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Real Estate

Q&A Namir Cortas

by Rayya Salem November 3, 2010
written by Rayya Salem

 

Four years from now, Beirut will have a new community adjacent to Saifi Village. District//S, a 50,000 square meter residential and retail development, will occupy a 13,200 square meter site and promises 22 five-story luxury buildings, with cafes and shops facing onto Italian-style courtyards. Executive sat down with Namir Cortas, chief executive officer of Saifi Modern sal, the Lebanese company that owns District//S, to find out more, while Anthony el-Khoury, CEO and co-founder of the property development firm Estates sal, joined the conversation to offer a sneak peak behind the curtains of District//S.

E Why did you decide to devote the plot to low-rise buildings instead of building high-rise towers like so many other developers have done in the Beirut Central District (BCD)?

NC: This project is in the BCD so already it has to fit with the general master plan. It was an obvious extension of Saifi village and therefore we, and the master planner, decided that the best use for this land would be a more contemporary interpretation of the same original urban directive. Also, the land allows for a district, as it eventually came to be called, because of its size and location.

This site links Saifi Village, Gemmayze and Martyr’s Square and is the gateway to the shopping and central area. The solution that we came up with is nothing revolutionary but essentially creates a city-like atmosphere through functional aspects as opposed to just building a high-rise or a tower. This is why we call it a city within a city. A city is about how people live, which is why we use this slogan: “architecture is inhabited culture.”

E  How did you finance the project?

NC: Like other developers, we use investors, financial backing from several banks and presales to finance it. We’ll tell you [the proportion] when it’s over!

E the architect, Graham Morrison of London-based Allies & Morrison Architects, likened the feel of the project to “simple Italian palazzos” whereby the mixture of courtyards and alleys with residences leads to “inside/outside living.”

Is this how you see it?

NC: A modern architectural language has been used to provide project specific solutions. The intent is to preserve traditional features like raised balconies, loggias, raised gardens, terraces [and] meandering alleys. These are all local features but they have not been repeated here in what I call a generic matter. They have been applied in ways that have been adapted to the project itself so that it would have sufficient harmony and patterns, but within such patterns, be varied enough.

It’s a form of contemporary Mediterranean architecture — I wouldn’t call it Western or European [architecture], it is beyond that. This is now a global world and it’s more interactive.

E How is District//S laid out?

NC: Practically every building has a raised garden on the first floor. And some buildings have a garden on top, as well as on different levels. The ground floor is all retail: above the retail spaces starts the residential areas. There are no offices in this project. There is a cultural center and a gallery to show off artisan’s work and hold exhibitions.

E  Around 30 percent of the project has been sold – are most buyers Lebanese?

NC: All of our initial customers were Lebanese. There has been, more recently, some interest from others. We sold to one European and one Gulf person recently. I think [the Lebanese] will remain the main buyers and users because they are more likely to understand it better.

The Lebanese expatriates who bought [in District//S] are the kind that are constantly here, even if their work is outside. The idea that [local] Lebanese can’t afford an apartment is untrue, even though there is a disparity. Indeed, some Lebanese have become rich because they own property.

AK: You have people who bought [apartments] who didn’t know what the [final] project will look like. They bought solely based on the story we told them.

E  What was the role of G, the sustainability consulting NGO, in the project?

NC: Hopefully we will have a green neighborhood. We do that through G by adhering to certain guidelines, which we will use to obtain a [Leadership in Energy and Environmental Design] certification.

E  Tell us how you went about planning the penthouses. What are some of their amenities?

NC: The guideline for the area [dictates] the height of the penthouses or “sky villas.” We chose to have [higher buildings] only in certain locations, generally around the corners, to use them sparingly and to lower the density of the project, and give them the additional amenity of an adjoining terrace on the roof of the adjacent building. Each one has a pool, and they enjoy an open terrace area. We have sold one penthouse recently. But we notice there is higher demand on smaller units.

E  Is this trend for smaller apartments here to stay?

NC: This is a general feature we will see more of, partly due to demographics: there are younger people buying. Prices have gone up not just for property, but for construction and power and fuel. So the running costs of the larger apartments have become… a consideration in people’s decisions.

E  What kind of retail tenants are you targeting?

NC: Interest has been coming from various parts [of the retail sector]. This will be an attractive, arty area. A little like Saifi Village, but more animated. We expect to have more cafes, more walking space, galleries, gift shops and boutiques. It’s helped by the fact that all the internal alleys and courtyards are pedestrian.  Car access will only be to the underground [parking] or the external pavements.

E  Once the units are occupied, how do you plan to control traffic in the vicinity?

NC: We have one double-ramp [whereby two lanes can exit and two lanes enter] and one single ramp. Obviously we have done all the traffic impact research. We have been generous in providing parking spaces and provided more than what is required to address the needs, [something that has] not been sufficiently addressed by other developments.

E  In terms of design, how flexible are the interiors for end-users?

NC: We worked on the design of the project with input from our marketing and sales people and direct input from actual or potential clients. As such, aided by the shape and size, we designed the flats from the inside and then added the facade. This makes it easier to have modular solutions and I believe it has helped us come up with more adequate layouts for the interior. For instance, people can buy two apartments on the same floor and merge them.

E  Tell us about the process that the architects went through, since it was their first time working in Lebanon?

AK:  The architects came and visited Beirut, we invited them on several occasions. They visited all of Beirut and the old Ottoman sites, even visiting cafes to understand the lifestyle… how people interact. We want to preserve the ideas of the old style and modernize and create continuity for our heritage. They redesigned several models, in fact they adjusted it four times, to make sure even the sunlight and wind circulates well. They were very precise about the angles of the street corners, the views from each unit, and making sure the horizontal and vertical lanes that run throughout the plot are unobstructed so there are no blocked views from alleyways.

E the architect also mentioned that none of the buildings are parallel, creating informal alleyways between them…

AK:  We want to keep people interested by having different widths of pedestrian walkways. At the plot entrance they are 4 to 5 meters wide and then open up to 8 meters wide creating “meandering alleys,” and thus none of the buildings are exactly parallel.

NC:  When you live in such proximity, vibrancy has to happen.

November 3, 2010 0 comments
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Business

Change is in the airwaves

by Karim Sabbagh November 3, 2010
written by Karim Sabbagh

Over the past decade, the telecom industry has helped to fuel the digital transformation of entire industries, economies and societies. But now the sector is entering a more challenging time following years of significant growth.

In order to stay ahead of the game, operators must build the next generation of high-speed fixed and mobile networks to keep up with customer demand; doing so will require massive investments. At the same time, they must invest in innovation and the development of new strategic capabilities. But operators are hindered in these efforts. Their traditional sources of revenues are becoming commoditized and many are struggling to find new unique services to catch the attention of their customers.

To meet all these demands, operators must strive to build leaner, more adaptive, modular and increasingly complex business models. And they must acquire the capabilities needed to ensure that these new business models can succeed, even as they continue to invest in next-generation fixed and mobile infrastructures.

Forward-looking business models must be based on a deep understanding of three overarching trends that are driving the industry into the future.

The first trend is customer ubiquity. Consumers and businesses demand constant and universal access to digital applications and content: The more bandwidth and services that operators provide, the more their customers will consume. This demand will put huge burdens on operators’ current fixed and mobile networks. Data already makes up the vast majority of network activity; much of it driven by video streaming on the web and it just keeps growing: video streaming in the United States has increased by a hefty 78 percent per year since 2005. The continuing rise of mobile ‘apps’ — the hundreds of thousands of services available on smartphones and other devices everywhere — will only intensify the phenomenon of customer ubiquity. Operators will lose ground to technology companies like Apple and Google unless they find a way to cash in on the mobile app business, which is expected to generate $40 billion in revenue by 2014.

The second trend is technology modularity, in which networks, services and applications are rapidly evolving and shifting away from vertical integration toward modular, open systems. Different networks (such as fixed, wireless and broadband) will serve end-users directly, delivering the required ubiquitous connectivity. Both applications and service offerings such as on-demand movies and gaming will likely be based on systems that will essentially be independent from the infrastructure through which they are accessed. This means that parts of the entire system can be built not just by operators but by a variety of non-industry rivals, as they try to gain a share of future revenues.

The third trend is industry innovation. Operators used to focus on protecting their core business — the development of large-scale networks — rather than experimenting with smaller initiatives. As a result, they have left themselves vulnerable to a vast array of competitors developing apps and services.

New models for a new industry

Once operators understand the implications of these three trends, they must select, design and build new business models — and the accompanying capabilities — to respond to and benefit from them. There are four distinct business models that will shape the future of telecom operators:

Network guarantors use their network assets to provide widely available and open infrastructure and timely, reliable, cost-efficient services. Their primary customers are companies operating under the business enabler model, which can take advantage of their infrastructure to offer more advanced services to their own customers. This model will require operators to be efficient in their planning, provisioning and operations, and to offer high levels of quality in terms of network reliability and service levels.

The business enabler is a “double-sided” business model. On one side, it provides end users with the broadband services they need. On the other, it helps application and service providers manage their own businesses, providing them with wholesale broadband, managed services, transaction and billing support, and platforms such as hosting and cloud computing. To make this model work, operators must cultivate their capabilities in partnership, offer flexible service customization, and aggregate their customer bases and service providers.

Experience creators capitalize on consumers’ thirst for new apps and services, as well as the needs of companies in any number of industries to digitize their businesses. They will provide consumers and business customers alike with the ubiquitous connectivity they demand — with targeted applications, fresh content and a distinctive experience — as well as the ability to create and distribute their own content. To do so, they must be extremely innovative in their products and services, as well as dedicated to serving different customer segments effectively.

Each of these three business models offers operators a way to compete in increasingly fragmented telecom markets. To extend the gains made in one market by replicating the model in other markets, there is a fourth business model that operators should consider — especially if they already have significant scale and scope, as well as operations beyond single markets or regions.

This model, the global multimarketer, offers a path for operators to make the leap to becoming truly global entities. Thanks to their inherent strengths in branding, efficiencies and reach, global operators are proving stronger than their local rivals. Successful global multimarketers are able to benefit from the cost savings available through sheer scale, as evidenced by the efficiency in capital expenditures that a select group of global operators have gained in some markets.

The only way operators can counter the numerous threats they face is by creating new business models that can effectively respond to the rapid changes overtaking the telecom industry. Operators that understand the need to move away from their traditional vertical organizations and to develop one or more of these business models must ultimately transform themselves into one or another of the modular organizations described above, with the ability to replicate their capabilities and business models across different markets and customer segments.

 But building those capabilities and business models will take time. The winners will be those operators that are first to understand the need to make this transformation, and then move fast.

November 3, 2010 0 comments
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Real Estate

A lack of Grade A

by Rayya Salem November 3, 2010
written by Rayya Salem

Though many of Beirut’s 130 downtown office buildings are in need of tenants, its Grade A office sector is suffering the opposite problem. Most of the Beirut Central District’s (BCD) premium offices are fully occupied and the supply is badly in need of restocking, as few developers have delved into that risky terrain in the last few years.‘Grade A’ typically refers to those offices in prized locations that feature top of the range interiors, facilities and services, and the shortage of quality supply was a factor helping Beirut earn the dubious honor of being fourth most expensive city in the Middle East and North Africa for office rent in Cushman & Wakefield’s February report.

Moving out

Office occupancy is at 75 percent in the BCD, the highest in a decade, according to Karim Makarem, director at Ramco real estate advisory. But most of the 100 to 250 square meter offices are unsuitable for multinationals and large firms, who typically look for 600 square meters of open floor space.

A source from Beirut’s Michael Dunn & Co. said that more than five multinationals have moved out of their Beirut offices in the last year. This was mainly because they were unable to find sufficient floor space serviced by the amenities they required with enough parking spaces for employees, forcing them to retreat to less costly suburbs such as Hazmieh, Sin El Fil and Mkalles.

Specific needs may also drive organizations to look outside the BCD: Abdullah Saleh, general manager of BrokersXP says a recent client, an Arab television station, needed an office with high ceilings and a good view for filming purposes. After viewing up to 15 premises in downtown, they opted for an office in Hazmieh on the outskirts of the city, where they found six-meter-high ceilings.

Bernard Mouchbahani, managing partner of corporate consultancy ProFinance expects areas such as Hazmieh and Sin El Fil to attract more commercial interest in the future and that Dbayeh will become a “middle class Solidere.”

But for firms like ServCorp, the world’s second largest provider of serviced offices, boasting a prestigious corporate address in downtown Beirut is a must. Barry Barakat, the firm’s general manager in the Middle East, says the country’s recent increase in construction activity and real estate prices convinced the management that demand for international services would pick up, and thus the company’s 95th branch was born in the BCD.

After settling into a 450 square meter office in downtown’s Louis Vuitton building last month, he told Executive: “In other cities, we would typically have a choice of three to five well known Grade A buildings to choose from. This was not the case in Beirut. [Compared to] the growth of Gulf Cooperation Council cities…the office sector in Lebanon has been somewhat stagnant.”

New supply

However, there is some hope on the horizon. The rate of construction for Grade A office buildings has picked up this year, after rents rose to a high of $400 per square meter annually from a market rate of $250 per square meter in 2009, according to Cushman & Wakefield’s 2010 second quarter report.

Brokers say the highest priced new constructions will be near the Starco and Bab Idriss areas of downtown. There, large firms are willing to shell out cash for what they consider to be Beirut’s prime office location: in downtown but comfortably distant from Parliament’s security upheavals and subsequent road closures.

Premium Projects is behind the upcoming eight-story Stratum office building near the Starco Center, designed by Australian architect Kevin Dash, who also designed the Bank Audi headquarters across the street. Ziad Karkaji, the group’s director of real estate, says that prices have doubled from around $3,500 to $6,750 per square meter in the sales-only project since they bought the 1,656 square meter plot in March of 2008. Some 90 percent of the grade A office building, to be completed by mid-2012, has been sold, he says, mostly to Lebanese companies who were operating in the Gulf and returned their headquarters to Lebanon after the financial crisis.

Stratum’s soon-to-be-neighbor, Developer Mouawad’s Palladium, is fully sold out. Marketer Foncia real estate consultants said the four office floors, ranging from 600 to 1,300 square meters in size, have all been leased to a single tenant. A representative from the Mikati-owned M1 group also confirmed their plan to complete a Grade A office building in three to four years on 25,000 square meters of built up area near the Starco building.

Ramco’s Makarem adds that there is a substitute to renting a downtown location: “Large, local companies come to us to look at alternatives such as buying land to develop their own office space or find other corporations [also] looking for large office space, so they can approach a developer together to get him to build what they want.”

Lebanese-Canadian Bank is building itself a nine-story $15 million high-tech headquarters on a 1,000 square meter plot in Martyr’s Square, while the Bank of Kuwait and the Arab World is erecting an 8-story, 10,000 square meter office on Foch Street, of which some 6,000 square meters will be rented out to tenants.

Parking

Although new construction will make Grade A office space more available, parking remains a major problem. “Even new office supply coming up is majorly lacking parking space. I know of some multinationals who want to move out because of this parking issue… it’s not enough for only the manager to have a parking spot,” says ProFinance’s Mouchbahani. 

Saleh of BrokersXP concedes that scant parking in downtown affects all categories of offices. “It costs $120 per car per month to park at Beirut souks and 55,000LL [$36] per month to park at [the Beirut International Exhibition and Leisure Center (BIEL)],” he said, adding: “Now they made free transport every 15 minutes from BIEL to downtown for all downtown employees, but of course top managers won’t take the bus.”

Even existing supply is not being fully used, as the 40 parking spaces under each of several downtown office buildings must remain car-free due to security rules enacted in 2006. 

The BCD municipality’s rules require only one parking space for every 60 square meters of retail space or 100 square meters of office space. International standards usually stipulate one spot per 15 square meters of gross leasable area, says Mouchbahani. Adding further pressure, he explains, is that the tenants of Grade A office buildings often try to economize on their investment by cramming their offices with workers, leaving a higher proportion without parking spaces.

The developer’s dilemma

According to Mouchbahani, part of the broader problem is that developers have shied away from building new offices because of their low yields, coupled with rising construction costs. “You need to rent it at $300 to $350 to make a 5 percent yield,” he says, suggesting they may be better off keeping their money in the bank earning interest. But these yields could be a smart investment, depending on the developer’s ability to finance the project and the expected capital appreciation.

Makarem says: “If you’re looking to develop property in downtown and not sell it, office space and their rentals would give higher yields than they would for residential. Yields for new offices vary between 5 and 6 percent, which is higher than residential property, which yields around 3 percent.”

Commenting on a recent trend whereby some developers chose to retain ownership of more than half of their office space, fearing inflation would chip away at their early profits, Mouchbahani believes prices in Solidere will remain stable for the next five years, following the continuous price rise since late 2008.

Demand and supply in this sector, or any other business sector, is heavily dependent on things we can’t depend on; though Beirut offers cheaper operating costs and higher-quality human capital compared to other Arab cities, both the political fluctuations and the lack of premium infrastructure hinders developers’ efforts.

Still, as ServCorp’s Barakat will tell you, Beirut is always a draw: “We have many Lebanese entrepreneurs expanding [their] business locations… as well as clients in our Jeddah, Kuwait, Doha and Dubai offices regularly asking us when we will open in Beirut.”

 

 

 

 

 

 

November 3, 2010 0 comments
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Finance

Banking Special – The hard truth

by Emma Cosgrove November 3, 2010
written by Emma Cosgrove

Hopefully your wealth management contracts and agreements are not the places where you skip the fine print, because if so, you could be getting hosed. Between initial charges, annual charges, transaction charges and performance charges, if you don’t pay close attention, your wealth management firm could be making close to the same amount of money from your portfolio as you are.

Even if you do read the fine print, banks are still making more than they disclose when selling third party funds, as the charges are not passed onto the client at cost. When a financial institution sells a product to a wealth management firm, the product comes with a certain charge, usually somewhere around 2 percent, which is split between the two. However, the wealth management firm will then agree with the seller to charge, for example, 3 percent and pocket the extra percentage. Essentially funds and products from third party providers are sometimes marked up twice from wholesale price.

Make sure they’re working for you

This creates an added incentive for wealth managers to sell specific products that bring in more revenue to the bank. Banks sell products and bankers essentially work on commission; they therefore inherently have split allegiances.

“Many wealth mangers focus on sales and marketing. They have a range of products and they spend their time convincing prospects and clients to buy them,” said Dory Hage, head of advisory and asset allocation at Banque Libano Francaise. “One of the most common mistakes that wealth mangers make is to sell a product that they don’t understand, driven by financial incentives.”

Also worth noting is that the volatility of today’s markets makes trades more frequent, meaning more transaction fees. Competition with online trading platforms has been pushing down bank fees, but transaction charges should still be monitored.  Keeping an eye on this figure is a necessary chore for any client with a discretionarily traded part of their portfolio. That said, trading should not be avoided for the sake of cutting costs.

And if you thought fees were bad, there is another threat to your earnings that is not contained in the fine print. This threat is institutional self-interest, and if you don’t watch closely, you can end up with a portfolio that suits your manager better than it suits you.

“In this universe there are thousands upon thousands of investments and the reality is that most bankers are more willing to push in-house funds, which are definitely not the best. The reason being that providing in-house funds, which the banking officer feels might do the trick, generates more fees for the bank rather than sending [funds] to a third party money manager,” said Nadim Haidar, senior private banker at FFA Private Bank. He continued: “All banks preach open architecture, but they rarely practice it because the bottom line is what counts. As a banker, you have to generate fees for the banks as a multiple to your salary.”

November 3, 2010 0 comments
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Economics & Policy

Q&A with Sir Andrew Cahn

by Caroline Anning November 3, 2010
written by Caroline Anning

 

Lebanon is Britain’s eighth largest trading partner in the Middle East, and exports from the United Kingdom to Lebanon in the first half of this year amounted to $348 million, while UK imports from Lebanon added up to $40 million. This is fairly small fish compared to Lebanon’s trade with other European countries, but Sir Andrew Cahn, chief executive of UK Trade & Investment — roughly equivalent to a minister of trade — is looking to change that. Executive sat down with him on his recent visit to Beirut to find out what the UK has to offer besides tea and Manchester United.

E  Britain is a relatively minor trade partner for Lebanon at the moment – do you have targets for how much you’d like to increase trade by?

I don’t think it’s helpful to have targets because I can’t pull levers to make targets work, the business communities are independent. But what I would say is that I think there’s scope for significant increase and we should work to that.

E  What are the sectors that you think that can be targeted?

Well, I met the minister for telecommunications, the minister for health and the president of the Council for Development and Reconstruction, and I was going to meet the minister for energy but it wasn’t possible. But I think that gives you a hint. Our largest volume export is pharmaceuticals, and they’re pretty significant for us, and the whole healthcare sector is one where Britain is world-leading — not just pharmaceuticals but medical devices and provision of healthcare.

In telecommunications, clearly we have leading companies, and I think the whole IT sector is one where Lebanon really does need to raise its game.

[As for] construction, I went with Solidere and saw their development and there was a lot of British involvement in that, but I would have thought that there’s much more scope for British involvement — not so much a construction company coming in and doing the building, but as architects, designers, quantity surveyors.

I also spent some of the afternoon at the port. British port people actually run the port of Beirut and rescued it from when it was nothing — it had almost stopped entirely — and now it’s about to double in size. That’s been a very successful joint project between British operators and the Lebanese government.

E  Do you do any work with the government to prepare the ground for British companies and services?

I certainly find myself saying to ministers you need to change your regulations or you need to change your laws. For example, Britain is world-leading in public-private partnerships; we invented it, we perfected it over the 1980s and 1990s. But…if you want public-private partnerships to be successful, you have to have the proper legislative background…in order to make it work.

E  Does the security situation give you have any concerns about promoting Lebanon as a business destination to British companies?

Nobody is pretending that Lebanon is quite the same as, say, Belgium, but on the other hand lots of people are doing business here, and the British should be doing more. I don’t have any hesitations in saying to British companies there is good business to be done in Lebanon…but they have to go in with their eyes open.

E  What can Britain offer Lebanon that other Western countries can’t?

London is often seen as the financial services center of the world and it is… but London is also the creative industries capital of the world. If you want to be in architecture or fashion, design or advertising, music or film, you want to go to London. And I think…the people of Beirut, are very fashion conscious, very design conscious, very chic and very international. I think Britain therefore has a lot to offer here, and I would hope we can offer more.

November 3, 2010 0 comments
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Finance

Banking Special – Gold: To buy or not to buy

by Emma Cosgrove November 3, 2010
written by Emma Cosgrove

Call it the gold rush or the gold bug, but one of the world’s oldest investments is making a name for itself as a safe haven in the financial storm. Part of investor portfolios since the dawn of our modern financial time, the precious metal was never the most exciting weapon in a hotshot investor’s arsenal, but current macroeconomic conditions have created a buzz around this previously pedestrian commodity. While gold is touted as a necessary base in any portfolio, current market conditions have shone a much more speculative light on the portfolio staple.

 

In September, famed market shaman and investor George Soros called gold “the only actual bull market.” Soros’ hedge fund, Soros Fund Management LLC, at the end of the second quarter was the third largest shareholder in SPDR Gold Trust, holding 5.24 million shares. On October 26 Soros’ share was worth $685.7 million and constituted 1.2 percent of the fund.

Also as of October 26, United States gold futures stood at $1,340 and spot gold just a few cents less than that. This represents a gain of 22 percent this year and a record-breaking streak of annual gains since 1920. 

A customizable commodity

The many ways to invest in gold can be customized to fit individual investor preferences and risk appetites. Buying physical gold is the most conservative option and is recommended as a hedge against any future financial or currency road bumps. Risk takers and market manipulators may also choose to invest in gold futures through exchange traded funds (ETFs) — such as Soros’ favorite APDR Gold Trust — which offer higher leverage and higher return but also present higher risk.

Many mangers are also advising clients to invest in mining or distribution outlets through equity investments as a middle ground. Soros’ fund also has $250 million in equity investments in gold and minerals mining.

The gains in gold have been caused by both massive quantitative easing in the United States and an erosion of trust in Western currencies. “As long as the US keeps on debasing its currency and the dollar is weakening, gold will keep going up,” said Mahmoud Ezzedine, head of private banking at Fidus.

 But some say that the gold rush may be coming to an end shortly. “When taxi drivers tell you that you can make a lot of money in gold, it only means the beginning of the end of this trend,” said Nael Raad, deputy general manager of Ahli Investment Group Lebanon.

Soros has stated that he will ride the gold wave for a bit longer before cashing in, but many local wealth managers say that the time for speculation is over, as the quick appreciation suggests that a correction is coming soon.

At this point it comes down to a hunch as to when what has gone up will inevitably come back down. Toufic Aouad, general manger of Audi Saradar Private Bank, predicts that gold will rise to $1,500 before it starts to drop, but is not necessarily recommending to buy.

 

November 3, 2010 0 comments
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Economics & Policy

Less water every day

by Sami Halabi November 3, 2010
written by Sami Halabi

 

Pierre may be covered in grease, but he is a happy man. Since he joined the family business five years ago, this has been his best year to date. “Actually, it’s been one of the best years ever,” he says. Pierre and his family are in the water transport business, and through the summer and into the autumn he has been busier than ever, shuttling from one side of the capital to the other cashing in where successive governments’ lack of policy formulation has left the state unable to adequately provide a basic human necessity.

This year has been particularly dry due to the low amount of snowfall last winter. The season for private water supply typically starts around July and, in theory, ends in October when the first rains start to fall. As Executive went to print at the end of October, Pierre’s business was still booming. Last year, he bought a new water truck and says he has easily covered his investment. That’s because over the course of the peak summer season when water is sparse, prices have risen from a minimum of $6.60 per cubic meter (CM)  (depending on whether the water tank is on the ground or on the roof) to reach at least $13.30 per CM and up to $20 per CM at the end of last month, says Pierre with a smirk.

Pierre’s continuing success is not surprising given that the World Bank (WB) estimates that 75 percent of total household water expenditure in Lebanon is spent on water provided by the private water market. The sector as a whole is estimated to rake in some $87 million per year.

In theory, all households should receive an average of 1 CM per day, but in reality the amount of water that comes depends on two factors: the number of hours water is provided by the local water authority, if any, and whether the household decides it wants to follow the law. Because of the government’s previous apparent disinterest in organizing the sector, instead of meters and a pay-as-you-go system, households in Lebanon pay one annual lump sum that is disconnected from actual consumption. The cost ranges from $156.5 in Beirut and Mount Lebanon to $117.4 in the Bekaa. Businesses have a different tariff structure depending on the type of establishment.

The only mechanism in place to regulate supply is a “gauge,” basically a plastic hole fitted to the pipe that brings water to households. “Those who remove the gauge get more and those who keep it get less than 1 CM per day,” says Abdo Tayar, advisor to the minister of energy and water and the person spearheading the country’s water strategy formulation.

Depending on the season and the location, water is supplied daily from three to 22 hours per day, according to data from the Ministry of Energy and Water’s (MoEW) draft water strategy acquired by Executive. Speak to Beirut residents in the summer, however, and it is not uncommon to hear them complain of days on end without water. That’s because, unlike electricity, people outside the capital have considerably better supply than those inside it. Officially, residents of Beirut receive three hours of supply per day in the low season and 13 hours in the high season, while the residents of north Lebanon receive 22 hours of supply year-round. Perhaps due to the fact that a private contractor manages water distribution in Tripoli, the city receives running potable water 24 hours a day. 

No good reason

The lack of water at the tap would perhaps be understandable if Lebanon was as arid as Jordan or Saudi Arabia. But Lebanon is the only country in the Middle East that does not contain a desert and comes second only to Iraq in terms of renewable water sources, according to the Food and Agriculture Organization of the United Nations (FAO). The three main river basins cover about 45 percent of the country and Lebanon is littered with springs and small tributaries.

Continuity of water supply (hours per day) - Lebanon

But even with these resources, if water is mismanaged, the Lebanese might as well be living in the middle of the Sahara. According to the World Bank, “if no actions are taken to improve efficiency and increase storage capacity, it is estimated that the seasonal imbalance of water resources will lead to chronic water shortages by 2020.”

According to a report by the global water consultancy Global Water Intelligence, Lebanon is already a water-scarce nation, with renewable water resources estimated at 926 CM per capita per year in 2009: just below the 1,000 CM per capita per year threshold that defines ‘water poverty’. That too is expected to fall to 839 CM per capita per year by 2015 because of population growth, and that’s before climate change is taken into account.

“We are going into a phase where we are going to have less and less snow and more and more rain,” says Nadim Farajallah, professor of hydrology and water resources at the American University of Beirut (AUB). “Snow is what recharges our ground water; rain just runs off into the sea.”

Even with all these signs pointing to impending disaster, the real problem may in fact be far worse, since no one really knows the exact amount of Lebanon’s water resources. In the late 1960s and early 1970s, the United Nations Development Program (UNDP) mapped Lebanon’s underground geological structures, including its aquifers. Until today the country has not performed an assessment of how much water these aquifers actually contain or how they can be exploited, and the UNDP’s maps do not cover all of the country, according to Tayar at the energy and water ministry.

Farajallah adds that, “Money has to be spent on this. We need to look at each aquifer, characterize it, understand how much it yields and what is a safe yield. You have to extract as much as you recharge if you want to sustain your source.”

Waste water flows from a storm drain onto Beirut
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November 3, 2010 0 comments
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Finance

A new era of innovation starts in the Middle East

by Shaun Young November 3, 2010
written by Shaun Young

Here’s a story you may recognize.

Ten years ago, two young Jordanian entrepreneurs founded an internet services company to foster an online community through which Arabic speakers could access and generate content. At the time, Arabic-speaking Internet users were only in the thousands and there were no regional venture capital (VC) funds. Undeterred, the entrepreneurs continued to experiment with different business models in the Web 2.0 space until they found one that worked. With some financial support from their families, the entrepreneurs were able to set up an office in Amman, launch their business and become pioneers in developing content for the world’s 320 million Arabic speakers.

If you identified the company as Maktoob, you’d be correct, and know that the story’s climax is last year’s $164 million acquisition by Yahoo!, marking the first major deal of its kind in the Middle East.

But, you’d also be right if you answered Jeeran.

Sharing an origin and path similar to Maktoob, Jeeran is an ad-funded online community that incorporates blogs, videos and photo sharing. With more than 6 million unique visitors per month, Jeeran is one of the most popular blogging services in the Arab world.

The example demonstrates that in the Web 2.0 space in Jordan alone, there are many promising tech start-ups: Arabic animated content, technology and multimedia design firm Think Arabia has created an educational animated short to introduce Google’s products to Arab-speaking Internet users. There is online recruitment company Akhtaboot and social media management and advertising firm Modern Media.

Among these tech start-ups, is there the next Maktoob? Quite possibly. Regarding Jeeran, Think Arabia and Akhtaboot, investors are likely to be thinking of them as the Facebook, Cartoon Network and Monster.com of the Middle East. These are tested business models transplanted in nascent and growing markets.

The more interesting question may be: Who will be the Yahoo! for the next Maktoob? Investors from outside the region will likely rush in, but the entrepreneurial ecosystem has evolved since Maktoob and Jeeran launched. Jordanian VC fund IV Holdings has invested in Jeeran. Dubai-based Abraaj Capital has bought the rights to a Think Arabia cartoon series on entrepreneurship. A prominent Middle Eastern entrepreneur has already invested in Modern Media and Akhtaboot.

With increasing regional investment and mentorship, the vernacular for rising stars in the Middle East is shifting from “the next Google” to “the next Maktoob.” According to Aramex chief executive officer Fadi Ghandour, “there is the potential for more ‘Maktoobs’ throughout the region right now. The challenge is supporting them, because several markets are more than emerging — they’re ready to explode. ”

Elevating entrepreneurship that generates the greatest impact

Small to medium-sized enterprises (SMEs) are prevalent throughout the Middle East. In April this year, the United Nations Economic and Social Commission for Western Asia (UN-ESCWA) Executive Secretary Bader al-Dafa reported that SMEs account for over 90 percent of businesses in the Middle East. Dafa added that SMEs build national economies through the job opportunities created for young people, the reduction of unemployment rates and increases in GDP.

If SMEs are a considerable driver of job and wealth creation in the region, it’s essential to support them. However, given that SMEs are such a large percentage of all businesses in the region, it seems only practical to identify and support the entrepreneurs who have highest potential and impact.

Endeavor is the global organization that pioneered the concept of “High-Impact Entrepreneurship" in emerging markets. The nonprofit identifies and supports entrepreneurs with the greatest potential for creating jobs, prosperity and a culture of innovation and investment. For 13 years, Endeavor has selected and supported 539 ‘high-impact’ entrepreneurs from 349 companies that have generated more than 130,000 jobs and $3.5 billion in annual revenues.

In its four years of operation in the Middle East, North Africa and South Asia (MENASA), Endeavor’s portfolio of high-impact entrepreneurs has grown rapidly (see chart). As of October, Endeavor was helping 41 companies that generate more than $163 million in annual revenues and provide 3,842 jobs across the MENASA.

“When Endeavor launched in 1997 with offices in Chile and Argentina, the landscape in Latin America looked similar in many ways to the Middle East today. I’ve been knocking down the doors of Silicon Valley VCs to let them know that the time for the region is now,” says Endeavor co-founder and CEO Linda Rottenberg.

Within the MENASA portfolio, there are companies that have grown into large enterprises and have become role models to aspiring and fellow entrepreneurs. For example, Pharmacy 1, the leading drug store chain in the Middle East, or Airties, the first company to introduce MESH networking technology suited for emerging markets.

However, as Endeavor has witnessed in Latin America, many more entrepreneurs can thrive given an integrated and international ecosystem of entrepreneurs, investors and mentors.

 Argentina to Egypt: a comparison of emerging market entrepreneurs

Egyptian entrepreneurs Ahmed Metwally and Mostafa Hafez head Nasr City-based Timeline Interactive, which develops video games that can be purchased and downloaded online. In 2009, Timeline released CellFactor, the first downloadable video game to use sophisticated 3D visuals and game play physics in five languages and for $10.

Founded in 2005, Timeline has already gained globally recognized partners and clients. The company is the first and only video game studio in the Middle East certified by Microsoft and Sony to develop games for Xbox360 and PS3. Timeline is creating a gaming ecosystem in Egypt by training engineers and cultivating demand for high-end games.

Metwally and Hafez also position themselves more broadly within the entrepreneurial ecosystem in Egypt. They understand that few investors and entrepreneurs in the Middle East take the initiative to become part of such a new movement. On another continent and in the same year Timeline launched, Mariano Suáraz Battán and Patricio Jutard founded Three Melons in Argentina’s nascent video game industry. After raising financing, the duo created their first game connected to advertisers, called an “advergame.” The launch of the company’s Indiana Jones LEGO game drew more than 10 million users worldwide, and more than 800,000 people every day play Bola, the studio’s first social game, on Facebook and Orkut.

Fellow Argentine and serial entrepreneur Wences Casares mentored Three Melons since its inception, and Battán and Jutard were able to raise $600,000 from Santander Bank. Jeff Brody of Silicon Valley-based Redpoint Ventures provided strategic advice to Three Melons during its acquisition by Silicon Valley social gaming firm Playdom. In July 2010, Disney acquired Playdom for $763 million.

Both Timeline Interactive and Three Melons started out with under a million in annual revenues, navigated the forefront of a regional market, developed a landmark product and won global recognition. The difference is that Mariano and Patricio benefited from a rapidly-developing ecosystem: the global and local network of investors, mentors and fellow entrepreneurs that catapulted Three Melons to the next level.

The catalyst of an established network composed of global and local investors, mentors and entrepreneurs, separates a country of high-impact companies and one of high-potential companies. Take Colombian based fitness center Bodytech and Turkish gym B-Fit or mobile phone software solutions providers ComperanTime of Brazil and Javna of Jordan, and the trend continues.

In these cases, the Latin American companies generate more impact — in annual revenues and jobs — than their Middle Eastern counterparts. Seasoned entrepreneurs like Fadi Ghandour and Maroun Chammas are set to change this. Charles el-Hage, former senior partner (now retired) at Booz & Company, says: “Entrepreneurs in the Middle East are not only creating innovative, high-growth, globally-competitive enterprises, they are assuring future generations of young entrepreneurs in the region that they can be next.”

“How soon?” not “What if?”

In Young World Rising, author Robert Salkowitz says the most important business story of the next decade is the convergence of three powerful trends: demographics, technology and entrepreneurship. The Economist addresses the union of these elements in a recent article on the rise of young entrepreneurs in emerging markets. In terms of trends, the much lower median age in many of these countries in 2020 is only the start (see chart above). Younger entrepreneurs are leading the internet technology revolution and have the uncanny ability to identify and shape new markets. They exchange seniority and security for risk and returns, and having succeeded with the trade-off, create a middle-class segment that has the wherewithal to also embrace risk. People in this group either have benefited from or are inspired to become entrepreneurs.

The article spotlights companies from Argentina to Ghana and concludes: “The next Facebook is increasingly likely to be founded in India or Indonesia rather than middle-aged America or doddery old Europe.” The article’s conclusion is provocative, but not as much as its omission: nowhere is a company or entrepreneur from the Middle East mentioned.

In the Middle East, technology, unemployment and innovation will start to expedite the development of the entrepreneurial ecosystem. It will happen by necessity, if not by design.

People under the age of 30 account for 70 percent of the Middle East’s population and this demographic is the primary driver of Internet penetration rates, which reached 28 percent in the region in 2009. There is urgency as this demographic faces one of the highest unemployment rates in the world. According to King Abdullah II of Jordan, the region will need to create over 200 million jobs by 2020.

Where established employers fail to provide them, many entrepreneurial young people will take matters into their own hands; in June 2009, Qatar-based nonprofit Silatech reported that 26 percent of Arab youth are planning to open a new business in the next year, in comparison to 4 percent of youth in the United States. 

With such a hunger for entrepreneurship, many aspiring and current entrepreneurs from the Middle East will participate in Global Entrepreneurship Week (GEW) in the region and the “Celebration of Entrepreneurship” conference in Dubai this month. Last year, 5.4 million participants attended GEW events in Endeavor-hosted countries. In the first quarter of 2011, Endeavor Lebanon will launch and, within the year, will support a portfolio of Middle Eastern entrepreneurs.

Who knows — one of them may be the next Maktoob.

November 3, 2010 0 comments
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Last Word

Empire in austerity

by Executive Contributor October 24, 2010
written by Executive Contributor

In an article earlier this year for Foreign Affairs magazine, the British historian Niall Ferguson discussed how quickly empires collapse. He noted that while many observers have tended to assume long cycles of imperial decline, a breakdown could come suddenly, “like a thief in the night.”

Ferguson has argued that the American empire is more likely to disintegrate for reasons related to the domestic economy than foreign policy. In his book ‘Colossus: The Price of America’s Empire,’ he argued that imperial America faced a ballooning fiscal crisis brought on by a propensity to consume much and save little, as well as an impending social security crisis caused by Americans living longer and overburdening the fiscal system.

In the Foreign Affairs article, Ferguson focused on the vital matter of perceptions of decline. Even if fiscal shortcomings were not enough to erode American strength, he pointed out, “they can work to weaken a long-assumed faith in the United States’ ability to weather any crisis.” Just look at the relatively minor sub-prime defaults that spread through the global financial system by “blowing huge holes in the business models of thousands of highly leveraged financial institutions.”

 Another scholar, Michael Mandelbaum, recently examined the implications of the financial crisis on American foreign policy in his ‘The Frugal Superpower: America’s Global Leadership in a Cash-Strapped Era.’ He argued that America’s debt obligations following the 2008 financial crisis, as well as its fiscal structure and entitlement programs such as social security and Medicare, prevented the country from continuing to play the leading international role it has for decades. 

 “[T]he public will no longer feel able to afford, and so will not support, operations to rescue people oppressed by their own governments and to build the structures of governance where none exist,” Mandelbaum wrote. “Interventions of this kind, which the United States has undertaken in the last two decades in Somalia, Haiti, Bosnia, Afghanistan, and Iraq, will not be repeated. The American defense budget will come under pressure, and so, too, therefore, will the missions that the defense budget supports.”

 All this raises an interesting question. If, as Mandelbaum affirms, the United States becomes more frugal abroad, will that not undermine America’s long-assumed faith in its ability to weather any crisis, as Ferguson pointed out? In other words: too much realism about American limitations may actually accelerate America’s waning.

Certainly that is true in the Middle East, where, under President Barack Obama, the US has visibly downgraded its commitments. Obama has withdrawn American combat forces from Iraq. He has overseen a significant tightening of sanctions on Iran, in part to better avoid being sucked into an expensive, hazardous war with the country over its nuclear program. Obama’s support for Palestinian-Israeli peace, while it fulfills a campaign promise, may be viewed as an effort to stabilize a region that might cost the US dearly in the event of new conflicts.  Even in Afghanistan, where Obama has deployed 30,000 additional soldiers, information recently published by the journalist Bob Woodward indicates that at the heart of Obama’s thinking were a clear-cut exit strategy and financial worries. “I’m not doing 10 years. I’m not doing long-term nation-building. I am not spending a trillion dollars,” the president told Secretary of State Hillary Clinton in October 2009.

That is sensible. However, America’s view of itself has always pushed in a contrary direction. It was John F. Kennedy who stated in his inaugural address that America would “pay any price, bear any burden, [and] meet any hardship… to assure the survival and the success of liberty.” For Obama to challenge that premise on financial grounds effectively denies Americans the self-assurance — some would say the egotism — a higher sense of purpose invariably brings with it. This in turn could hasten the demise of the American empire that Ferguson discusses.  Balancing national values with national accounts will remain a major difficulty for American leaders. But the process of change may be quicker than some imagine, as Ferguson believes. America may not be able to afford high ambition, nor might it long outlast excessive modesty. 

October 24, 2010 0 comments
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Companies & Strategies

Buying back the Love

by Executive Editors October 24, 2010
written by Executive Editors

A journalist from Executive magazine and 200 others from around the globe were flown to San Francisco last month on a junket that included airfare, two nights at the Hilton Hotel, gourmet cuisine and a perpetually open bar.

Clearly, hosts Microsoft had something they wanted to say, or more accurately, wanted the assembled hacks to say. While some events make news, others are made news, and the later was certainly the case with the launch of Internet Explorer 9 (IE9) beta.

But why such expense for the trial version of a ninth edition web browser? As Sebastian Anthony, an editor at the AOL-owned technology blog Download Squad said, it’s been a good few years since Microsoft has been able to generate decent media coverage, while at the same time “Apple sneezes and people write a story about it.” Thus, perhaps, the reason for the public relations bonanza.   

Internet Explorer (IE), at one point the default browser of nearly 95 percent of web surfers, has seen its market share slip through the noughties to just over 60 percent today, as competitors such as Mozilla’s Firefox, Google’s Chrome and Apple’s Safari have gnawed away at IE’s slice of the pie. Still, that’s 60 percent of the almost 2 billion Internet users worldwide.

“It’s a fun story to tell sometimes how IE has declined, but it is still very strong,” said Brian Hall, general manager of Windows Live and Internet Explorer. Microsoft officials promised, and in many ways demonstrated, at the September 15 launch in San Francisco that IE9 heralds the next generation of web browsing.

While developers and enthusiasts might ogle over its “hardware acceleration” and the evolution of HTML5 coding, the layman attraction is that web browsing with IE9’s minimalist interface feels cleaner, and is a whole lot faster than competitors when it comes to loading large websites. (IE9 requires Windows Vista or Windows 7, however, so those using Windows XP or older operating systems will have to fork out for something newer).

Weeks before the beta launch, Microsoft gave many of the world’s most popular websites advance access to the new code and offered support to help optimize the sites for EI9, thus securing customer usage and adoption even before the release.

Then it was time for the charm offensive in San Francisco for the beta launch, which Microsoft will use to gather feedback from users and developers before launching IE9’s final version, at an as yet undisclosed date.

Regional strategy

Asked whether Microsoft had a specific strategy to promote IE9 in the Arab world, Hall noted that the company operates in most countries around the globe and while there are some unique local Internet intricacies regarding bandwidth and latency in developing markets, generally, “the market dynamics are quite consistent, which is: enthusiasts set the tone, sites drive the real adoption, distribution helps with adoption.”

He said Microsoft will now work at “encouraging” PC manufacturers to ship IE9 with their products, and Microsoft has more than 1,000 staff who will seek out local partners to work with. “Even in Lebanon, we will have people who are meeting with companies that build the top sites in Lebanon, and we’ll want them to do work for Internet Explorer 9.”

What profit?

This all sounds very expensive, leaving one glaring omission: how will Microsoft make money off IE9?

“We don’t,” said Dominic Carr, director of Windows Communication. “Our business model is ‘happy Windows customers.’”

As Hall explained: “We have a little tiny business called Windows,” an operating system with more than one billion customers. “Especially for home users, the number one thing people do on their PC is browse the Internet… our job is to give the best web experience to Windows customers that we can, and that is the purpose of the browser.”

So will this strategy work? Will IE9 help Microsoft regain browser market share and put smiles on the faces of Windows users?

“No one thought they would succeed with the X-Box, but they threw enough money at it until it succeeded, and now it’s huge,” said Download Squad’s Anthony. “I think [IE9] will succeed — they will throw money at it until it is a very big success.”

“It comes down to how much they value their free browser app, and whether they just want to beat Google — that might be the pure intention: they want to smash Google to pieces.”

October 24, 2010 0 comments
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