Feature

Secrets of the stones

by Executive Editors
written by Executive Editors

It is easier to walk into the Lebanese Parliament than gain access to the higher echelons of Lebanon’s jewelers, given the amount of security, how frequently top jewelers travel and their secretive nature.

To visit the offices of a jeweler is akin to entering Fort Knox: beyond the usual security to an office block there are multiple bulletproof doors to be buzzed through — including a holding room — until you’re sat in a padded leather arm chair of the ‘old world’ style.

When you keep merchandise worth up to $80 million on the premises, as some of the top jewelers do, such security measures are understandable. Yet while carrying out a heist on these jewelry fortresses would be difficult, just as challenging is getting interviews with members of what is arguably the country’s most secretive industry.

The sector, which by dollar value accounts for an estimated 30 percent of Lebanon’s total trade and exports, is so devoid of transparency that accurate figures are hard to come by and no companies are willing to open their books to external scrutiny.

“Around 90 percent of sales are not declared,” said one jeweler in a rare off-the-record disclosure.

Getting jewelers to talk is like getting blood out of a stone; they tend to clam up when it comes to figures, market variables and projections. Indeed, some jewelers are so tight lipped that half-hour interviews yielded just a few lines of useful information and usable quotes.

While Lebanon is well known for its banking secrecy, the jewelry sector should be equally — if not as infamously — renowned, particularly given its economic significance and export clout. According to the Syndicate of Expert Goldsmiths and Jewelers in Lebanon (SEGJL), Lebanon is the leader in jewelry and gold production in the Middle East (excluding Turkey), employing 8,000 people with 2,000 qualified jewelers and experts at some 60

major workshops.

According to the country’s other jewelry-related body, the Syndicate of Lebanese Jewelers, the sector employs 5,000 people. By comparison, the banking sector employs some 20,000 people.

Judging by the Lebanese Customs’ records, jewelry exports were valued at $707 million from January to September 2009, equivalent to 28.8 percent of the country’s total exports. Imports on the other hand were 4.2 percent of total imports, valued at $505 million in the same period.

However, domestic sales are not reported or listed by the Ministry of Economy and, as stated, much of what is sold and exported is not declared. According to SEGJL, approximately 80 to 90 percent of Lebanese jewelry is exported to the Gulf, Europe and North America. But the syndicate did not make clear whether that amount includes undeclared exports or not, and presumably much of what is actually exported is not disclosed, either by customers or by jewelers themselves travelling on sales trips.

When a single four-part set of jewels can sell for $4 million, “clients don’t want the value [of their jewelry] to be mentioned because of thieves and ransom threats,” said Gerard Tufenkjian, managing director of Beirut-based jeweler Tufenkjian.

One jeweler recounted that when he goes abroad for exhibitions he may take $3 million to $4 million worth of merchandise, but may only sell $2 million, so he will not declare the amount on arrival or departure. As Tufenkjian related, “Our business is in a bag, we come and go with one or two Samsonites [suitcases] to do our business.”

Patrick el-Khoury, head of publishing and events at Arabian Watches and Jewellery magazine, said he had heard rumors circulating within the industry that the sector was worth some $4.5 billion, which would be equivalent to a staggering 16 percent of Lebanon’s gross domestic product. “But this figure is not confirmed,” he stressed. Neither the syndicates nor jewelry companies would offer another figure.

The annual exhibition Joaillerie Liban 2009, however, stated on its website that “Lebanon has become one of the top five jewelry producers in the world,” with “60 percent of [the country’s] $1 billion production in jewelry and designer jewelry sold in Lebanon to visitors or importers from the region, Europe, the Far East and the Americas.”

Given the discrepancies of up to 90 percent between the SEGJL’s export figures, Khoury’s and Joaillerie Liban’s figures, the true value of the sector and the size of exports is essentially anyone’s guess. It is certainly one of Lebanon’s more successful sectors, but given its lack of transparency, a sizeable amount of money is not being disclosed and consequently, minimal revenues are going into government coffers.

Taxation is one reason the sector is opaque. Under Lebanese law, jewelers pay the standard income tax on employees’ salaries, but not on the value of precious metals or stones. For sales, taxation is 0.8 percent — a policy introduced in 2004 by the late Prime Minister Rafiq Hariri.

“We don’t impose this tax on the customer,” said Hovig Yessayan, marketing manager of Yessayan, adding that 95 percent of his firm’s sales go abroad to the Gulf and Lebanese expatriates.

The sector is dominated by family run firms, and families tend to not like their laundry, clean or dirty, aired in public

Diamonds are deception’s best friend

Another reason for the sector’s secretive nature is the diamond trade (see page 31). Lebanon exported 2.45 million carats in 2008, estimated at $48.47 million,  according to the latest figures from the global regulator, known as the Kimberly Process Certification Scheme (KPCS) (see chart below).

But according to Partnership Africa Canada’s “Diamonds and Human Security Annual Review 2009,” more than 97 percent of all diamonds leave Lebanon soon after they arrive, with 85 percent arriving in the country certified as industrial diamonds — used in drill-bits, saw blades and abrasives. Curiously, however, “some 250,000 more carats leave as gem quality diamonds than arrive — worth 36 times their import value,” the report stated.

With the average diamond imported into Lebanon at $19.67 per carat (among the lowest rates in the world), if exported at 36 times this value they would be worth some $708 per carat; carry this over 250,000 carats and there would be a $177 million differential between the value of diamonds entering and exiting Lebanon.

This math is only a guesstimate, however, as the value of diamonds per carat can vary widely depending on the specific stone; the global

average price per carat stands at around $95, while the highest quality diamonds can reach up to $4,000 per carat.

According to KPCS figures, there is a difference of just $1.6 million between Lebanese diamond imports and exports.

“The most common explanation of where diamonds are misclassified is tax avoidance, or some kind of [money] laundering scheme within a trading company,” said Annie Dunnebacke, a campaigner at the natural resource focused rights group Global Witness, based in London.

Quite clearly there are a lot of diamonds knocking around that are not being declared — at least in true worth — and so far, the KPCS has not investigated such discrepancies in Lebanon (see facing page).

When asked about why the sector is not better regulated, Hovig Yessayan said: “When [you are] making money for the country, no one cares.”

Keep it in the family

Among the factors allowing the sector to remain so hidden from scrutiny is that it is dominated by family run firms.

Leading companies such as Tufenkjian, Nsouli, Antoine Hakim, George Hakim, Azar and Gemayel have been in the business for more than 100 years. And families tend to not like their laundry — clean or dirty — aired in public.

“It is a closed sector, much like banking,” said Yessayan.

The cutthroat competition between the high-end jewelers over designs also emphasizes secrecy.

“Secrecy is very important in this business, there are lots of designers and outsourcing cannot be recorded,” said Khoury.

As Lebanese jewelers’ reputations continue to grow around the world, the opaque nature of the sector is only likely to increase. Lebanese jewelers can export to the United States tax free, and are expanding their presence in Europe, the Gulf and Asia, whether through showrooms or attending exhibitions and fairs.

“Some 250,000 more carats leave as gem quality diamonds than arrive — worth 36 times their import value”

Setting standards

Competition comes from the Far East, but Lebanon has the upper hand on design and quality for regional sales.

“The quality of the jewelry that is [made] in Hong Kong or China is not as good as Lebanon’s, it is thinner; Arabs are used to bulky jewelry,” said Yessayan. He added that jewelry is 15 to 20 percent cheaper in Lebanon than in the Gulf. “So if you are buying a set of jewels for $500,000, it is worth flying over; even Sheikhas take a private jet here and we close the whole building down as we want total privacy for royal clients.”

Lebanon’s designs and highly skilled craftsmen have also placed the sector on equal footing with Europe.

“The standards we have here are comparable to Swiss or French jewelry, and we’re very picky about our staff,” said Karim Hakim, one of the four brothers who run George Hakim, based in downtown Beirut.

“The designs, the model making, the execution of the casting process in all its five stages, the setting, electroplating, polishing and so on, all are taught here in our country and [produced] uniquely by Lebanese craftsmen,” said Berge Arabian, a senior member of the SEGJL.

Lebanese jewelers have weathered well the financial storm of the past year and a half, particularly the high-end stores, on the back of wealthy customers moving some of their money into hard assets due to concerns about banking stability, inflation and the depreciation of the US dollar.

The regularity with which regional clientele buy jewelry, compared to Europe or the Americas is keeping sales buoyant. “In the West, people will buy [new jewelry] once every 10 years, but Arabs will buy…something new every two to three years,” Yessayan said.

There has been a slight downturn, evident in a drop in regional advertising expenditure, but this has not prevented jewelers from expanding in the region. Yessayan, which saw 20 percent growth in 2009, plans to open a showroom in Saudi Arabia, while companies are working on developing their own brands and identity by increasingly moving into retail.

Rumors circulating within the industry suggest the sector is worth some $4.5 billion, equivalent to a staggering 16 percent of Lebanon’s GDP

Branching out

“There has been a big shift away from wholesale. You sell more and you get cash, you don’t wait for payments and it is better for the brand too,” said Yessayan. “We are heading into branding and creating an identity for ourselves, including a watch brand, Scala.”

Bejeweled watches are a growing segment for the sector, similar to how fashion and car brands started to bring out their own line of watches over the past decade. The jewelers team up with Swiss horologists to manufacture timepieces that are then imported to Lebanon to be turned into a watch.

“The Lebanese are starting to compete with international designers, and Lebanese jewelers have excellent design, execution and prices. The combination of the three is quite unique,” said Khoury.

Yessayan said the demand for such bejeweled watches predominantly comes from the Gulf, with prices reaching $100,000 for a diamond-encrusted offering. The Gulf will remain the sector’s primary export market for the foreseeable future, given the Gulf’s status as the fourth largest diamond market in the world.

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Ungracious guests

by Nicholas Blanford
written by Nicholas Blanford

The Palestinian gunman, his face screwed up with rage, ran towards us, raising his AK-47 and yelled, “Get your hands up! Get your hands up!”

It was June 2007 and in the north of Lebanon, the Lebanese army and Fatah Al-Islam were in the early stages of a bloody battle at the Nahr Al-Bared Palestinian refugee camp — a confrontation that would last 106 days and leave 168 soldiers, over 200 militants and dozens of civilians dead.

The fighting in the north clearly had unnerved the Palestinian gunman. He was a guard at the entrance of a small military base at Ain Al-Bayda, near Kfar Zabad village in the Bekaa Valley, manned by the Popular Front for the Liberation of Palestine-General Command (PFLP-GC), a Damascus-backed radical faction. The PFLP-GC runs five small bases in Lebanon: Ain Al-Bayda, Wadi Heshmesh just north of the Bekaa village of Qussaya, Jabal Al-Maaysara on a lofty mountain plateau east of Qussaya, Sultan Yaacoub in the western Bekaa, and another at Naameh, 15 kilometers south of Beirut.

The PFLP-GC and Fatah Intifada, another Syrian-supported Palestinian group that also operates small camps north of Rashaya in the western Bekaa, were on high alert during the fighting in Nahr Al-Bared.

My two colleagues and I were forced to sit on the ground, our hands on our heads, for five minutes until the arrival of the guard’s boss, incongruously dressed in a purple shell suit. Calm and polite, he told us: “We are guests in this country and we are here in these bases only to help liberate Palestine.”

That incident occurred more than a year after the National Dialogue, the round-table forum grouping Lebanon’s top leaders, had agreed to shut down the Palestinian bases and ban arms carried by Palestinian militants outside the 12 established refugee camps. Nearly four years after that decision was reached, it has yet to be implemented. The Palestinian bases still exist, surrounded by Lebanese troops who prevent civilians and journalists from accessing them.

The issue of the Palestinian bases may well become salient again in the coming months, given the easing of tensions between Lebanon and Syria since the formation of the new government in Beirut in November, and the visit to Damascus by Prime Minister Saad Hariri in December, 2009.

Although both countries have undertaken the historic step of exchanging formal diplomatic relations with the opening of embassies in Beirut and Damascus, the pace of rapprochement will depend greatly on how Syria reacts to Lebanese requests for assistance in some key — but solvable — areas. The first is the fate of the PFLP-GC and Fatah Intifada bases, the second is a decision to begin the long-neglected delineation and demarcation of the border between the two countries.

It is evident that following the Nahr Al-Bared experience, the army has no taste for forcibly dismantling the Palestinian bases, even though in military terms it would be a much simpler task to shut the isolated rural outposts than weeding out Fatah Al-Islam’s die-hards from the cramped interior of a Palestinian refugee camp.

Furthermore, the PFLP-GC, in particular, is an ally of Hezbollah — these days serving almost as the Lebanese party’s private militia force, which adds an awkward political component to closing the bases.

In January, Abu Musa, the leader of Fatah Intifada, declared that he rejected the disarming of Palestinians outside the refugee camps and that the fate of their weapons was a matter to be decided among Palestinians.

Abu Musa’s rare press conference appears to have been an effort to hinder attempts to close the bases before they had even begun. Importantly, however, Abu Musa would not have made such a bold declaration without the knowledge of his hosts in Damascus. Syria has said that because the bases lie on Lebanese soil, it has no jurisdiction to have them closed. In reality, if Syria instructed the PFLP-GC and Fatah Intifada to dismantle their outposts and return to the refugee camps in Damascus or Beirut, they would do so quickly and with a minimum of fuss.

Damascus bridles against international pressure and tends to dig in its heels when lectured by the West. Whether Syria will show goodwill over the Palestinian bases, remains to be seen. But if it does it would win international praise at almost no tactical cost to itself.

There are indications that the United States will soon develop a more nuanced approach toward Lebanon, beyond the repeated calls for the implementation of Resolution 1701. The new track will focus on the border between Lebanon and Israel, probably in terms of seeking to extend the current calm along the Blue Line. But there will be other indirectly related issues the Americans will likely pursue, such as encouraging Lebanon and Syria to begin mapping and formalizing their joint border and closing down the Palestinian military bases.

How Syria responds to such calls will provide early indicators as to how the Lebanon-Syria relationship will unfold in the months ahead.

Nicholas Blanford is the Beirut-based correspondent for The Christian Science Monitor and The Times of London

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Editorial

The time for waiting is over

by Yasser Akkaoui
written by Yasser Akkaoui

Like the sands of Arabia, the movement of money has shifted, and those economies considered too slow (Saudi Arabia), too conservative (Abu Dhabi), too risky (Lebanon) or too small to be a player (Qatar) are now destinations for the region’s capital. Dubai, once the flagship of the Gulf Cooperation Council’s prosperity, is nursing a bruised ego and considering its options.

What’s the moral of the tale? That steady-Eddies are the best bet? That the tortoise eventually beats the hare? That Saudi Arabia was the perfect example of a state exercising leadership and intervention when crisis hit?

Well, it’s not quite as simple as that, and maybe the answers can still be found among the skyscrapers of Dubai, where businesses, or should we say the business community, is still struggling to adapt its strategies to the new reality. Essentially, human nature is risk averse and there is a reluctance in Dubai to seek out new markets, because businesses in Dubai are playing a risky waiting game, hoping to turn a corner that may not loom into view for a while.

It is a syndrome that the Lebanese know only too well. They sat around in the late 1970s convinced that the civil war would soon be over — in just a few months things would pick up again. Fifteen years later, they realized they were wrong and that for many of them, the best years of their lives had been wasted. The Dubai mindset must change. The private sector must seek its corporate sustenance in the fertile plains of Saudi Arabia, Abu Dhabi and Qatar, all markets that rode out the financial storm.

But it is not all gloom and doom for the glamorous emirate. Its time will come again. The hard work has been done. Not only is Dubai ‘built’, it was built at a time when the price of construction commodities was lower than it is today and a time when the dollar was in ruder health. Today, anyone wanting to emulate Dubai’s undoubted magnificence, and they will for this is the nature of the beast, will have to pay triple the price.

The hard work has been done; the table is set; the private sector just needs to get hungry enough to go find some food. 

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Real Estate

Q&A: Mounib Hammoud

by Executive Staff
written by Executive Staff
 
E: The Souks Project is a quite misleading name. What is exactly meant by the term?

Contrary to what many people think, the Souks Project does not refer to the SOUKS in the traditional sense of the word. It is a high street retail area that is going to blend into the Beirut Central District and complete the retail scene. It is like the last piece of the jigsaw puzzle that had been missing so far.

E: When exactly did Solidere obtain the permits? And when will construction start?

The Souks project consists of a northern and southern part. We obtained permits for the southern part, which is the retail area. Works will start in January. As all underground facilities, including the parking, have already been completed, we only need to build the superstructure. Delivery time is some 16 to 18 months, so we expect the project to be completed in the summer of 2006.

E: How come you did not obtain permits for the project’s northern part?

The northern part consists of a cinema and department store. The design for the cinema stems from 1996 and just needs updating. The trend has changed. Today, a cinema needs to be done like an arena with at least 1.10 meters of leg space, so people can pass without stepping on each other. That’s why the initial plans had to be revised. The updated design for the department store has been handed in and we’re waiting for the final permits.

E: What can we expect in the retail area? 

It will be a self-sustained and complete retail area with underground parking facilities for some 2,500 cars. The complex will be covered, but not like a traditional SOUQ. It will be a pedestrian area with some 250 shops both inside the complex, as well as outside along the streets. The whole structure has a very beautiful architecture and will offer a clean and secure environment for the whole family, both day and night. As the area is constantly guarded, shops do not need any shutters, so people can even visit at night to go window shopping.

E: What will be the main retail features?

The area will have four anchors. First of all, there will be the jewelers’ corner, where most Lebanese and international jewelers have taken an option on both retail and office space. There will be no specialized streets in the area, but for security reasons, all jewelers will be based in one area. Jewelers at the SOUQ are a major magnet. Shoppers from the region who have a personal relationship with jewelers will come to shop and then use the rest of the SOUKS. The second anchor will be a gourmet supermarket, which will be based in what used to be the old French SOUQ. Thirdly, there is the cinema complex and fourthly a department store.

E: Is there demand for such a large development in the downtown area? What would be your immediate catchment area? 

First of all, in residential terms, there is the Saifi Village, which has been a highly successful project with some 240 apartments sold. Then there are the seafront apartments, many of which have already been bought by high-end individuals. Zeitouni Street will become a residential area, geared up for both medium and upper income individuals. The same is true for the Wadi Abu Jamil area, while Zoukak al Blatt is already fully occupied. Secondly, there are some 3,500 hotel rooms on the western end of the project, which will be increased to some 5,000 in the near future. Visitors can walk from their hotel into town to go for a meal or to go shopping. Then, there is the business and public sectors. All government institutions are based in downtown. If you need to be at the finance ministry, at the prime minister’s office or at customs, you have to come to downtown. Most foreign embassies are located in downtown. Most Lebanese and foreign banks have their head office in downtown. The same is true for insurance companies. And there are all the Lebanese and foreign companies which have their offices here.

E: But in terms of office space, the BCD has so far not experienced the success as expected?

That’s a misconception. There is a lot of demand. Starco is full. Azariah is almost full. Atrium is full. In fact, 95% of all smart office space is occupied. This is why [Joseph] Mouawad is building a second Atrium. And, contrary to what people think, some 85% of all old buildings has been booked. The thing is that a lot of clients own office space, but haven’t moved in yet. At the moment, I have only five or six offices for rent. That’s it. And so, the situation for offices is similar to the residential one, where 95% is occupied and 5% is natural recycling.

E: Are you not afraid of competition with malls such as ABC in Ashrafieh and the new Admic mall in Dora? 

Only time can tell what will happen, but I think the Lebanese retail market is becoming more mature. I think each has its market and critical mass.

E: In 2001, Admic was considering taking the department store plot and opening an outlet of the Les Galeries Lafayette? Are they still interested?

We’re currently talking to a number of international players. I can’t say more than that.

E: Can you tell us about the pricing strategy.

That is also too early to tell, as we only got the permits a month ago. As soon as the tenant strategy has been determined, we can decide on prices.

E: A lot of people in the country have been wondering why it took so long to obtain permits. Maybe you can give us the definitive answer. Was it a political issue? 

I’m not the one to ask this question. All I can say is that this is an extremely complicated project, with both private and public spaces. What’s more, we’re not just talking about constructing a building here. We’re regenerating streets and recreating the heart of the city, which not only promotes Beirut but the whole country, and which has to compete on a regional level. That’s why it received a lot of political attention from all sides.

E: Did you lose business because of the delay? 

The SOUKS were always supposed to be the driving force, the engine, of the refurbishing of downtown. Today, Solidere has succeeded without. Already we have some 30,000 to 40,000 visitors a day, and these are people not living within the project. Especially when downtown Beirut will be residentially mature, the SOUKS will only complement what already exists and only push Beirut further into being a regional magnet.

E: Will Beirut be able to compete with for example Dubai? 

It is not about competition. Dubai has its market and we have we ours. However, apart from things like climate, geography and history, Beirut as a retail and entertainment center offers one big difference with Dubai. I was in Dubai recently and ended up eating in the hotel restaurant for three days in a row. Not only was I tired from work, but it would take about 20 minutes to go to the restaurant of my choice. In Beirut you leave the hotel, go for a walk, and you have an overwhelming choice.
 

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Real Estate

Ruins to spring riches

by Nada Nohra
written by Nada Nohra

 

Nestled amid pine trees in the Naas area of Bikfaya in Mount Lebanon, sits an old abandoned factory in which Lebanon’s cleanest and healthiest mineral water used to be bottled.

Today, all that is left is a small spring running straight from the mountain through three small taps.

But this is soon to change. FFA Real Estate, the fully owned subsidiary of FFA Private Bank, has a four-year plan to turn the factory into a luxurious wellness resort, surrounded by signature villas, bungalows and a five-star hotel. The estimated development cost is $60 million, and construction is set to begin by the end of this year.

A touch of history

The water source was discovered in 1917 by the landowners, the Majdalani family. In 1933, the family was granted a license to build and operate a bottling plant, and opened their business shortly after.

In 1939, the factory halted operations because of World War II, not to open again until the early 1970s, when the Naas Bikfaya Mineral Water Company was formed by a presidential decree. The business operated as a joint stock company and was traded on the Beirut Stock Exchange.

In 1986, however, production stopped again due to the Lebanese Civil War, when the factory was used as a Lebanese Army base. The factory has not reopened since.

 Healthcare and water

FFA Real Estate wants to capitalize on the rare properties of Naas mineral water, which — after having done comparative studies with local and foreign bottled mineral waters — proved to be the least mineralized in Lebanon and can compete with the well-known water brands across the globe, such as Evian and Vittel. Julien Khabbaz, manager at FFA Real Estate, explained that Naas water helps flush kidney stones because of its low mineral content and is good for bathing because of its high sulfate level.

“We are still conducting research on the water,” he said. “We are going to integrate this spring water into the spa, creating a holistic experience where people can drink the water and bathe in it.”

Acquiring Naas

In October of last year, FFA Private Bank announced the acquisition of 86 percent of the Naas Bikfaya Mineral Water Company through a private placement, at $0.93 per share. Georges Abou Jaoude, general manager of FFA Private Bank, said the bank currently owns 91 percent of the company after acquiring additional shares. Most of the shares had been owned by the Majdalani family, of whom Roy Majdalani still holds the remaining shares and will chair the company.

“He stayed in as chairman and he is helping us on a daily basis to acquire more shares, partner with the neighbors and enhance the whole project,” said Abou Jaoude.

He explained that FFA Private bank met with the Majdalani family in 2008, but did not decide to buy shares and start the project until the bank saw stability in the tourism and real estate markets in 2009.

Abou Jaoude explained that in December 2010 or January 2011, Naas Bikfaya Mineral Water Company will be listed once more on the Beirut Stock Exchange with a new initial public offering (IPO) to raise capital for the project, with shares offered at between $1.25 and $1.30 each.

 The project

The initial plan was designed on a 46,500 square meter plot, but has since seen 5,000 more square meters added from a neighboring property through a joint-development agreement, and is likely to be expanded further.

“We are trying to talk to everyone to see how [our neighbors] can be integrated through joint developments…anything that would help the area overall,” said Khabbaz.

According to the preliminary concept, the Naas resort will include a wellness center (the restored old factory), a 60-room luxury hotel, 25 bungalows and 10 residential villas.

While the blueprints of the project have yet to be finalized, the initial architectural design was created in collaboration with three architects: Guillaume Credoz, director at the French Ateliers U, Ayssar Arida, the founder of the London-based Q-dar, and Guerric Péré, president of the France-based Ilex Paysages.

The resort operators have yet to be chosen; Abou Jaoude added that FFA are looking at some 20 operators in order to choose the best one.

 

“We think we will have a clear view on operators, architects and financing within the next 3 months,” he said.

Since the factory has not been operational since 1986, its infrastructure is damaged and FFA Real Estate is going to rebuild it entirely, in compliance with Leadership in Energy and Environmental Design (LEED) standards.

“New infrastructure, new sewage systems and a new electricity grid will all be done again,” said Abou Jaoude.

The project will be financed from three sources: new subsidized loans from the central bank for the tourism and environmental sectors, the pre-sale of the signature villas, and the equity that will be raised from the eventual IPO on the stock exchange.

A master plan

Abou Jaoude said that FFA is trying to help develop a master plan for the whole Naas area, beyond this one project, to enhance overall growth.

“It is about changing the identity of Naas, creating a destination, and making it as one of the environmentally friendly areas of Lebanon,” he said. Accordingly, FFA Private Bank, in collaboration with the municipality of Bikfaya, wants to lobby for a ‘green committee’ in the area that will help revamp the old, dormant hotels, protect the green spaces, set planning guidelines and increase the investment value of the land.

“That is our aim at the end of the day — having a profitable project called Naas for our shareholders and investors,” said Abou Jaoude.

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Finance

Reeling in the rich

by Emma Cosgrove
written by Emma Cosgrove

 

The region’s rich are staging a comeback. With the timeline for an economic rebound still unknown, personal fortunes may be the first to recover from the global financial meltdown. And as the rich get richer, the region’s banks are poised to catch as many big fish as they can.

“The global financial crisis hit the investment portfolios of the wealthy worldwide and banks, now more than ever, need a compelling wealth management offering,” said Gul Khan, HSBC’s global head of wealth management for the bank’s Islamic entity, Amanah.

HSBC and Standard Chartered, two of the region’s largest international banks, have announced efforts to expand their offerings in the premium banking market, catering to the wealthy and the super wealthy in new ways.

Tough at the top

The upper crust has seen losses the world over with the Forbes list of the world’s billionaires shrinking by 30 percent from 2008 to 2009.

Of the 752 who made it to the list for 2009, 87 percent saw losses last year. The total of the group’s wealth was nearly halved, dropping from $4.4 trillion to $2.4 trillion. Along with personal fortunes, assets in private wealth management decreased significantly from 2008 to 2009. According to wealth management advisory firm Scorpio Partnership Director Stephen Wall, the private banking industry worldwide is valued at $14.5 trillion, down 16.67 percent or $17.4 trillion from 2008.

“It’s a rather strange period in the sense that, although the overall impression is that the banking sector is shrinking and that there are less opportunities, there are still a number of opportunities arising in private banking,” said Panos Manolopoulos, vice president for the Europe, Middle East and Africa region at Stanton Chase International, an expert in the field of executive compensation.

But now that the crisis seems to have bottomed out, banks are expanding their services in premium and private banking for clients with more than $100,000 in capital and  upwards of $1 million, respectively.

HSBC has opened a premier Islamic program in Malaysia, Saudi Arabia, the United Arab Emirates, Indonesia, Qatar and Bahrain, to serve affluent clients who wish to use Sharia compliant banking services. The bank heralds the program as the first of its kind in the world. Though capital requirements vary in some countries, most of the bank’s premier programs require $100,000 in assets and investments to qualify.

HSBC Lebanon Chief Executive Officer Francois Pascal de-Maricourt told Executive in December that the premier market would be a focus of 2010.

Standard Chartered Bank is also targeting affluent clients. The bank announced in November that it will be opening private banking offices, catering mainly to millionaires, in Qatar, Bahrain and Lebanon. For premium customers not eligible for private banking, Standard Chartered will be adding 850 financial advisors to its global “Priority Banking” program by the end of 2010.

The perks

What does $100,000 get you? The programs include free transfers to accounts at any branch of the bank, anywhere in the world. Most other fees are waived as well, including ATM charges. The programs also include a high-limit credit card (at HSBC the limit is $20,000.) Customer service benefits include dedicated call centers, meeting rooms and lounges at bank branches around the world, as well as emergency services such as cash advances.

Of course, both premium and private banking also include dedicated financial advisors to help clients grow their fortunes.

And with private banking  — usually requiring $1 million in capital — the benefits and service increase with special dedicated wealth managers and offshore accounts with a promise of privacy. These services may include special loans for when a client needs cash but doesn’t want to pull out investments, and dedicated trading programs for those who want to take control of their own portfolios.

Back on track

Drops in investment returns, executive salaries and bonuses have affected smaller portfolios likely to be in the market for the $100,000 asset cut-off of most premium banking programs. But thanks to a stronger leaning toward prudence, executives in the Middle East have taken a softer hit than elsewhere in the world.

While ubiquitous in the West, the outrageous bonuses often three or four times higher than the executives’ annual salary were not conventional in the Middle East.

Stanton Chase’s Manolopoulos said he expected executive compensation to be restored to its pre-meltdown levels in the near future.

“There have been some pressures and some bonuses were given up, it’s true,” he said. “But there hasn’t been so much impact in that field.”

“By the end of 2010 we will be back to the original numbers of previous years.”

A run on the banks

Scorpio Partnership and Standard Chartered Private Bank released in September 2009, “The Future Wealth Report,” a survey, conducted in May and June of 2009, of 1,414 individuals with average net worth of $2 million each. The global survey called them “the future rich,” all of whom would be considered premium banking clients, and many would qualify for private banking services.

 

The survey noted that half the respondents had goals of quadrupling their fortunes within the next 10 years, one quarter of those in the next five.

According to the survey, “34 percent admitted that they have lost money in the crisis, but the vast majority believed that 2009 will not be a write off and 2010 might even be a good year.”

Though the respondents in the Middle East and North Africa were more willing than their European counterparts to hand the reins of their cash over to a financial advisor  — with 34 percent saying that they would use a financial planner in the future, compared to 10 percent in Eastern Europe and 17 percent in Continental Europe — large banks are still fighting the bad reputation built by the financial crisis.

“The common conception in parts of the world where confidence in the financial advisory profession is low, is that the financial industries lack professional standards and are dogged by sharp practice and short term goals,” said the report.

This sentiment is precisely what the financial services industry will be fighting in the coming year.

This distrust of financial planners does not, however, equate to an aversion to risk; 60 percent of the respondents reported being “intrigued” by investments with a high level of risk and a corresponding high level of return. HSBC’s Maricourt said this was one of the key issues in financial advising for wealthy clients.

“Quite often we are trying to get a view of what kind of risk level the client wants to take because clearly the more risk you take, the higher the potential return,” he said.

Getting their groove back

In a time where liquidity is scarce and bad loans are a fact of life, tapping into the wealthy set is a good way for banks to efficiently grow deposits.

 

“Premier banking is usually intended for a bank to grow their liabilities and to grow their deposits,” said James Gebara, senior manager of personal finance services at HSBC Lebanon.

And after the banks have collected their high profile clients, they must shepherd their portfolios toward growth, a game that has changed in recent years.

“What we have seen is that clients are now trying to really have a better understanding of what they are investing in,” said Maricourt. “We saw, for instance, that for a period of time, our clients were less interested in equity because there was a lot of uncertainty in terms of stock markets and in terms of what would be the potential loss on equity markets.”

“More recently we have seen some people reentering the equity markets, but we try to select the markets that we think are more likely to grow with a lower level of risk.”

According to the Future Wealth Report, today’s premium banking client prefers to be hands-on with his money. For financial advisors and wealth managers, the watch word for the coming year is “diversify.”

“They are trying not to invest all of their eggs in the same basket and I think that nowadays the key is to achieve the right level of diversification,” said Maricourt.

With almost a third of the Future Wealth Report’s respondents under 29-years-old and just under half were between the ages of 30 and 44, the premier and private banking sectors look set for a busy time ahead.

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Real Estate

Tripoli’s Idle arches

by Executive Staff
written by Executive Staff

 

The Rachid Karami International Fair stands tall in the heart of Tripoli, Lebanon, and should be an iconic symbol for this aspiring city. Yet very few people seem to know much about this architectural masterpiece, designed by the world famous Brazilian architect Oscar Niemeyer.

The fair was part of an ambitious plan to modernize Lebanon at large, to focus on the areas outside of Beirut in the 1960s. The master planners nearly achieved their ambition but were foiled by the Lebanese Civil War. Fifty years later, the fair stands as a poignant reminder of what could have been and how stagnant the modernization process of Lebanon remains, with its dilapidated concrete structures holding firm but desperately in need of investment.

Brazilian curves in Tripoli

Oscar Niemeyer, who turned 102 last year, is renowned for his work in his home country Brazil and its capital city, Brasilia. Niemeyer was appointed the master architect for Brasilia — a city built from scratch in the 1950s. The architecture he created was exquisite and won accolades around the world. Dubbed the “King of Curves” for his famous domes, curves and arches, Niemeyer said his distinct style was inspired by “the body of the Brazilian woman.”

President Fouad Chehab commissioned a report from the Institut de Recherche et de Formation en Vue du Developpement (IRFED) in 1961 to appraise Lebanon’s human, economic and social needs. The report highlighted the need to create an economic center away from Beirut, which was sucking up most of Lebanon’s available capital and creating large income disparities with the rest of the country.   

Following the IRFED report, the idea arose for the Rachid Karami International Fair, to turn Tripoli into a more desirable place to live.

“The upgrading project will provide Tripoli with a trendy area filled with housing, commerce, sports, recreation and tourism,” states the profile of the project on Neimeyer’s website. “The International Fair of Lebanon is to be the central attraction in Tripoli: a center of culture, art and recreation; of major importance in its theaters, museums, local sports and entertainment.”

The project was commissioned in 1963 and work gradually commenced, but just shy of its completion in 1975, work halted with the onset of the civil war. A dilapidated structure is largely what remains today but one that still maintains a high potential for renovation.

The buildings of the International Fair are listed on the World Monument Fund Watch List. Although sections of the fair were reopened in 1995 and exhibitions are held in parts of the grounds, the vast majority of the structures have been neglected.

Since 1994 there have been various proposals to redevelop this massive site, many of which have fallen through, overcome by the fair’s expansive 1 million square meter grounds.

“There are a total of 20,000 square meters for exhibitions, of which only half are currently used,” said Antonie Abou Rida, director general of the Rachid Karami International Fair. “Further to this, there is another potential area of 40,000 square meters that could be used as exhibition space if redeveloped.”

Chinese investment

One investor interested in the International Fair is the Chinese government-owned firm Chinamex, which offers Chinese companies a platform to sell goods to retailers and suppliers.

Lebanese industrialist Jacque  Sarraf, chairman of the multifaceted Malia Group, is leading the ambitious joint project with Chinamex to redevelop the International Fair. They have already set up successful hubs around the world in Atlanta, Dubai, Amsterdam and Manchester.

“This is part of a global plan for Chinamex, they need somewhere in the Levant — everywhere else is covered,” said Abou Rida.

Both the Lebanese and the Chinese stress they are keen to protect the architectural heritage of the site. “The design has to be approved by the government and nothing will be changed,” Sarraf said. “No new construction will be added.”

 

The scale of the project is such that two phases have been laid out. “The first phase plans to bring 1,200 Chinese companies [in] and then the second phase will bring that number up to 3,000,” Sarraf told Executive. The total cost of both phases will be some $29 million. If this project goes through, Tripoli could see dramatic changes as, according to Abou Rida, the project would bring some 3,600 Chinese to Tripoli with their companies, and would provide some 3,000 jobs for locals.

However, trying to convince the Chinese government that the security conditions are good enough in Lebanon is not easy. The government has already given Chinamex an exemption on work visas and import tax. The project, planned to start in 2005, was first delayed by the 2006 war and then indefinitely after the Nahr el-Bared crisis in 2007.

“This situation was made even worse with the financial crisis. The international market is now not the same as it was in 2005,” Sarraf said. It is evident, however, that the Chinese government remains interested.

“Just last week the ambassador of China came to Tripoli to look at the site and see if the project was possible,” said Abou Rida. But Sarraf is cautious as to the prospects, “We just don’t know if it will go ahead or not.”

The IRFED legacy

The Lebanese government is keen not to give up on the project and appears to realize the continued importance of the IRFED report. Tripoli is desperately in need of major investment. There will be many skeptics regarding whether a Chinese company bringing in a significant number of its own labor is the right way to go about this investment. But the government and the Minister for Economy and Trade Mohammed Safadi, in particular, seem convinced and are actively trying to reactivate the project with the Chinese.

“The new government of (Prime Minister Saad) Hariri and (President Michel) Sleiman have a new strategy for foreign investment that should also make it easier for the Chinese to invest, and Safadi will also go to the Shanghai Fair in May,” Sarraf stated.

President Chehab left a lasting legacy that is yet to be completed, with his plans for Lebanon still relevant today. The need to develop an economic center outside Beirut is still as vital in 2010 as it was in 1961, as modernization of the country’s institutions remains as stagnant as ever.

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Finance

Shadows of foreclosure

by Emma Cosgrove
written by Emma Cosgrove

 

A Dubai court issued a precedent-setting ruling last month that may be a game changer for the emirate’s real estate market. When the housing bubble burst and Dubai’s properties lost an average of 52 percent of their value, many homeowners fled the country to escape mortgages that had become worth more than the value of their homes.

But British bank Barclays, in the court judgment on January 11, won the right to repossess these properties and auction them off in traditional foreclosure proceedings.

The ruling is the first application of Dubai’s 2008 foreclosure law, which had yet to be put to use. Until 2008, the United Arab Emirates’ legal system made foreclosure and repossession difficult if not impossible, leaving banks with the options of settling loan defaults out of court or simply waiting for the economic climate to improve so that they could begin collecting from their debtors again.

“The court’s decision in Barclays’ favor strengthens our belief that the UAE property market is evolving in line with other mature markets,” said Zeeshan Saleem, Barclays consumer banking director, in a statement. “Customers’ financial wellbeing is our key priority. We understand that the global financial situation may have impacted some of our customers and that they may face challenges in meeting their financial commitments.”

In September, the ratings agency Moody’s predicted that 12 percent of Dubai’s 27,000 mortgages would default within 12 to 18 months. According to UAE central bank statistics, bad or non-performing loans rose by 10 percent from October to November, totaling $8.7 billion.

Price protection

Under the new law, lenders must give 30 days notice before beginning foreclosure proceedings before a judge. If the claim is found to be legitimate, the property is turned over to the Dubai Land Department, which will sell foreclosed properties at auction. If the result of the sale is less than the amount owed by the debtor, the bank may collect the rest from the borrower, in accordance with the mortgage contract.

If, to the contrary, the auction price exceeds the value of the mortgage, the balance is returned to the borrower; with Dubai’s housing market still in the dumps, however, this scenario is unlikely.

According to legal experts, the whole process will take between two and four months.

Though Barclays will be foreclosing on an unnamed number of properties along with the region’s largest mortgage lender, Tamweel, which has several foreclosure proceedings in progress, industry sentiment is that this ruling will not lead to an avalanche of foreclosures before the courts.

“[I’m] not sure if [banks] will be rushing to repossess properties and then have to sell the properties into a still depressed market,” said Robert Thursfield, director of financial institutions at Fitch Ratings.

Christopher Neil, chief executive officer of real estate investment consultancy Landmark Advisory said: “Banks will go to the courts and make use of this law if there is no other way of trying to resolve the default situation, [but] they will try other means before doing so.”

“If, however, the borrower has left the country, then the bank has little choice but to go to court.”

The main worry is that flooding the market with foreclosed properties at auction will bring down prices in an already suffering market.

“The local banks in particular will not want to push prices down further and exacerbate the negative equity in their lending portfolios,” said Neil, adding that this was a common notion across the banking sector.

 “Banks will adopt a number of strategies to avoid foreclosure such as extending payment terms, agreeing to accept interest payments only, deferring interest so that installments become more manageable, or persuading borrowers to downgrade thereby releasing equity for repayment.”

“Eventually when prices rise again, they will then be able to repossess the properties and sell them to cover outstanding debts.”

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Sectarianism ends at home

by Sami Halabi
written by Sami Halabi

 

As Mediterraneans, we Lebanese like to compare ourselves to our Italian counterparts in more ways than one: our food, our way of life, our weather; the list goes on. But one, perhaps less desirable, similarity is just starting to be addressed by our Mediterranean cousins. Last month, an Italian judge ordered a father of a 32-year-old to pay his daughter’s allowance, which came to $490 per month, as well as $16,850 in arrears or risk having his assets confiscated. The ruling was slammed by Italy’s Minister for Public Administration — who described the ruling as “a slap in the face of good sense” — calling for a new law to force Italy’s bamboccionas, roughly translated as ‘big babies’, to leave home by the age of 18.

Generally speaking, laws that dictate to the public how they should conduct their lives are antithetical to free societies; but considering that more than 59 percent of Italians under the age of 34 still live at home, the proposed law could be a welcome exception. 

Looking to our own country, a similar pattern of refusing to fly the nest emerges. The lack of a census makes hard numbers impossible to come by, but the phenomena of the bambocciona in Lebanon is perhaps embodied in a well known Arabic proverb: “Those who live with their parents [can] take it easy.”

Taking it easy, however, has far-reaching economic consequences. Without incentives for progress, societies naturally become inefficient and lose economic footing. Just look at the former Soviet bloc’s economies during the Cold War or that of Cuba’s today. Conversely, societies that push their youth to “find their own path” not only encourage (or force) them to find a job, retain it, and develop their own ideas independently from their family; they also, in effect, encourage integration within society that breaks down cultural stigma and religious discrimination. 

With a little help from the Allies in World War II, the Italians managed to scrap their most deplorable political construct: fascism. Even with the horrors of a 15-year civil war, the Lebanese have still not managed to do away with their primary political ailment, sectarianism, since it reared its ugly head in the mid-1800s.

The conflation between the bambocciona and the protraction of sectarianism in society is significant in the Lebanese context since children are first and foremost susceptible to their parents’ ideologies. In a seemingly endless and vicious cycle, children raised in a sectarian household pick up the bitterness of the previous generation, add their own context to it, and inevitably hand it over to their children. What’s more, young men and women typically leave the nest only when they are married, usually to someone from the same sect and political mindset, thus compounding the problem and making any break of the cycle virtually impossible.

It is almost laughable to observe Lebanon’s political class squabbling over the establishment of a committee to merely study the abolishment of political sectarianism, let alone sectarianism in general. Firstly, those spearheading the initiative — the parliamentary opposition and more specifically the parliamentary speaker — have little political interest in implementing tenants of the Taif accord, which mandated that a non-sectarian senate be formed who’s head would rival the speaker’s for political influence. Hence, it’s quite obvious that the call is little more than a political parry to the parliamentary majority’s thrust over the issue of Hezbollah’s weapons.

For their part, the Christian parties in the parliamentary majority and opposition are up in arms and clinging to the rights accorded to them by the institution of political sectarianism. Those with the most to gain from sectarianism, the country’s religious figures, predictably balked at the mere suggestion of setting up the committee. The last time civil marriage was proposed, the Sunni mufti rejected it outright, as did the Maronite patriarch out of “solidarity” with his Muslim counterpart. To top it off, the prime minister could only muster the sentiment that any agreement should be based on a “consensus,” the Lebanese code word for indefinite delay.  

With all this bickering in the political sphere just to establish a committee, waiting for our “leaders” to resolve the issue is tantamount to “Waiting for Godot.”

While enacting policy in Lebanon to force youths out of their homes and into the real world may be a tad excessive — not least given the economic hardships Lebanon has faced since the end of the civil war — creating the societal structures to produce a healthier and more economically vibrant country has to start somewhere. It’s not going to start in the halls of government, so it might as well start at home. Babies have to stop crying sometime, no matter how big they become.  

SAMI HALABI is the deputy editor of Executive Magazine

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Tight-lipped Libya’s brazen bluff

by Paul Cochrane
written by Paul Cochrane

When sanctions against Libya were lifted in 2004, international oil companies (IOCs) viewed the former rogue state as the El Dorado of black gold, and clamored to be the first to exploit the country’s riches after a 30-year hiatus. But five years later, IOCs are reining in their enthusiasm as doubts arise over how much oil Libya really has.

As international relations thawed, Libya’s National Oil Corporation (NOC) embarked on a global campaign to attract IOCs, offering competitive bidding rounds to explore and develop the country’s energy reserves. Part of the enticement was an oft repeated statement that 70 percent of the country was yet to be explored for oil and that Libya had 39 billion barrels in proven reserves.

These ‘facts’ are still doing the rounds, with the “BP Statistical Review of World Energy 2009” and the United States’ International Energy Agency (IEA) stating Libya has 43.7 billion barrels of proven oil reserves. At face value, this would mean Libya has the fourteenth largest reserves in the world and the largest in Africa, ahead of Nigeria’s 36.2 billion barrels.

But Libya, like the majority of oil producing countries, has been playing it thick and fast with their figures. A leading petroleum geologist familiar with Libya, who asked for anonymity so he could still work in the country, told me: “[The reserve] is nothing like that, it is a third to half of that figure.”

That would mean anywhere between 14 to 21 billion barrels, placing Libya second in reserves in Africa, ahead of Algeria’s 12.2 billion barrels. And as for 70 percent of the country being unexplored, that figure is “nonsense; it is very well explored,” said the source.

The geologist added that the amount of reserves that Libya actually has are evident at the NOC’s technical conferences, where diagrams are shown that indicate less than half of the official government figure — if you know what you are looking for. When the presenters are questioned in public, “they squirm,” the source said, but when queried in private on a technical basis they agree that Libya doesn’t have the reserves it claims.

There was further indication that Libya has been inflating the figures when the NOC last year revised their production capacity target of 3 million barrels per day by 2015 down to 2.3 million barrels per day.

The exploration licenses Libya granted to IOCs are also indicative of there being less in the ground than hoped. Out of the 90 wells drilled after the country’s most recent exploration and production sharing arrangements — the EPSA-4 acreage, launched in 2004 — only five discoveries have been made. International oil and gas exploration and production company Occidental has had a zero success rate, drilling 18 dry wells.

IOCs are now banking on the Sirt, Ghadames and Kufra fields to turn up trumps, but even if there are sizable finds they are unlikely to boost the reserve’s figure to 43 billion barrels. The NOC’s current policy is to focus on developing existing fields — there are an estimated 60 to be tapped — rather than offer IOCs expensive tenders to explore territory that may well draw a blank.

So why is Libya cooking the books? One reason is that it attracts more foreign direct investment (FDI) and interest from IOCs, similar to how countries like to boast of huge FDI inflows yet fail to mention that however-many billions of dollars is over 10 years or has been ‘pledged’ in investment — very different from actual annual inflows. Secondly, it puts Libya in a better bargaining position within the Organization of Petroleum Exporting Countries (OPEC) when it comes to oil quotas.

“It isn’t acceptable within the NOC to question [the] numbers because [they are] given for political reasons, for political advantage within OPEC,” said the source.

But why would BP and the IEA back up the Libyan figures? Well, the British oil giant is operating in Libya and presumably doesn’t want to ruffle any feathers. As for the IEA, its credibility came under fire last November when a whistleblower said the agency was deliberately underplaying an impending global shortage over “fears that panic could spread on the financial markets if the figures were brought down further.”

The game that Libya is playing is dangerous and, alas, one that it is not playing alone. Saudi Arabia, the world’s largest oil producer, has never been transparent with its reserve figures, nor are the majority of OPEC producers.

If we can’t take oil reserves at face value and trust them, then how much oil is there? If you subtract 20 odd billion barrels from Libya’s ‘proven’ reserves, and so many billion barrels from, say, Saudi, Algerian and the United Arab Emirates’ reserves, among others, then the total global oil reserves would be substantially less than claimed. It’s time Libya — and everyone else — starts telling it like it really is or the financial markets could be in for yet another turbulent ride.

PAUL COCHRANE is the Middle East correspondent for the International News Services and writes for Petroleum Review

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