towering profits

by Rayya Salem
written by Rayya Salem

 

A remarkable 2010 witnessed the wholesale destruction of records in the real estate sector. Soaring tower heights were matched by booming construction activity, high-profile conventions, more sales than ever (and of higher values) and the launching of unprecedented mega-developments. With foreign investment steadily increasing and excess liquidity at local banks, the property sector enjoyed a healthy stock of both cash and confidence.        

Lending for new homeowners has never been more varied, as banks competed this year to offer housing loans across the market with rates tailored to various requirements. Some lending facilities allow residents to borrow 80 percent of a home’s value and have raised the maximum value of loans in parallel with the climbing real estate prices seen across the country, though especially in central Beirut.

As the supply of free plots runs thin and the cost of land climbs ever higher, experts agree that prices, though they have stabilized, will remain at levels too high for most local Lebanese. Bilal Alayli, president of the Order of Engineers and Architects, said there were around 100 plots left in Beirut, covering some 400,000 square meters. He added that owners are holding on to their land, hoping prices will continue to soar.

The ubiquitous cacophony of construction that has been Beirut’s soundtrack all year is scored in the statistics: figures from the Order of Engineers and Architects of Beirut and Tripoli show that construction permits, one of the major indicators of real estate activity, covered an area of 14.4 million square meters in the first ten months of 2010, compared to 10.19 million square meters in the same period last year, a 41.4 percent increase. Cement deliveries reached 3.8 million tons in the first nine months of 2010, an increase of 5.3 percent from 3.7 million tons in the same period last year, according to the Banque du Liban (BDL), Lebanon’s central bank.

Total revenue from property sales in Lebanon reached a record-breaking $6.96 billion in the first nine months of this year, an increase of 60.6 percent compared to the same period last year, according to the General Directorate of Land Registry and Cadastre (GDLRC). The number of total transactions increased by 25.3 percent to 69,501, also the highest recorded in that category. The average value of all the property sales in the nine-month period increased 28.2 percent compared to the same period in 2009.

According to the Ministry of Finance, property registration fees in 2009 made up 1.2 percent of gross domestic product, which translates into $417 million. In the first quarter of 2010 alone, registration fees jumped 87 percent year-on-year, reaching $128 million.

Investment

According to the Investment Development Authority of Lebanon (IDAL), 70 percent of total foreign direct investment in 2009 was funneled into the property sector, which translates into more than $3.3 billion. Hawlo Tleiss, executive vice president of IDAL, conceded that while some foreigners may be put off by Lebanon’s shaky national security situation, the group pointed potential investors toward the low crime and robbery rates in Beirut compared to other major cities.

A World Bank report also suggested that a growing proportion of remittances, estimated to reach up to $8.2 billion by the end of this year, are being used to buy land and housing.

Those in the sector say that the administrative red tape involved in property development — a major drawback for investors — has been more burdensome than usual in 2010, which was borne out in the “Doing Business 2011” report issued by the World Bank/International Finance Corporation in November. Lebanon was ranked 142nd globally out of 183 countries and in 16th place in the Middle East and North Africa (MENA) region for ease of obtaining construction permits. It also ranked 111th place globally and 16th regionally for time it takes to register a property.

Lending

This year, banks were more willing than ever to offer tempting mortgage deals to homebuyers, thanks to the excess liquidity on their books, courtesy of the influx of funds that flowed into Lebanon’s banking sector after the financial crisis.

Nassib Ghobril, chief economist at Byblos Bank, told the Development and Real Estate Annual Meeting (DREAM) conference in November that mortgages increased in value by nearly 50 percent in the year ending June 2010. As of that same month, mortgages accounted for 13 percent of Lebanese banks’ private sector lending, according to Executive calculations based on BDL data.

Despite easier access to credit, one of the major topics this year in real estate was the fact that most locally employed Lebanese have been priced out of the Beirut property market due to the growing disparity between prices and income. Few Lebanese can afford a home in Beirut when first floor prices in new buildings start at $6,000 per square meter. However, despite the financial crisis, wealthy Lebanese expats and Arabs living in the Gulf continued to spend on Lebanese property, sustaining the high prices.

Downsized demand

While the real estate sector in general has experienced sustained growth and momentum, the stagnation in the upper end of the market that started in 2009 extended throughout this year. Sales of ultra-luxury apartments slowed, and sky-high prices began to — if not come down to earth — at least plateau.

“It’s probably healthy that it did [slow down],” said Karim Makarem, director of Ramco real estate advisory firm. “We were seeing 25 percent growth in prices per year for five years, which is unsustainable.”

Faris Smadi, chief executive officer of SV Properties & Construction, agrees: “After the surge of real estate prices in the last three years, we did reach something of a plateau this year, mainly due to the fact that developers put prices that weren’t achieved.”

The let-up in the market seems to be focused on prices of large apartments, which have been stagnant for the last year and a half, with some prices even falling as sales slowed. According to Joe Kanaan, president of brokerage firm Sodeco Gestion, “there is a shortage of what is really in demand — small apartments.”

Faris Smadi of SV Properties and Construction, the firm behind 3Beirut

Demand has clearly shifted toward 80 to 200 square meter apartments, especially on the outskirts of downtown. High-end areas such as Sursock, where developers usually build larger apartments, are also experiencing the shift.

“The mentality has changed,” said Smadi of SV properties. “Before, the traditional buyer in downtown wanted a large apartment, particularly with large traditional living rooms, and the sea view was more important to him. Now, buyers are happy to have smaller apartments in the right location with the right infrastructure and amenities. We took that into account in our new project [3 Beirut] where approximately 50 percent of the apartments are between 200-240 square meters.”

Land going through the roof

Construction prices and the price of labor remained stable in 2010 (as opposed to a slight rise in 2009), but finding reasonably priced land in Beirut was a major headache for many developers. The Beirut Central District (BCD) does have available plots, but is too over-priced to be a feasible option for most. As such, many developers have started construction — even of high-end residences — on the outskirts of Beirut. Houssam Batal, founder and CEO of Premium Projects, said that the “market noise” created by some of these developments is confusing clients, as they are marketed as luxury residences in “prime areas.”

Construction area authorized by building permits (million square meters)

“Developers buy relatively cheap lots [in areas such as Badaro, Zkak El Blat, Tehouita, or Sioufi] and claim that the location is prime, but they are at risk because sophisticated clients will realize that these residences are not worth the higher prices and are resistant to pay for the more expensive units,” he said.

Mohamad Chamseddine of Information International, a Beirut-based research consultancy said: “This year, land prices in villages rose because more people want to build homes there, seeing that Beirut prices and rents are too high. Tens of thousands of Beiruti families have moved to suburbs like Damour, Meshref, Khalde and Aramoun. We even saw [during the 2009 elections] that politicians who want to appease the Beirut voters visit these areas heavily because those families can’t afford to live in Beirut anymore.”

The average price per property on sale in Beirut grew 22 percent year-on-year in the first nine months of 2010, while the figure stood at 28 percent for Lebanon as a whole in the same period, according to Bank Audi. As land became scarce, prices had no place to go except up, although a period of stabilization is expected in the immediate future.

To keep prices from escalating further, Alayli of the Order of Engineers and Architects suggests higher taxation on property sales, noting that the registration tax is a lowly 6 percent. Currently there is also no capital gains tax. Kanaan, of Sodeco Gestion, also suggested axing the old rental law, in gradual phases, to allow old buildings to be demolished, freeing up new lots for new developments.

FDI inflow to the real estate sector + Arab FDI inflow to the real estate sector

Higher price tags are causing property shoppers and potential clients to become savvier, focusing on the construction specifications, negotiating harder and taking longer to seal the deal.

Due to limited space, rising prices, and a more competitive market in general, developers are spending less time analyzing their bottom line to focus on staying ahead of the pack. To entice clients with a prestigious address, Premium Projects spent about two years buying out the old residents and combining properties to put together a 1,800 square meter plot for Sursock Yards in Ashrafieh, an 18-story complex that is already 65 percent sold. Premium Projects’ Batal said, “We are willing to consume time and cost to get these prime locations.”

The “non-professional” scourge

Many developers and brokers have complained that there have been a rising number of non-professionals in the business, attracted by what they perceive as opportunities to get rich quick in Lebanon’s booming real estate market. They say the negative side effects have affected the whole industry.

“Since 2007, we have been seeing more people developing buildings that are really not professionals in the field. If they don’t take into account the urban planning, they are harming the area around them,” said Alayli, adding that there needs to be more regulation of urban development. 

Property forecast

Lebanon’s real estate market is predicted to grow 10 to 15 percent in the next three years, Fuad Fleifel, director general of the Ministry of Economy, said in November at the Beirut International Property Fair.

Apartment permits issued - Beirut, Lebanon

Experts agree that such growth is normal and expected for a country with so much demand, both local and foreign.

“From now until 2013 in Beirut, 90 percent of available land will be built up,” said Alayli, who adds that local demand is rising. “We have around 35,000 marriage contracts and 5,000 divorces per year; thus you can say we need at least 40,000 new apartments.”

Developers predict that even the roughly 350 projects underway in downtown will be fully absorbed, though it may take more time than usual.

Some suggest that as the Lebanese have become relatively more affluent in the past few years, more Lebanese (as opposed to Arab nationals) will be buying than before. Smadi said in earlier projects, such as Beirut Tower, 50 percent of buyers were Gulf clients and expatriates. The more recent Bay Tower is 90 percent Lebanese-occupied and most are local residents, attributing the change to the fact that the latter apartments were smaller.

Cement deliveries (First nine months of each year - in 1,000 </p> </div> </div> <div class=

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