Society

The ABC of corporate crisis management

by Executive Staff
written by Executive Staff

 

May you live in interesting times.” More than ever before, this Chinese curse painfully rings true for companies treading today’s dangerous world, prone to corporate crises and scandals on a daily basis.

With the recent global economic downturn, companies worldwide have been undertaking significant cost-cutting to stay on their feet. But cutting costs means cutting corners and slacking off on quality. Last year’s melamine scandal that surfaced in China and shook the world showed us exactly what can happen when some companies are financially squeezed, when in an attempt to cut costs, dairy farmers and distributors ended up poisoning and even killing people, including infants.

The financial crisis has also contributed to a more hostile and cynical environment, with rampant mistrust that has the public ready to pounce and punish companies in the event of the slightest mishap. This is compounded by an increasingly connected public, making it much easier for scandals to break and spread, and where one frustrated customer on Twitter can cost a company millions of dollars.

In such merciless times a company mishandling its response to a crisis can mean its demise, the fittest are the ones that successfully deploy the right crisis management and communication strategy. This means following the ABCs of crisis communication, which can get a company through any ordeal with its reputation intact.

Act swiftly

Whenever there is a hint of a corporate scandal, the general inclination is to follow a “wait and see” approach, allowing the issue to unravel before deciding on the measures to be taken. Although this might seem like the reasonable thing to do, when many facts have yet to unfold and reactions have yet to emerge, a company that decides to test the waters to see how the public will react and then make a move will unmistakably be throwing itself into a blaze and is unlikely to emerge unharmed. Moving quickly is essential to mitigating the crisis, as stakeholders need to be reassured that the organization is committed to immediately investigating the issue at hand and ultimately taking the proper actions.

Johnson & Johnson’s handling of the poisonous Tylenol crisis is always used as a best practice example when it comes to acting swiftly; the company not only launched its investigations but immediately, and in parallel, sent out an instant alert about the dangers of the Tylenol product on the market at the time and recalled around 31 million bottles with a retail value of more than $100 million. Johnson & Johnson sent out a clear message that it puts customer safety first, before worrying about profit or reputation, by promptly responding to the crisis and assuming responsibility of the tampering of Tylenol although it was not directly responsible for the poisoning, and then proceeding with the complete investigation.

However, moving swiftly should certainly not imply acting brashly or responding before having reached a clear understanding of the issue, as Perrier learned the hard way. When traces of benzene were found in Source Perrier’s bottled water, the company issued a rushed explanation, which later turned out to be incorrect. This only served to undermine the company’s credibility and reputation.

Be transparent

There is no denying that transparency has become an essential value in the corporate world, with stakeholders considering it a fundamental right that companies provide them with all the information that might be of interest to them. Today, more than ever, the public holds companies accountable for their level of transparency and crises are no exception to the rule.

It is therefore imperative that, whenever a crisis emerges, the company openly acknowledges the problem, if in fact there is one, and accordingly assumes responsibility, regardless of the costs it may incur.

There have been many examples across history of companies withholding the real facts, trying to cover up the truth or spinning it in the hopes of escaping unscathed, and in almost every single case, this strategy backfired and ended up in severe and irreparable damage to their brand image, stock value and sales.

A recent example was when Coca-Cola launched Dasani water in Europe as a “pure, still” water. Soon after, the media broke the story that it was not natural spring or mineral water but purified water being sold for 3,000 times its price. Samples of the water were also found to contain a cancer-causing chemical, causing Coca-Cola to recall the product. Throughout the crisis, Coca-Cola responded to the accusations by using half-truths, issuing defensive statements denying the public concerns, and repeating its marketing messages. By spinning the truth, Coca-Cola only dragged out the crisis, made stakeholders even more wary of the company and left everyone wondering what the truth was about Dasani.

Choose the right spokesperson, message and channel

The time of a “one size fits all” approach has come and gone. This cannot be truer when it comes to crisis management. The nature of the issue, its extent and scale, who it has affected and its future repercussions, are only some elements that should imperatively determine the person who should be assigned to handle the crisis publicly. Whereas the company’s head of public relations can successfully ward off damage in a certain crisis, only the chief executive officer should address the issue in another, as the choice of spokesperson can speak volumes as to the seriousness and importance that the company is giving to the concerns of its stakeholders. In some cases, only the more knowledgeable person in the specifics of the issue should provide a direct and detailed response to the crisis.

A clear example was when the CEO of JetBlue Airways took it upon himself to address disappointed and upset customers and apologize to them, after a severe ice storm brought operations to a standstill and subjected passengers to major inconveniences. He also created a blog on the airline’s website where he personally addressed customers’ questions and interacted with them.

 

When it comes to communicating the right message, none can be more effective than a message of stalwart commitment to stakeholders and of placing their well-being and interests ahead of all other considerations. This implies adopting the right tone of sincere regret, apology and dismay in the case of harm that is caused by the company in one way or another. It also entails explaining the corrective measures to be put in place and, when warranted, the punitive actions that will be taken to hold those responsible to account.

Continuing with the JetBlue example, when their terminals buzzed with hundreds of disgruntled passengers and the airline was facing a maelstrom of criticism, the CEO adopted a suitable apologetic tone whereby he expressed the company’s true remorse for disrupting passengers’ schedules. He also explained how JetBlue was going to rectify the situation and emphasized that corrective measures were going to be taken in order to avoid such problems in the future, among which was the “JetBlue Airways Customer Bill of Rights,” the company’s commitment to its customers as to how it will handle uncontrolled operational interruptions in the future, including details of compensation.

What sets a company apart today is not whether it monitors the web and social media platforms for burgeoning crises, but whether it also successfully leverages these channels to reach, inform and reassure its stakeholders. In January 2009, the Peanut Corporation of America announced a recall of peanut butter products due to salmonella contamination.

During this crisis, a comprehensive social media campaign was rolled out, using new media channels like blogs, eCards, text messaging, podcasts, online videos, social networking sites, widgets, micro-blogs and virtual worlds such as Second Life. The crisis communication fittingly leveraged these new channels, which reached and informed consumers, successfully mitigating the crisis and eventually saving many lives.

A savvy company in today’s world is the one that not only wards off damage to its brand and reputation in the wake of a crisis but also turns it into an opportunity to strengthen bonds with stakeholders by showing deep concern and unfailing commitment to their well-being. Successfully handling a crisis takes a disciplined implementation of the basic ABC principles of crisis communication, a formula that can break the curse of our tumultuous times and turn them into fruitful ones.

Dima Itani, Zeina Loutfi & Ramsay G. Najjar S2C

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Society

Modernizing the marque

by Executive Staff
written by Executive Staff

BMW Group’s unveiling of the Ghost, its newest addition to the Rolls Royce line-up, at the Frankfurt Motor Show last September sent a small shockwave through the blogs and forums of the automotive world. Critics responded to the new model, which is smaller and significantly cheaper than its predecessors, with a mixture of surprise, praise and confusion.

As top dog in the high-end luxury auto market, Rolls Royce’s decision to “tone down” its new model, ostensibly to produce a more affordable, driver-focused experience, seems a deviation from the company’s long-standing policy of marketing only to the best-heeled buyers. Since its earliest days, Rolls Royce has cultivated a reputation as a kingmaker — today, just owning a Rolls separates suzerains from ordinary human beings. After more than a century of production, the company has built up a reputation that goes beyond the physical properties, considerable as they may be, of the cars themselves. Now the world is wondering: could an expanded consumer base put that reputation in jeopardy?

Certainly, expanding production seems to be a major feature of BMW’s plans for the brand. When the German automaker salvaged the company in 1998 it took concerted steps to keep the personality of the brand quintessentially Rolls — in terms of know-how, feel and luxury — as well as retaining the original factory in Goodwood, England. At the same time, BMW began a gradual escalation in production levels. In 2007, Phantom sales broke the four-digit mark for the first time in the brand’s history. Today, current projections for 2010 more than double that figure, with production of 2,000 to 2,500 Ghosts anticipated.

Speed demon

Yet the Ghost is by no means a streetcar. Carrying a price tag of between $200,000 and $300,000, the car is likely to satisfy buyers that the Rolls Royce marque, in terms of quality and luxury, is as alive as ever in this newest model. The body alone shows the effort its designers made to incorporate the brand’s most fundamental design cues: the upward sweeping sill line, elevated prow and long bonnet all impress upon the viewer that this car, in every essence, is a Rolls.

At the same time, there is an air of informality — if such a thing can be said about a Rolls Royce — and dynamism present in the Ghost that clearly sets it apart from other cars in the Phantom line or before it. Chrome tailpipes, the car’s smaller size and flowing, powerful lines hint at a shift toward speed and power.

 

Indeed, the Ghost is the most powerful car made by Rolls Royce to date, due in part to its smaller size, but also to a number of mechanical modifications. The new 6.6-liter V12 engine used in the Ghost supplies 563 British horsepower — enough to propel the car from zero to 96 kilometers per hour in just 4.7 seconds. That’s not quite a supercar, but it’s getting close in terms of performance.

Breaking new ground

At the same time, the Ghost’s interior boasts all the trappings of luxury. Elegant frosted lamps, reclining lounge seating and deep-pile carpets affirm the car’s true nature. Two LCD screens, analogue watches and meters, as well as the signature flying lady icon add to the image. There is little doubt that, powerful as the Ghost may be, it is still a luxury vehicle, and still a Rolls Royce.

The real question is: can the brand foray into new territory without corrupting its core values? At the moment, the general consensus seems to be yes. The Ghost maintains an elevated standard of luxury while breaking new ground in speed and drivability. One might speculate that, spurred by a drop in sales during the global recession, the car has taken Rolls Royce to a new breed of auto enthusiasts — younger, with plenty of money to spare and an eye for both luxury and performance — without selling the brand short of the expectations of its traditional customer base.

Where does the company go from here? Is the Ghost the lowest threshold, or will BMW continue to pare down the Rolls into an ever-fainter specter of its former glory?

A policy like this would prove fatal in the long run for the same reasons it might prove lucrative in the short run. It’s the name that sells the Rolls Royce, a name built up through decades of top performance. But the drivers play a role as well — every king, president, celebrity or sheikh that adds their name to the list of Rolls’ customers adds something to the brand as well. To spread that brand around, to make it more accessible to the public, puts its star power at risk — and without star power, what is a Rolls but a really, really high-end car?

Nadim Mehanna is an automotive engineer and has been a pioneer of motoring on Middle Eastern television since 1992

 

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Economics & Policy

Fiscal deficit at $2.6 billion

by Executive Staff
written by Executive Staff

 

Lebanon’s Ministry of Finance has stated that the fiscal deficit widened to $2.6 billion in the first 11 months of 2009 — 25.1 percent of the 2009 budget. Standard Chartered Bank forecasts that the total budget deficit for this year will reach 9.5 percent of the economy, the highest in the Middle East and North Africa and the second highest in emerging markets. The Economist Intelligence Unit forecasts the deficit to constitute 10.3 percent of gross domestic product in 2010. Government expenditure came in at $10.3 billion, a 15.5 percent year-on-year increase in the first 11 months of 2009. Debt servicing — the payment of interest on the public debt — also increased to $3.4 billion, making up a third of total expenditures. Revenues over the first 11 months of 2009 also rose to $7.7 billion (21.9 percent), mostly from taxes, which accounted for a total of $5.5 billion. A further $1.68 billion came from customs revenues over the same period, constituting a year-on-year rise of 72.9 percent. Some 87 percent of total customs receipts were processed through the Port of Beirut.

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Economics & Policy

New year, few IPOs

by Executive Staff
written by Executive Staff

The start of 2010 sparked discussions on better primary market conditions in the Middle East when compared with the preceding 18 months, but hard evidence for a good year in initial public offerings has yet to emerge.

The Saudi Stock Exchange (SSE) regulators had approved three IPOs back in December, of which one, by restaurant operator Herfy, took place in January. The other two, for industrial manufacturing group Al Sorayai and for travel company Al Tayyar, have been scheduled for February 1 to February 7, and February 22 to February 28, respectively.

Subscription to the $110 million Herfy IPO for 30 percent in the company closed on January 17. Details on the share allocation and distribution rate were not available at the time of going to press. The issue price of $13.60 per share included a premium of $10.93. 

The second IPO in the region was set off on January 17 by real estate developer Mazaya Qatar. With $137 million in value, the issue by an affiliate company of Kuwait’s Mazaya has faced skepticism from analysts.

Herfy’s major shareholders are Savola, the massive food conglomerate, and the Al Tayyar Travel Group, started 30 years ago as a family business. Little other information is available about either, as the companies have made scarce news in the international or regional press.

Moods in world markets were mellow with regards to IPOs at the start of 2010. Asian markets were reported as most optimistic on account of buoyant economic growth forecasts, but in the United States the year’s first public offerings had a rough time and issuers in January either reduced their price expectations, as in the case of insurance firm Symetra Financial, or cut the size of the offering.

 

Although the fourth quarter had been positive for secondary markets in the Middle East, and emerging equity markets rallied in the past three quarters, 2009 provided such slim pickings in primary markets that it seemed almost inevitable to expect more from 2010.

In 2009, even the comparatively low value of $2.1 billion in aggregate Middle Eastern IPOs — excluding issues that had been offered for subscription in 2008 but started trading in 2009 — masked the fact that more than 75 percent of this value was delivered in only two of 15 IPOs: Vodafone Qatar and National Petrochemical Company in Saudi Arabia.

Some of the 11 IPOs that were completed on the Saudi Stock Exchange (SSE) in 2009 were so small in size that one had to hunt for them with a magnifying glass. This was reflected in the fact that demand for SSE primary market issues fell back to an average of 1.16 million subscribers per IPO.

The forecasts that every investor would like to have — what will the markets be like in 2010 — have been circulating in January in the vast agora of advice and opinions, but there is no sign and no reason to expect that this year’s predictions will be different in their reliability from those made in 2008 or 2009.

Among the more amusing expectations, one Gulf-based newspaper had apparently given its editors the New Year’s holiday off and came up with a late December tale that “as many as 45 Saudi-listed (sic) companies have plans to launch initial public offerings” in early 2010.

The count of companies that have at some point voiced ambitions for flotation on one of the bourses in 2010 is easily above 150.

How many of these rumored offerings will be delayed further, channeled into different equity raising deals or simply evaporate is anyone’s guess, but might not even be the main question. It still seems to be a too widely held assumption that a large number of public offerings are automatically good news for the market.

One might note, though, that post-IPO track records of primary market activity in the past few years showed some highly hyped companies falling severely short in performance and governance compliance, such as the case of jewelry company Damas, which apparently incurred a very costly mishap to investors due to not applying basic practices of corporate governance.

To return to hard numbers, the post-IPO performance data in the Middle East showed two clusters of companies coming out on top.  Last year’s debutants in Saudi insurance showed share price gains since flotation at an average 335 percent and six companies listed on the new Damascus Stock Exchange (DSE) achieved climbs of 138 percent, on average. The DSE, which will celebrate its first anniversary in March, could still radiate some of the charm of a sleeping beauty awakened when further companies will list there in the coming months.  

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Economics & Policy

Tele-me-when

by Sami Halabi
written by Sami Halabi

“If you don’t have it you are losing the game,” said  Gareth Locksley, author of a new study by the World Bank, which found that if broadband penetration had risen by just 10 percent in 2008, Lebanon’s economy would have grown by an additional 1.2 percent to 1.5 percent, with similar growth for every 10 percent increase thereafter.

According to the study, Lebanon could accrue $78 million to $98 million for every 10 percent rise in broadband penetration. The economic growth allowed over just one year by such an increase would easily cover the costs of the required infrastructure upgrades, and even turn a profit.

“In some circumstances, [the cost to benefit ratio could be] substantially less, depending on the technology used,” said the report.

Smoothing internal strife

“The impact on the Lebanese economy if [it does not] embrace broadband now would be equivalent to Lebanon having not embraced learning foreign languages a generation ago,” stated the report presented by Locksley, who spoke at a press conference last month alongside Telecom Minister Charbel Nahas and the chairman of Lebanon’s Telecom Regulatory Authority (TRA) Kamal Shehadi. At the conference, Nahas announced that he would set out his general policies for the government-owned sector over the course of 2010.

With both Nahas and the previous minister hand picked by the parliamentary opposition leader Michel Aoun, it now seems that his party, the Free Patriotic Movement, has chosen to change its telecommunications policy, which was previously highly critical of the TRA that was supported by the parliamentary majority in the run-up to last June’s elections.

“The TRA is bound to fulfill all its duties and responsibilities under the minister’s supervision, following all general rules for the regulation of telecommunications services in Lebanon, as set out by the minister,” the previous policy read. The TRA is meant to regulate Liban Telecom, the corporate entity which would inherit the different areas of Lebanon’s telecom infrastructure from the telecom ministry. However, the realization of Liban Telecom has been delayed since the telecom law was passed in 2002.

Since taking the helm, Nahas  has promised to reorganize internal policies and external relationships with regards to licenses, pricing and prerogatives between the TRA and the Telecom Ministry which were still “not clear.”

Waiting on the government

As Executive went to print, the Shura council, Lebanon’s highest court, had still to rule on several cases regarding prerogatives in the sector which arose during the conflicts between the TRA and the ministry, such as a national numbering plan that would outline how numbers are distributed to the public.

“If we don’t have a real and practical partnership we won’t get anywhere,” said Shehadi.

The telecom minister also laid out a plan to implement broadband Internet in the country at a cost of some $166 million, although the minister conceded that “we cannot know what the projects will [actually] cost.”

According to Nahas, the proposed cost of the overhaul has been approved by the finance ministry and is included in the proposed 2010 budget, which had yet to be ratified by the cabinet or parliament when Executive went to print. The minister would not comment on issues regarding government-controlled pricing, which sets some of the highest rates in the world.

The first tenant of the proposed plan was to begin by connecting Lebanon to the International Middle East Western Europe 3 (IMEWE3) network by May, a major requirement of broadband infrastructure in Lebanon. The expansion plan also includes laying 400 kilometers of land lines, which would accommodate 400,000 new users, in addition to laying 830 km of fiber optic cables.

The upgrade would result in the national throughput capacity increasing from 2 gigabytes to 120 gigabytes and result in a corresponding increase in Internet speeds from 256 kilobits per second to 2 megabits per second, according to Nahas. The ministry also plans to increase the number of leased lines available to the private sector from 800 to 4,000 connections.

When queried by Executive, Nahas refused to comment on the creation of Liban Telecom or the continued gross corporate governance violation within the ministry, whereby the director general of operations and maintenance, who has close ties to the parliamentary majority, heads the incumbent operator, Ogero, and the arm of the ministry that oversees its operations.

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Real Estate

Hiking up mountain prices

by Nada Nohra
written by Nada Nohra

 

Northeast of Beirut and far from the coast’s cloud of persistant pollution lays the village of Kfardebian. The village’s 40 square kilometer boundary, of which the most well known areas are Ouyoun Es-Siman and Faqra, extends from 600 meters above sea level to reach 2,800 meters in altitude, in the Kessrwan district of Mount Lebanon. 

A renowned tourist destination, Kfardebian is particularly popular in the winter season, when both locals and tourists partake in winter sports on its snow-covered hills.

The tourism activity in Kfardebian has attracted significant real estate investment over the last few years, in chalets, hotels and restaurants. While the Ouyoun Es-Siman area has become overcrowded with developments, making land less available, developers are now turning their attention to the quieter Faqra.

“If we are talking about Faqra and excluding Faqra Club, it is still empty,” said Nadi Nammar, managing partner at MR Group, architects of soon-to-be-built mountain resort Les Dunes de Fakra.

Bassam Salameh, vice president of the Kfardebian municipality, explained that the real estate activity in Faqra was formerly concentrated within Faqra Club — a gated community, which was created in 1976 — but in the last few years, new investment and developments appeared in areas adjacent to the club such as the Tilal Faqra, Oakridge, Les Dunes de Fakra, Ahlam and others.

“Activity in the [Faqra] area during last year was crazy,” said Salameh.

All of these developments are high-end mountain resorts comprising small and big chalets, with or without gardens, spas, swimming pools and different amenities.

Karim Bassil, chairman of Byblos Real Estate Investment (BREI) — developers of Edelweiss, a small aprés ski village in the heart of Faqra Club — thinks that the spike in demand for Faqra property goes back to the 2006 war.

“The war made people realize that in Lebanon, no matter what, we are in a risky environment and in case something happens, [Faqra] could be a safe second home,” he said. “All of them are Lebanese families.”

Skiing season and demand

Until mid-January, Kfardebian was still waiting for the winter storms that usually cover the area with snow much earlier in the season. Wael Hmaidan, executive director of environmental campaign group IndyAct, told Executive in December that Lebanon’s longer summer season is one of the consequences of global warming and the country is threatened by severe desertification in the future. ?But real estate experts are at odds as to whether the shortening of the winter season, already seen this year, is impeding the area’s growth.

“It has affected us a little bit because if the snow season is delayed, our selling season is delayed, since this is the time when we sell,” said David Mansour, developer of Tilal Faqra, adjacent to Faqra Club. “If [people] don’t see the snow they don’t come up to the area, and if they don’t come they don’t buy.”

Salameh agreed, saying: “People are not motivated to come and stay in their chalets [if] there is no snow.”

But others believe that Faqra, in particular, is more of a summer attraction, since buyers in the area are looking more at investing in gated mountain resorts than the nearby ski slopes in Ouyoun Es-siman.

“I think people prefer summer over winter because in summer, you can spend two whole months but in winter you only go up for a weekend,” said Bassil.

For the same reason, Carlos Chad, sales manager at Faqra Club said, “I think that the strength of Faqra today is in summer rather than winter.” However, he said the changing weather could affect the area.

“In my opinion, in 10 years, it will be a summer place if [the weather] continues like this,” said Chad.

With the change in weather in mind, the club is working on a grass slope to allow for summer skiing.

Prices rising

Chad explained that Faqra Club owns some 80 percent of the land available for sale; the price is currently at $1,300 per square meter, compared to $250 in 2003, and set to rise.

“I’m sure we will reach $2,000 by the start of the summer,” he said.

Several years ago, Bassil bought land in the center of Faqra Club for $400 per square meter, which is now worth around $1,500.

The remaining 20 percent not owned by Faqra Club are also expected to command sky-high prices.

“There was an offer at $1,700 [per square meter] and the owner of the land refused because he thinks it is worth more,” said Chad.

Land scarcity is inflating prices:  of the 900 plots within Faqra Club’s boundaries, only 45 are currently offered for sale. Outside the club, prices have not reached the same level, but are rising due to the increasing attractiveness of the area. “In 2006, the price per square meter of land was $100 or $150,” said Mansour. “Now it is $600 to $700.”

MR Group’s Nammar said, “Where we are building Les Dunes, it was very cheap; but not anymore. Five years ago, you could have bought land for $90 per square meter, now you cannot find [any] below $250,” he said.

Prices of built-up areas follow the same pattern, with the average price per square meter in Faqra between $3,500 and $4,000, compared to $1,500 three years ago, said Salameh. Within the club, prices may rise to $8,000 per square meter for built-up areas, depending on the developer and the design, said Chad.

Challenging construction

Another price inflator is the fact that building in Faqra costs more than in coastal areas. The cost of both labor and material is higher because of its remote location, which increases transportation fees.

“The same chalet in Faqra costs some 15 percent more [than in Beirut],” said Mansour.

Profits are further dented by the increasing prices of land, coupled with rules which forbid developers to build high-rise buildings or construct on more than 25 percent of the plot.

Chad said that the expense factor has made it unfeasible for developers to build in Faqra Club anymore.

“Edelweiss would have not happened if the land wasn’t bought four years ago,” he said.

Another challenge of building in the area is the harsh winter season, during which construction halts.

“You can barely work seven months per year,” said Mansour.

Infrastructure ails

Even though Faqra Club has its own infrastructure, developers who build outside the club have to bring their own power and water supplies, build their own sewage system and repair the roads. The fact that Kfardebian covers 40 square kilometers does not make it easy for the municipality to supply a comprehensive infrastructure for the whole area.

“If a developer wants to build in the area, he [has to] do everything by himself,” said Tilal Faqra’s Mansour.

“The road that leads to our project was only three meters wide, but there was a plan by the municipality to enlarge it to 12 meters and we helped,” said Nammar.

Municipality chief Salameh said that while Faqra’s infrastructure was costly and a significant problem for developers, the municipality has plans, backed by construction permit revenues, to collaborate with developers and enhance the area’s amenities. 

Demand outgrowing supply

Whether the winter season gets shorter or not, investing in Faqra seems to be a promising deal and developers in the area anticipate a further increase in both demand and prices over the next few years.

“I think that the demand in the next two to three years [will be] much more than all the supply combined,” said Mansour.

“According to what is happening now, I expect that the prices in the area will double or triple in the next two to three years,” said Salameh, adding that if the Kfardebian municipality can operate well, it could compete with the most important skiing destinations in the world. 

 

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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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Economics & Policy

Money makers

by Sami Halabi
written by Sami Halabi

Many of the headlines splashed around the economic pages since September 2008’s global financial earthquake have inspired little confidence in Middle Eastern equities. The latest aftershock, involving Dubai World’s liabilities, has put off any return to the boom days of the last decade for a while to come.

If you still have any money left that you are willing to invest, the best course of action may be to put it into an asset class that has begun to come into its own, despite the shaky financial ground in the region: the currency markets, better known as Forex (FX).

“For the FX market, it has indeed been a time of plenty,” said Mario Camara, co-managing director at the Forex company ACM Middle East and Asia based in the United Arab Emirates. “What happened [during the crisis] was a wonderful thing for the Forex market because the volatility drove people away from other markets and [made] the futures market so attractive.”

The steadfastness of the Forex market stems directly from the nature of currencies depreciating or appreciating against one another and, as a result, the more chaotic the fluctuation, the more the market moves. What’s more, according to the experts Executive spoke to, daily trading in the Middle East and North Africa (MENA) region now fluctuates between $2.5 trillion and $3 trillion per day.

“This is the most liquid market in the world and it is more liquid every day,” claimed Michel Daher, managing partner and chairman of FXCM MENA, the regional arm of the global currency exchange company FXCM. “It doesn’t stop, so the sky is the limit.”

Like most asset classes, Forex trading in the MENA region is underdeveloped compared to most other global markets, leaving much room for growth in the sector. How much growth is possible is a point of contention since consolidated figures in the MENA are not readily available.

Forex is very much decentralized as a result of the fact that the industry is made up of disparate business models, ranging from physically present traders within the region to offshore online intermediary traders. Even so, the numbers that do exist reveal that the industry is booming.

According to figures from the Dubai Gold and Commodities Exchange, currency futures transactions increased by 88 percent in 2009. Deutsche Bank’s online Forex platform, dbFX.com, reported a year-on-year increase of 501 percent across the Middle East for the first quarter of 2009 alone. That gargantuan figure is even more impressive considering that globally, the platform saw just a 37 per cent increase in trading volumes over the same period.  

“When all other markets were running for the hills and being chased by bears, this market flourished,” said Camara. Even though Camara could not disclose his revenues, he did affirm that since the global downturn began his company’s gains have been “significant.”

To desk or not to desk

Two different models are at loggerheads over how the industry should be run. The argument is centered on whether it is better to have a “dealing desk” or not.

Those who operate without a dealing desk make money off of pips — the smallest unit of a currency for every trade (cents in regards to US dollars, helal for Saudi riyals, etc.) Those who do operate with a dealing desk also make or lose money depending on whether their clients gain on a currency trade or not. In essence, the client has an account with the desk and the desk has an account with the liquidity provider.

If a client buys one euro, for example, at a certain price, the desk purchases that euro from the liquidity provider at the price shown. If the price of that euro falls, the client is liable to the desk for the difference in value, and vice versa. This model also necessitates that ‘dealing desk organizations’ maintain higher levels of liquidity and risk.

“We are basically making a commission off an introduction. I would have made four to five times as much money if I was a dealing desk, but I don’t want to take that risk,” said FXCM’s Daher, who’s company operates without a dealing desk.

Having a dealing desk allows clients to place orders over the phone and is also a requirement of many international regulatory bodies.

The Central Bank of Lebanon (CBL) regulates FXCM MENA. The company has 20 liquidity providers, which include JP Morgan, Deutsche Bank, Credit Suisse and Union de Banques Suisses. While the CBL is perhaps not a widely recognized regulatory body, it has been heralded by many as having policies that were able to absorb most of the brunt of the global financial meltdown. ACM is regulated by the Swiss Financial Market Supervisory Authority.

“They [dealing desk companies] know your position…so they might show you false prices,” said Henri Chaoul, member of the board at FXCM global. Camara explained that his company’s prices are not exactly those of the liquidity providers, and Daher claimed that his company displays the exact market price “99.99 percent of the time.”

 

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Real Estate

If you build it, will they come

by Nada Nohra
written by Nada Nohra

Burj Khalifa - Dubai

 

Spectators at the January 4 inauguration watched fireworks turn the world’s tallest tower into an 828-meter fountain of flame. What came as a surprise is that the tower, known as Burj Dubai since its announcement in 2003, was renamed by Dubai ruler Sheikh Mohammed bin Rashid al-Maktoum as Burj Khalifa Bin Zayed, in honor of the United Arab Emirates President  and ruler of Abu Dhabi Sheikh Khalifa bin Zayed al-Nahyan. Burj Khalifa was originally set to open by the end of 2008, but Emaar properties, the developer behind the tower, delayed its opening several times until January 4, 2010, the date marking Sheikh Mohammed’s fourth anniversary as ruler of Dubai.

 Dubai to Khalifa

The name change came as a surprise and was decided upon at the last minute; the tower’s souvenirs and tickets purchased for the observation deck on the 124th floor still said ‘Burj Dubai’, while ‘Burj Khalifa Bin Zayed’ was only carved on the tower’s plaque.

“[It] was obviously something that was kept close under wraps until the last minute,” Michael Hughes, executive director of strategy at the Brand Union in Dubai, told Maktoob Business. Brand Union is  working with Emaar on the Burj’s brand, according to Maktoob.

Although rebranding Burj Khalifa was welcomed by the media and the general public, and considered as a way to affirm the unity between Dubai and Abu Dhabi, it will come at a high price for Emaar. The developer will have to pour large amounts of money into rebranding. Some estimates say it could take up to three years and tens of millions of dollars to get the right branding message established.

Whether the whole area will be rebranded as Downtown Burj Khalifa is still unknown, since street signs remain unchanged and no announcements from the Dubai municipality have been made on the issue.

“[Downtown Burj Dubai] is currently being rebranded by Emaar, and we are still waiting for the announcement,” said Ian Albert, regional director at commercial real estate specialists Colliers International.

Burj Khalifa, built at an estimated cost of $1.5 billion, is expected to remain the highest tower in the world for at least the next few years and includes residencies, office space, a hotel, a fitness center, meeting rooms and other amenities. Although the tower is officially open, delivery of units will not take place until February or March, and Emaar is yet to announce its handover plan and the number of units available for lease and sale.

“We haven’t received confirmation [from] Emaar yet,” said Ghada Ghannam, residential leasing consultant at Better Homes.

“It is not clear at the moment how many units will be handed over at each phase,” added Albert.

Selling like hot cakes

Emaar’s Chairman Mohamed alAbaar has announced that 90 percent of the tower has been sold and that 85 percent of the payments from buyers have been made. The rest will be paid upon delivery. 

“From what I’ve heard in the market, I don’t believe there has been a lot of flipping, but details about sales at the Burj Khalifa have been kept heavily under wraps,” said Wendy Hulbert, residential leasing consultant at Better Homes. “The word on the street is that a Korean investor bought the entire top floor, but this is only speculation.”

Albert thinks that units at Burj Khalifa were subject to a high level of speculation and at the peak of the market reached sky high prices.

“The average rate reached [$35,000 per square meter]. However, following the market downturn prices fell to [$11,600 per square meter] at the beginning of January 2010,” he said.

It is unclear whether Emaar will sell its remaining 10 percent, but the company has revealed that it will rent out the top floors for meetings and workshops for around $2,700 per hour, according to The National. 

The secondary market

The selling price at Burj Khalifa for residential units ranges between $10,200 and $12,000 per square meter, while commercial units are selling for $17,000 to $20,000 per square meter, according to Vineet Kumar, head of sales at Asteco Property Management.

Units sold to investors in the primary market are expected to be resold or leased, but all the brokers Executive spoke to said it is still unclear how many units are currently available in the secondary market.

“Most of the units that were sold in the primary market will eventually be on sale or lease, though we don’t know the exact number yet,” said Bernard Aoun, manager at the residential sales and leasing department at Better Homes.

The leasing market is equally as murky. There are still no units available for rent and it is unclear how high the rental rates for either the residential or the commercial units will be.

“The [office rental] rates are still unclear at the moment. We expect the rent to be around $1,800 per square meter or more, depending on the floor level,” Porush Jhunjhunwala, manager at the commercial leasing department at Better Homes told Emirates Business 24|7.

Filling the tower

The opening of the tower came at a time when Dubai was still suffering from an oversupply of properties, especially in the commercial market, and even though the Burj will be one of the most prestigious addresses in the world, there are concerns that the absorption rate of its units may not be as high as expected.

“Everything is a challenge at the moment,” said Better Homes’ Hulbert, while speaking about how soon the units may be filled.

“It’s hard to forecast if the tower will be filled up completely, we’ll have a better idea as we watch the property market here over the next few months,” added Aoun.

Competition may also come from the 740,000 square meters of office space that are expected to be delivered in and around Downtown Burj Dubai during the year, which will further increase the vacancy ratio in the area, according to Jhunjhunwala.

Funds from a burj

Emaar’s Abaar told The Khaleej Times that the tower was expected to yield 10 percent for the company and the revenues from sales will be included in its 2010 financial statement, after the units are delivered. He added that although the falling cost of construction material had kept prices down, the tower had still exceeded its budget by some 10 percent.

Roy Cherry, research analyst at the Dubai-based investment bank Shuaa Capital told Alaswaq.net that the revenue Emaar will receive from the Burj in 2010 will amount to $2 billion to $3 billion, some 30 percent of which will be net profit for the company.

Waiting on the numbers

While the long-awaited Burj Khalifa has finally opened, the Armani Hotel inside is still not completed, units are yet to be handed over, and room rates have yet to be set. Accordingly, it is too soon to predict how the tower will fare in terms of pricing and occupancy, and whether it will truly be the center of business attraction or the most prestigious white elephant in the world.

“Until the tower is fully completed, it is not possible to predict what the impact will be from improved, or worsening, global and regional market conditions,” said Colliers International’s Albert.

While the tower will likely add to a positive balance on Emaar’s books, economists are skeptical about whether it will boost confidence in Dubai’s troubled economy in general, or its real estate sector in particular.

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