Lebanon’s $530 million retail jewelry sector has been putting in a strong performance over the last decade, with a reputation as one of the leading markets in jewelry manufacturing in the region. However, less optimistic observers will point to the fact that Lebanon has lost ground to other countries, notably in the Gulf, and, despite the potential for further growth, more could be done to promote the sector.

According to a report by the World Gold Council (WGC), before the outbreak of the civil war, Lebanon was the leading jewelry hub of the Middle East with a reputation equal to that of South Africa, London, Russia and Zurich. It had an emphasis on craftsmanship and creativity as well as an ability to combine the Middle East culture with modern methods. But the sector lost its luster during the war as most of Lebanon’s homegrown talent fled the country. Those who remained struggled to keep the industry afloat as Dubai, Kuwait and Saudi Arabia grew in stature. Ironically, the people who drove the development of the sector in these countries were mainly Lebanese.

“Although Lebanon continues to suffer from severe economic strains, we enjoy the fact that jewelry is still a major tourist attraction, especially to visitors from Arab countries, the US, Europe and Cyprus,” said Carole Hakim, marketing manager for Antoine Hakim Jewelers. “We have a worldwide reputation for our know-how in jewelry.” Leading jeweler George Mouzannar concurs: “There is no doubt that, as Lebanese, we are more into the creative side of jewelry making. Our designs can be found among the top international brands. This makes us proud, but of course there’s always room for improvement in any kind of business, and the jewelry industry is no exception.”

Exporting

According to ministry of trade and economy statistics, jewelry is Lebanon’s number one export industry, constituting 30% of the overall industrial sector in Lebanon. The latest data shows that jewelry export figures have increased by 9% since 2002 to around $465 million in 2003 – over 75% of which constitutes exports to Switzerland. First quarter of 2004 exports have reached $147.5 million.

But according to Vasken Hadidian, president of the Lebanese Jewelry Syndicate, the official figures hide the true story. “The government doesn’t differentiate between raw materials and finished products,” he explained. “Seventy percent of the figures constitute raw materials and not finished goods. The reason why Switzerland is seen as a major importer is because we sell them scrap gold, which is a form of money transfer rather than a commodity.” He added that Lebanon imports around 25 to 30 tons of jewelry yearly, only 30% of which remains in the country. The rest is designed, worked on, and then re-exported to Gulf areas, mainly Dubai and Kuwait. In fact, according to Hadidian, the majority of local jewelry is actually exported to the Gulf, with Switzerland mostly importing watches made specifically for the Swiss market. “We export to Switzerland under our international brand name, Romulus and Remus, with small quantities re-branded,” he added. There is room for improvement to make the sector more self-sufficient. Although Lebanon exports high-end jewelry (unlike the lower quality products exported by the Far East markets), it still lacks what it takes to make a genuine manufacturing sector. “We import finished products like chains, when most countries, like Italy, have all the equipment required to create everything they need,” said Mouzannar. “It is a pity that we still have not yet reached that level.”

Who’s buying?

According to Hadidian, local consumption is worth around $50 to $70 million. Statistics provided by the ministry of economy and trade reveal that jewelry imports to Lebanon reached around $302 million in 2003. “Subtract from that amount what we consume locally and the rest is reproduced and exported,” explained Hadidian.

“Only 2% to 5% of the local population, namely the upper class, spends on high-end jewelry,” he added, “the rest prefer to invest in gold in its cheapest form.” Hadidian admitted that local sales had been hit by the frosty economic climate. “Our biggest customers were middle class consumers. We are loosing them. Even the upper class is not spending as much as they used to in the past. Instead of buying an item for $10,000 they now go for something that’s around a $1,000,” said Hakim.

Competition

Jewelry, as a luxury product, is much more sensitive to the economic cycle. Naturally, jewelers also have a tougher time keeping their heads above water when the downswing comes, as they need continuous capital to continue and grow. Although their profit margin is around 20% to 30%, unlike other industries, the largest share of revenue goes to labor.

The competition is growing in the world and in the region, and Lebanon is feeling the squeeze. Today, Dubai offers the Dubai Metals and Commodities Center, a hub for gold, diamonds and commodities trade, which aims at attracting key players throughout the industry sectors – including relevant support industries such as finance, logistics and insurance – by offering free zone services. This has not escaped the attention of Lebanese jewelry makers. “They are offering great incentives, so why wouldn’t Lebanese jewelers focus their expansion on these countries? It’s enough that they are offering 100% business ownership and no taxes for up to 50 years. How can we even dream of such a perfect deal in Lebanon?” asked Mouzannar.

For the record, the local industry employs around 20,000, including business retailers and manufacturers. “No one can really know how many people actually work in this sector, because some have factories others have smaller workshops, and others work on a freelance basis. Labor is expensive compared to other countries like India and the East Asia,” explained Hadidian. Mouzannar added, like most industries in Lebanon, social security remains a big problem. “The government is not motivating people to invest in expanding their businesses in order to employ more people and spread out. It’s better for us to outsource finished products, as it’s less expensive. Having three employees is like paying for four and there are no facilities or incentives encouraging enough for us to develop our business,” said Mouzannar. Hadidian hopes the government is aware of regional developments and reacts appropriately. “So far, no one is showing interest in this matter. We are supposed to be the hub for the Middle East, but while we’re doing nothing, others in the region are doing a great job,” he said.

“We are still far behind in terms of international movements that will hinder our advancement and development,” he said, adding that Lebanon has yet sign the Kimberly process agreement. The agreement, which involves 48 governments and the diamond industry, is in an attempt to create a certification system that would label legitimate stones, thereby blocking the sale of conflict diamonds and protecting the integrity of the $7.8 billion annual trade. Statistics show that about 4% of that trade is in conflict diamonds, the profits of which are said to finance terrorism.

Hadidian admitted that since Lebanon hasn’t signed the agreement yet, “we are jeopardizing our reputation and hindering exports to other countries, as well as local development – like licenses for setting up diamond refineries and so forth. All of these should be taken into consideration before making any further decisions.”

Solutions

“We definitely stand out in quality and availability; yet our position needs to be enforced by building stronger strategies with the help of the Lebanese government,” said Chafic Idriss, marketing manager at Nsouli Jewelry. “We need an institution that can teach jewel manufacturing as well as a gem and metallurgy lab.”

At the international level, steps have been taken to help revive the sector. A few years ago, as part of their move towards liberating the international jewelry market, the WGC approached the Lebanese government with a proposal to reduce customs duties to 4%, a rate similar to that of the UAE. They also recommended the establishment of an alternative jewelry hub in the Middle East, more specifically for the Levant and Egypt. Key jewelers from Egypt and the Gulf have urged Lebanese officials to encourage the jewelry sector. As a result, Lebanon has halved customs duties on imported finished gold jewelry to 5% in November 2000. At the same time, customs duties on all consumables and chemicals used in jewelry manufacturing were abolished. The government also stopped tariffs on precious stones. “Thanks to the government and the Jewelry Syndicate, VAT was decreased from 10% to just 1.2%,” said Mouzannar. This may have been the only positive step taken by the government thus far to keep jewelers from losing their businesses, said Hadidian, but he was quick to point out that many in the sector don’t feel that they have benefited from any changes in real terms. “The real problems that the industry faces lies in the hands of government officials. We are suffering while others are booming. One thing is for sure we cannot sit and wait for the government to do anything – one has to take matters in his own hands,” said Hadidian. “Industry professionals, who would like to go seek their future in Dubai, for example, should do so, as they will see no growth in Lebanon. They are providing so much for people in our business there, so why not?”

According to Hadidian, the only thing that could give Lebanon a genuine competitive edge is turning the country into a free zone market for jewelers, abolishing all taxes. “That is the only chance I see for us to compete.”

Fashion

While the Lebanese haute couture business has reached international catwalks and made it onto the backs of Hollywood’s most glamorous stars, Lebanon’s $150 million ready-to-wear garment sector, once a regional power, is decidedly threadbare. In 2003, Lebanon imported $247 million worth of garments but exported only $43 million worth. For the record, according to the Lebanese Industrialists Association, in 2003, Lebanon produced 25 million items of clothing; but the country actually has the capacity to triple this amount and, given the right initiative, create jobs for 30,000 workers, five times the current workforce. Still, Fouad Hodroj, president of the Lebanese garment manufacturers, is nonetheless upbeat and believes that Lebanon is going through a transitional phase, one that will see a brighter future. “International business trends change over time, the same way fashion changes seasonally,” he explained. “We must follow the trend now and Lebanese manufacturers should be working towards revamping their business strategies, investing in other creative aspects.” In the past, Lebanese designers have been known in the region for the quality and accuracy of their sewing, while a new generation of designers, including Elie Saab, Robert Abi Nader, Zuhair Mrad and Abed Mahfouz took a giant step into the world of glamorous clothing, selling to other Arab countries and achieving international recognition. “We are good at designing and creating beautiful clothes,” said Hodroj. “This is what we should invest in. Ten years from now, I see us designing and creating while sending sketches to the Far East or Egypt for manufacturing. This is what most Europeans do. It’s the way people are doing business abroad, and it’s time we follow that model,” Hodroj said. “Today, we are in no position to compete against ready-made garments imported from the Far East, as their prices are far less than ours. We can compete against European imports however, as our prices are almost the same. Therefore, we should be investing in quality rather than mass quantities, and more so, on the creative aspect. This is how international clothes industries are working – we should be doing the same.”

According to Daniel Tchakedjian, store manager of the ABC mall in Ashrafieh, it’s all in the quality. “The Lebanese fashion collections we have in our stores don’t sell as well as their Chinese and other counterparts,” he said. “I disagree when people say that it’s a matter of mentality and that people prefer to buy international products. They’d rather buy quality for the money they are paying and, unfortunately, the quality of local products is very low, especially when compared to its price tag.”

Maria Mansour, a local shopper, says that she prefers paying around LL100,000 on a shirt for her husband from Massimo Dutti, rather than from a local manufacturer. “I think [locally made clothing] is too expensive for what it is,” she explained.

Tchakedjian said that Lebanese are very sophisticated and are very smart shoppers. They will not buy anything that has no quality. Those looking for cheaper brands go for imported goods from the Far East. So what went wrong? Hodroj explained that the history behind the industry is important as it shows why the sector is in its current condition. The ready-to-wear garment sector began in Lebanon after the country’s independence in 1948. “This industry was booming in Lebanon. We found ourselves in this line of work more than others in the region, since Lebanese were naturally more open to other cultures, especially western ones.”

During that period, according to Hodroj, ready-to-wear garments accounted for 40% of the total industrial sector, and the garment industry enjoyed a long period of success that lasted until the outbreak of the civil war. “Before the war, there were no laws, no customs fees, no high electricity bills and no social securities to be paid, among other things,” said Hodroj. “But as production costs increased dramatically over the years, profit margins also had to increase, as producers had a great deal of expenses to pay. So, many in the industry suffered.”

To make matters worse, the industry lost nearly half its 25% market share after the government’s trade deals facilitated the import of Syrian and Egyptian products. “The government has not done enough to protect the local industry. What’s more, we cannot export our products to Egypt and Syria – does that make sense?” he asked.

Until the early 90’s, there were around 1,240 factories in Lebanon. That number has more than halved to 500 factories of varying size, employing 11,000 workers today. Those left are the ones who have invested in modernizing their factories with the latest equipment, and directed their business towards designing and producing quality products that have a chance to compete against European goods.

“Lebanese haute couture has been displayed along side Yves Saint Laurent, Armani and Christian Dior, among others. Hopefully, our ready-made clothes could do equally well in the future,” said Hodroj.

Lebanon’s new boom is tourism-related real estate. Significant developments – worth in excess of $4 billion – in this field have begun roughly four years ago and accelerated massively by this year. The Middle East’s largest resort project, Sannine Zenith, topped the list of headline-making projects by size. But other projects are also highly noteworthy, from the Metropolitan Park development in the Jamhour area above Beirut, which will be the Eastern Mediterranean’s first theme park, to a wave of new beach resorts with names such as Oceana, Bamboo Bay, La Voile Bleu, Edde Sands and, the latest addition, La Guava.

Ironically, as much as beach life has long been associated with the Lebanese scene, the development of good beach resorts is a recent phenomenon. As short ago as 2002, an economic guidebook on Lebanon could undisputedly label the nation’s publicly owned coast as having “little more to offer than uncontrolled industrial development and mountains of garbage.” Whereas beach facilities previously existed in some numbers, they did so either in form of elite islands for a most narrow clientele of Lebanon’s upper 10,000 or would meet only the lowest possible denominators of cheap fun, the new resorts are seeking to provide both class and relative affordability in an ecologically compatible setting.

The importance of resort development for the future of Lebanon can hardly be overestimated. These new trump cards in the Lebanese development game score on two crucial economic fronts – tourism and real estate. While sales of apartments and vacation homes on the high end of the market entered a boom phase over the past two years, economists, sector analysts and major real estate players cautioned that this flare of mostly foreign direct investments was restricted in its economic benefits. By contrast, resort properties are productive. As tourism destinations they attract visitors, offer jobs and operator profits. As real estate they boost values at the site and the surrounding area. Operators and developers of the new resorts reported sotto voce that their presence, whether on mountain or seashore, send land prices soaring in the immediate area by at least 50% and up to three times. In parallel, the developers uniformly agreed that the mere act of constructing a resort or setting up a building somewhere on unused land does not add any value. This value is created through sound commercial leisure activities that are up to 21st century standards on infrastructure, business concept, marketing, and environment.

Sannine Zenith

Beyond its image as behemoth and mother of all mountain resorts, much mystery still shrouds Sannine Zenith, the largest commercial real estate adventure ever attempted in Lebanon. The initial political hype over its ownership structure has settled and the land purchases have been registered to the As Salam company, which is now wholly Lebanese owned by Jean Abou Rached, according to public relations manager Firaz Amine. “This project is a golden egg. It is so beneficial to all of Lebanon that nobody can question it,” he enthused.

Burnt somewhat by controversies over an alleged sell-out of 1% of the nation’s surface, the developers prefer to liken Sannine Zenith’s current property tally of 75 million square meters to covering an area “four times the size of Beirut.” As the detailed final master plan and feasibility studies for the project are still being worked on, the use concept and ultimate scope of the mammoth site still has some vagueness to it. But the people of the company will gladly present feel-good videos that virtually glow with promise and reveal that in the end, after further intended land acquisitions, the project size will most probably amount to 95 million square meters of “virgin land.”

Of the land already bought for more than $200 million, about 30 % are earmarked for potential construction comprising of infrastructure and hotels (not less than 8), houses, and commercial buildings. Ski slopes (double the area of the Faraya ski slopes) and three, 18-hole golf courses will consume a substantial portion of the territory, for which the developers push the slogan “in the heart of Lebanon and above the clouds.”

A green spine with one million (yet to be planted) fast-growing Nordic pine trees, an artificial lake, a heliport and three residential villages – themed eco, sports and lakeside – are key characteristics of the design. Also important, areas above 1,600 meters elevation will not see any building of houses and other structures and the peaks zone above 2,200 meters will be turned into a nature preserve, Amine said.

As Salam, whose concept includes financing of the development by issuing $1.25 billion in Global Depository Receipts to willing investors, foresees a construction phase of 12 years, during which the project will provide thousands of jobs. A project of this magnitude cannot prey on only the rich as their clientele, and Sannine Zenith confesses to have a family-oriented approach that targets normal earners as well.

Asking prices for land in the area rose to $8 to $10 per square meter since the project was announced this spring, from $3/sqm, which As Salam paid in acquisitions last year, Amine said, marveling himself at the fact that the company could keep their intentions a secret during the purchase phase.

When work is underway full steam, the company “will be happy to sell a square meter at $100,” he gave as an approximation of anticipated future prices. If all goes according to plan, As Salam might even attempt to take their mountain identity to the sea and launch a new big seaside resort venture in North Lebanon, under the name Sannine-sur-Mer.

If successful, Sannine Zenith, with a population projection of 45,000, would provide a case study for what appreciation a large, desolate chunk of land, that no one knew what to do with, can achieve in a grand development scheme. “Once it is developed, it most definitely will be a project to lift the Lebanese GDP,” Amine said.

Oceana

Widely credited with having broken the ground for more stylish beach resort ambiences on the Lebanese coast, the Oceana resort is reopening this summer at a new site in the coastal plane of Damour, to where the resort relocated this year from their previous address in Rmeileh several kilometers further south. The all-new Oceana resort will be a double feature with a landside pool face for the day and a seaside promenade face at night.

The natural Mediterranean beach in Damour is narrower than in Rmeileh and the old railroad tracks cut right through the property, so Oceana operators Cimes focused their creativity on turning these two limitations of the site into advantages, Cimes CEO Gilbert Khoury told EXECUTIVE. To do so, the developers aligned a boardwalk on the railroad right-of-way to create a 310-meter promenade along which they strung a lineup of restaurants designed to serve the resort patrons as well as a hoped-for dinner crowd. Since Lebanese beach goers mostly won’t seek direct exposure to the ocean waves and prefer to frolic between swimming pool and picnic tables, Khoury expects that the narrowness of the natural beach will not hurt the resort which is laid out to accommodate these customer desires during the day with the recreation facilities on its 30,000 square meter site and the restaurants facing it along the boardwalk.

Come evening, however, the promenade should rise to a second life as destination for people who fancy a walk and a meal or a party on the seafront. Then the restaurants will shift their attention to their west-looking terraces. Under this concept, “the short distance to the water is an attraction instead of a handicap,” Khoury said. The big pulling point that led Cimes to establish the new Oceana at Damour are the green surroundings. With the nearest building 500 meters away, the beach resort aims to entice Beirut dwellers to its Utopian setting only 15 kilometers from the capital. “It might be pretentious but we think we can create a wholesome destination for people to come there,” Khoury said.

This determination includes a commitment to preserve the integrity of the Damour plane, which represents a unique alveolus holding fresh air in the country’s coastal zone. Being to close to the sea for their purposes, farmers could not find much use for the land. For several years, the area had been under study for development as eco-tourism realm, and Oceana wants to be an anchor for environmentally sound recreation there. According to Khoury, all soil dug out during Oceana’s construction was reused in landscaping and above ground structures are built with wood.

With time, the resort intends to promote bicycle and horseback riding, and jogging as alternative to morning walks in the polluted city. With such features, the Damour plane fits the profile of new tourism-related real estate projects that can create new leisure values, property appreciation, and economic opportunities.

Apart from the location’s great overall potential, one reason for moving Oceana to the new site, so Khoury, was that Cimes didn’t want to operate the resort on conditions of a short-term lease. When first venturing into developing beach resorts four years ago, the company wanted to reduce its risks and rented the land for its first two beaches, Oceana and Bamboo Bay. The new Oceana, which involved a $2 million investment, is still set up on leased land but the terms are longer, seven years in Damour versus three years in Rmeileh. In Jiyeh, where the company is working on improving and expanding the Bamboo Bay resort by adding hotel facilities, the contract is for 10 years with extension option.

Ultimately however, the drawbacks of leasing arrangements can outweigh the advantages as the market for beach resorts is heating up, Khoury discovered with a laughing and a crying eye. “Now we are established in the market, but most of the added value is going to the landlord instead of us,” he said. In the case of the Damour property, the cost of the lease is still slightly better for Cimes than the cost of finance in purchasing the land, partly because owners in the area revised their prices for selling substantially upwards within the relatively short time from when Cimes signed their lease agreement until today.

In the longer term, however, Khoury wants to achieve gains from both operating beach resorts and from the real estate appreciation a resort creates. His aim for future projects is to have a two-pronged structure of a real estate investment firm and an operator company – but with separate shareholding bases, to avoid conflicts of interest between the resort operation side and the real estate aspect of the business.

Faqra and Mechref

The ancestral tree of the new Lebanese resorts family includes a number of projects that were important in evolving this particular real estate culture over the past thirty years. On the mountainside, the Faqra gated community was established in 1974 as a winter sports resort and pioneer of such developments. After the war years presented it with the challenge of serving different needs from the original design – customer demand for plots and construction was driven by Faqra’s security and insulation from the conflict zone – the project could re-emphasize its original focus over the last 12 years and today continues to grow, marketed now as an all-year, high-altitude resort community.

At a size of two million square meters, the Faqra Club group of companies, whose original investment has been estimated to translate into approximately $73 million in today’s dollars, saw a substantial recent increase in sales prices for their properties, from an average of $200 per square meter two years ago to at least $300 today, according to company managers. Plots are also tending to be larger. While the company designed its plots originally to measure from 700 to 1,000 square meters, a new 100,000 square meter segment under development today offers land ranging up to 4,000 square meters per plot.

While its presence pulled nearby land values up, the remoteness of Faqra granted the project an existence largely undisturbed by problems with individuals developing land outside of the community’s boundaries, although Faqra’s strict building codes were not implemented there. The value-added that the company provides to its residents comes from the infrastructure it established and from communal services – water, electricity and such – which the project owners in fact subsidize.

Industry observers regard Faqra as a successful development, which however remains by necessity restrained in scope to a comparatively narrow profile of a second or third-residence community for a small target group of affluent Lebanese, Lebanese expatriates and regional buyers. Within these limits, the project’s standing is strong and if the prospect of a belt of ski slopes interlinking the entire Faraya-Sannine area under the Sannine Zenith concept is realized, the good new neighbors could give Faqra yet another boost.

A further landmark in the history of private developments in Lebanon was established when the Mechref community saw the light in 1996. While earlier upscale suburban developments, such as the Rabieh subdivision to the north of the capital, had to face the handicaps caused by the conflict years and the social environment of the time, Mechref opened the gates for a wholly privately planned and structured community angling into the market as new one-site answer to the residential and recreational needs of the well-heeled.

The Mechref community covers a land surface of 3.3 million square meters at 30 to 350 meters above sea level overlooking the Damour coastal plane. Since the developers acquired the land in the mid nineties for an average $17 per square meter, value appreciation of both land and built-up real estate has been substantial. According to general manger Fouad Salha, cost per square meter to the company stands today at $85 and selling prices average $250 to $300, with upward outliers. Calculating that 300 villas have been completed, at average size of 600 square meters per dwelling and $750 cost for land and construction per square meter, the real estate worth of the Mechref community easily reached more than $130 million over eight years.

About 30% of the total area comprises developable land, 40% of which are still available in the market, Salha said. The company today tries to discourage the buying of plots by persons who speculate on increases in their value and do not intend to establish residences there. He described the increase of land prices in the developed as 35 to 40% since 1996, which he claimed was juxtaposed by a contraction of real estate values in much of the overall Lebanese real estate market by a similar percentage, thus further underscoring the Mechref value proposition.

In Salha’s expectation, the community will gain further from clustering of attractive tourism projects nearby, such as the Oceana beach resort in Damour. The awakening of tourism in the area would allow taking a new look at a hotel project in Mechref, which the developers had shelved after earlier feasibility studies had not projected satisfactory returns.

The visions do not end here. The developer of the Edde Sands resort in Byblos, Roger Edde, has a full plan up his sleeve to capitalize on the cultural and natural wealth of this ancient Phoenician city kingdom to amplify its tourism power into a leisure land embracing tennis camps, wellness hotels, green villages and its own port for yachts and even cruise liners – a $2 billion dream for the Byblos-Amcheet stretch alone, and that is without counting in Edde’s ambitions for a snow-side resort development in the Tannourine-Jaj cedars region. “I am fully bullish on the Byblos destination,” Edde told EXECUTIVE. “I feel the tourism industry and tourism related real estate in Lebanon are two years ahead of a moving curve, which will move up substantially in the 15 years that follow.”

Solidere has launched a new program thought to bring many changes to your business. What is the program’s core offering?

The program is based on settling part of the price of real estate transactions through shares at a time when we have noticed a major pickup in interest in developing downtown projects.

What motivated you to create this program?

What started us thinking about this program was the realization that the share price cannot stay where it is, because it is significantly undervalued. We have to do something to try to make people and shareholders realize that there is much more value in the company stock.

In launching the program, you mentioned that the Solidere share price is undervalued. Where do you see the fair value?

We estimate that the land bank that we own is worth $ 4.5 billion. That is excluding the properties that have been developed, which we value at $300 million. This will increase immediately when the Souks are completed, bringing the value of the buildings that the company owns to about $800 million. So I think if you do the numbers, the shares are definitely undervalued.

Seven years ago, the most optimistic estimates by international finance houses saw Solidere shares going up to $18 or $20. Now we are happy to be at $7 per share. We are not happy to be at seven.

What number would make you happy?

I will not comment, but as the value of this land bank appreciates the share price appreciates. The other element is payment of dividends. This is a key component of our program, that we will request the cancellation of the shares, which we will acquire. Then whoever is left as shareholder in the company will own a bigger portion.

How long ago did you begin preparation for this program?

It has taken us some time but I think what is important is that this program is coming at a time when there is significant interest in development in the BCD.

Are you saying timing is everything?

Timing and the circumstances. The other beautiful part of this program is that it doesn’t have a drain on our cash situation. It is basically a buy-back program. We are buying back shares but without having to shell out cash and instead giving land.

Did you develop this all in-house or did you use outside consultants?

We consulted with different individuals but in the end these ideas really came from within.

Do you have grounds outside of the new program on which to base your optimism?

Beirut is a city that definitely is in fashion. I talked to international retailers who see that point very well and are able to gauge that through their global activities. They see that Arabs are now looking inwards and Beirut is a spot where they want to be. The Lebanese diaspora is also looking to invest in Lebanon.

Two years ago, you started on an upward curve. Is it correct that the company had a good year in 2003 but showed lower results because it did not want to record sales on its books before they were fully registered?

No, we had cancellations related to shareholders in Bank Al Madina. These were the transactions that had this negative impact on our income statement. Otherwise we would have had probably as good a year as the previous year.

Is the new program and special offer valid at this moment?

Yes, from the day that we declared it and it is already being practiced. But it has yet to result in sales. That is not the case. We have several contracts in different phases of execution. Some were prior to this offer. There are stages of signature, final stages of fine-tuning the contract, but as far as I am concerned, these are sales that are behind us. We are negotiating with a major investor on a huge lot, but this story is at a stage where we cannot yet make an announcement.

Are you in effect reducing the price of land that you sell in Solidere?

To make this program work, we offer a discount of 15% from the list price. We review our prices every six months, and have been moving them up all the time, and this will continue. Pricing the land is another mechanism that has to do with many other factors. We will not change that. What we have always done when we price land is that we stick to it to make sure that people who have invested are somehow protected.

How much did prices go up since Solidere started to market properties?

We started selling initially at $950 [per square meter of built-up area/BUA] and we had a transaction for a hotel that was at slightly less than $950. But since then we have gone up to $1,550. This was the price for a superb piece of land that sits right on the edge of the Marina. I will not be surprised when we are selling some similar properties with commanding views at $1700 or $1800 in two years’ time.

But is it a fact that with the current offer, prices for the buyer have gone down for the first time since the company was established?

No. We have made deals on a cash basis where we applied discounts. While this is not a cash deal, mind you, we are getting 40% payment in shares upfront. We were always getting 25%. This is already a plus. We are getting more money upfront. And we are getting the rest of our money more quickly, three years instead of five years. So this discount is not a giveaway. It has economic bases.

Thus, the 15 % discount would be compensated by a decrease in exposure of the debt over two years and at the same time by the price of shares?

Not by the price of shares. We are acquiring a larger down payment at 40%, which could be 40% in shares or 30% in shares and 10% in cash, instead of 25%. But I tell you something that nobody has noticed yet. This program will have a positive impact on our retained earnings, up to a certain point. As long as we acquire the shares at less than [the nominal issue value of] $10 and we are canceling them at $10, there is another positive impact for the shareholder but not for the real estate investor.

How much could an investor gain in a best-case scenario if he bought shares when they stood at $4 or $5 and used them now for the offer?

This depends on several factors, at what price you bought your shares, how long you have held them, what is your borrowing cost. But if you buy shares today and your borrowing cost is very low and you wait on these shares and then execute the program, these shares will probably be at a higher price a year from now and you will even get another benefit. You get a bonus of 10% on the price of your shares and you get a 15% discount on the land. The program is also telling you as a shareholder that your shares are dearer to you now. You should hold your shares and not accept to sell them at these lower levels.

Is the offer open ended?

We have no time limit on it today but it is an offer that we will have to keep assessing as time goes by.

Is the offer giving a certain edge to large investors and large shareholders over small ones?

No, not at all. It is probably giving more edge to the small shareholders. Large shareholders have held on to their shares. The small shareholders have been panicking when their share prices have been going down. I think today they have no reason to panic. They are in a position to feel that the company is backing their shares.

Can you ensure that no information on your new program was leaked, to people who had already been negotiating with the company over buying a property?

We have our internal procedures to make sure that this is the case and I hope they work.

How would you respond to concerns that this city is a place where insider trading and conflicts of interest between ownership and management are common?

I believe our internal procedures are working as far as confidentiality and as far as transparency. We have shareholders all over the world. We have to ensure that we are not only playing by the rules in this country but by global standards.

What about allegations reported by some Beirut media about controversies in your general assembly on June 21?

We answered that. The auditors obviously never said anything [of the sort which was reported]. No shareholders, including those who stood up and screamed for other reasons, said such things in the assembly. Where did this reporter come up with those allegations? We have no idea. In fact the owner of the newspaper also doesn’t know where these allegations came from.

Can you comment on expressions of discontent at your general assembly?

You have to evaluate this discontent. If it is coming from a shareholder who is concerned about the interest of the company, I definitely take it seriously, but if it is criticism coming from troublemakers or people who have disputes with the company, this is negative for the other shareholders who have real concerns and [who risk] not having these concerns heard.

Could you give examples for real concerns?

There are many concerns that shareholders can voice and they do voice them. One of the concerns is why we aren’t paying dividends. This is a catch-22 situation; if we pay dividends we will not have enough cash to move ahead with the development process. If we pay dividends, some shareholders will be happy because it is an immediate benefit but in a way it will be taken away from future potential benefits.

In the long term, where do you see Solidere obtaining revenues?

From property management. Key to that are the Souks. Are local retailers getting twitchy over the delays and planting their flags elsewhere?

I am not concerned that this will happen. In fact, we have every indication that retailers understand the importance of this location very well. I would have liked to have completed this project by now, but we are about to start now, within the next couple of weeks. So within the next 18 months, we will have it up.

What do you say to developers who say the price of land makes it almost impossible for them to make money?

I tell them there are others who do and continue to come and buy land. This is what is happening. I am sure that also in Saifi and other non-waterfront residential areas, projects are making money.

And developers who are buying land at $1200 BUA and have to sell at roughly $3,000, can achieve that now?

Absolutely.

The large majority of building stock in any modern society needs to consist of affordable, social, smart residential units, which means a massive presence of low cost apartments. This is an inescapable attribute of the highly populous and predominantly urban human existence that defines our world. Lebanon, with its very high degree of urbanization and population agglomeration, underprivileged masses and overall young citizenry, is at least as dependent as any developing country on improving and increasing its metropolitan living quality through provision of inexpensive but humane housing.

At the peak time of drafting great post-war reconstruction programs, this urgent necessity was recognized in one single key project for creation of urban living spaces – Elyssar. Under the patronage of the mythically enlarged figure of the Phoenician princess and founder of Carthage, Elyssar was initiated as a development project for the capital’s southwestern realm with a preliminary master plan in June 1995. In the area between Beirut International Airport and the new Sports City – both at the time two of the largest construction sites in a construction-happy city – Elyssar was to create a mixed environment with commercial and recreational qualities and at the very minimum, 2,500 units of quality housing for low and middle income families. Nine years later to the month, and well over half into the project’s “global estimated time frame of 14 years” for accomplishing this development, Elyssar in reality remains the forgotten twin-sister of Solidere that was lost in the slums. Not a single low-cost apartment, workshop and shop appropriate to the economic situation and needs of the poor has been built. The BHV-Monoprix shopping complex on the airport highway across from Sports City is the only element of the concept that stands accomplished. Today, outside of some references in highly academic but incompletely researched papers from international conferences on urban development, Elyssar doesn’t even exist. Or does it? Amazingly, the administrative offices of Elyssar are operating in 2004 and according to PR-responsible Fadi Moucharraf, do so with a staff of “around 40.” The entity has prepared a large amount of engineering studies and plans, said Moucharraf, but central management has put a moratorium blocking all media inquiries and interview requests due to the absence of new activities.

This leaves it anybody’s guess as to what the real status and future of the Elyssar project might be – a viable question of public concern not only because of the project’s theoretical importance but also because of its obligation to meet public scrutiny. Created explicitly for improving both the social and physical fabrics of Beirut’s suburban areas that had borne long-term damage from Lebanon’s internal conflict in form of illegal settlements and unacceptable living conditions, Elyssar is, by the decree that defined its legal status in 1996, “a public agency with administrative and financial autonomy.” As such, it ought to be directly accountable to the sovereign public and its political organs and representatives. Some reasons for the utter failure in implementing the Elyssar project to date are common knowledge. The realm under the agency’s responsibility has in critical aspects not been accessible to normal state authority. Sect-related influence spheres in the area and active resistance by people living in the concrete slums over years made it prohibitive for government representatives to instigate measures, such as the tearing down of illegal buildings that stood in the way of road and infrastructure construction. On occasion, government officials setting foot in the area, namely entering the Ouzai quarter, were confronted physically by outraged crowds. The financing formula for building the affordable housing units, which were to be offered to the displaced and underprivileged people living in the slums north of the airport, hinged on the plan to find commercial investors willing to pay large amounts for developing the neglected and run-down Elyssar seafront into chic resorts. But as Beirut reconstruction and commercial development activities began to slacken in 1997 and 1998, this concept fell victim to the less-favorable-than-expected circumstances. The worsening crisis stemming from the government’s overestimation of economic growth coupled with exploding reconstruction costs and rising public debt subsequently eliminated any rational possibility that sufficient government “allowances” would be available to increase the Elyssar project’s viability.

In addition to these immediate political and financial problems, the concept drew suspicions from an increasingly skeptical populace and became the target of opinion makers alleging that underneath the veneer of social development and promotion of economic opportunities for the masses, “dirty hands” were manipulating the project for corrupt self-enrichment. These allegations may not have been presented with full and verifiable evidence but they left large population groups with an image of Elyssar as a scam run by Prime Minister Rafik Hariri. Until today, and in the minds of some students at top Lebanese universities, Elyssar is nothing but another exploitation scheme by which the ruling clique wanted to amass more money, power and control over some of the most valuable real estate in metropolitan Beirut. All above factors played a role in turning a proposed grand Lebanese solution for an important socioeconomic challenge into a Lebanese problem exemplifying the national struggle with administrative inefficiency, distrust of politicians, internal disunity, and massive suspicions of corruption and squander of the people’s monies. Elyssar wanted “to set new precedents of the government will and dedication to promote balanced growth and to provide social equity to all Lebanese citizens,” stipulated the officious document that can be read on the agency’s website. “The success of Elyssar is also crucial for the future of Beirut. Its redevelopment should provide back to Capital [sic] its distinguished character along the waterfront while setting higher standards for quality of living,” it said.

In light of the unabated housing crisis in Beirut’s poorest suburbs and the danger of increasing social tensions among impoverished segments of society, such words constitute bitter and involuntary irony on part of a public agency that will not or cannot explain what options remain for rescuing its forgotten project, which it is managing PRO-FORMA at a cost to the public that must have accumulated to millions of dollars over many wasted years. As things stand today, it seems increasingly difficult to envision a new future for Elyssar under its original mission. Some real estate experts now expect the project to be reborn as an upscale commercial development venture, because they see the land between Beirut Airport and the city as prime real estate with potential per square meter values comparable to downtown. While the assuredly well-paid, seven-member board and general management of Elyssar and their superseding political decision makers are not available for comment, it is not possible to do anything but speculate about such possible fundamental changes in Elyssar’s orientation. The uncertainty is made worse by the fact that neither public nor commercial alternatives to the scheme are in sight, which would have the much needed capacity to serve as a model for low and middle income urban housing creation. Opinions among developers today differ whether such a project could be feasible. Some reasoned that all such projects require public subsidies and no investor would be able to venture into a socially responsible residential development of the required proportions, while others claimed that too much government involvement is the main obstacle to making social housing projects work.

There is also a growing argument for fundamental questions on orchestrated housing projects. Town planning specialists continue to discover from evidence in developed and developing societies that mega-projects in social housing run up an incessant bill of negative social and economic results, from growing crime rates to failure in motivating both job creation and job acceptance. The challenge resulting from the human limitation to centrally plan urban life and implement compatible schemes for mass-living places all deliberations on this important issue in a bind to come up with what modern marketing-speak likes to call “innovative solutions.” The progress of commercial developments of large real estate projects in Lebanon is slowly extending from top-end wealth communities down the income ladder. It may one day reach the point where social projects become satisfactory under both profit and humanitarian considerations. But the urgency in alleviating the plight of Lebanon’s slum inhabitants in the meantime gives a multitude of reasons to ask about the vision and weakness of Elyssar. On paper, the Elyssar mandate is concise and unchanged. The area under this public agency’s care is outlined in its official FINAL MASTER PLAN from May 9, 1997 as being bordered by the Mediterranean Sea to the west and the Beirut International Airport road to the east and stretching from Adnan Hakim Street (where BHV is located) in the north to the airport’s boundary. This rectangular area comprises 560 hectares of urban and waterfront properties, including three kilometers of sandy beaches.

The mandate stipulates that three sources of funding are to be used for developing the area: · Allowances from the fiscal budget

· Profits from real estate developments

· Loans or investments from public or private sources

The core development objectives of the mandate are, in order of presentation on the agency’s website:

· Creation of a vision

· Building affordable housing units

· Upgrading of infrastructure

· Creation of development opportunities