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St. Georges and the Dragon

by Executive Editors July 13, 2004
written by Executive Editors

“We can’t keep the blinds open” said Fadi Khoury, chairman of the once magnificent St. Georges Hotel. “They will be able to see me and I can’t risk that.” After more than a decade of fighting, often very publicly, with Solidere and the Beirut municipality, both in the courts and in the press, Khoury initially comes off as determined to press ahead with his vision of reconstructing what was once Beirut’s, and the region’s, star attraction for the rich and famous. “I will not sell out, never!” he told Executive.

While the last two scraps have kept up the image of Fadi the fighter, the culmination of so many years of battling has clearly left him fatigued even as he pulls out map after map of what has, for him, been an exhaustive exercise in the complications, contradictions and “injustices” of Beirut’s rebirth.

Khoury acknowledges that the long-running saga on rebuilding the St. Georges has also taken its toll on his personal fortune. Several years ago, the authorities ripped up the hotel’s berths that were bringing him an average of $1.5 million in annual boat docking fees. Shortly thereafter, he had to endure various municipal obstacles to fully operating his beach club – his main source of revenue. Now, he says, “My revenues have been cut to so little. I have virtually no way to make a profit.” A pathway to the oceanfront, a reduced sea wall, his old piers and permission to build are all that he wants, he says. The crusading sound bytes of public space, “just compensation” and “anti-monopolistic development” would all stop there – he is, after all, a businessman.

As he adjusts one of his many remote cameras from his desk to close in on what he calls an illegal Solidere office trailer near the St Georges, Khoury adds, softly, almost to himself, “I don’t know how long this can continue.”

July 13, 2004 0 comments
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Eating goes upwards

by Executive Editors July 13, 2004
written by Executive Editors

With the number of tourists entering Lebanon reaching an all-time high, business has been booming for Beirut’s retailers and restaurants this summer. Cafés and eateries in the Beirut Central District reported an average increase of some 30% compared to normal year-round sales, and a general increase of 5% to 10% compared to last year. Serge Kirbeh, however, manager of Asia rooftop restaurant, reported a 30% increase compared to the annual average, even though he added that “last year was better.”

Restaurants in other parts of town did well too. George Khoury manager of Amore in Verdun, a traditional hotspot for Arab tourists, reported an increase similar to last year of some 35% compared to spring figures. The management of the Blue Elephant in Raouche estimated July turnover to be up 25% compared to last year, and no less than 200% in August, “thanks to an intensive advertisement campaign.”

But it is not just restaurants that are doing well. “Every summer sales are up some 60%,” said Jihad el Murr, managing director of Virgin Megastore, “not just because of Arab tourists, but also because of the Lebanese who return for holidays.” Most retailers in the downtown reported a figure similar to the ones in the restaurant business.

Likewise, most shops and retailers in the Verdun area experienced a 25% to 30% increase in sales, while lingerie, souvenir and clothing shops in Hamra reported an average increase of some 25%. Though Arab tourists did visit the ABC shopping mall in Ashrafieh, it seems it has not yet become their favorite hangout, as most shops reported an increase of no more than 20%. A comparison with last year is not possible, as the mall only opened its doors six months ago.

July 13, 2004 0 comments
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Banking on religion

by Executive Editors July 13, 2004
written by Executive Editors

Islamic banking products continue to rise in market appeal, with international and regional banks working to meet demand. The latest Sharia-compliant financial tool to be made available to Lebanese and Middle Eastern investors is the HSBC Amanah Global Equity Index Fund. Launched last month as the first index tracker fund to invest in the 100 largest Sharia-compliant companies by market capitalization, the fund is a product of HSBC Amanah, the Islamic financial services division of leading global banking group HSBC.

Buyers can participate with a minimum of $5,000 in the fund, which is designed to provide them with long-term appreciation of capital through investment in a portfolio of worldwide listed equities that meet Islamic standards. These standards mandate, among other requirements, that companies under investment not be involved in activities such as gaming and alcohol, which are forbidden under the tenets of Muslim faith.

Demand for Sharia-compliant banking products among customers of HSBC Lebanon has been increasing consistently and amounts to “a lot,” confirmed a spokesperson for the bank, who declined, however, to give figures on either the number of private banking clients at the bank’s Lebanon branches or the exact demand for Sharia-compliant products among its customers.

Meanwhile in the local market, Beirut-based Al-Baraka Bank announced that it is opening four new branches. The bank, which operates under Islamic principles, had seen several years of minimal activities in Lebanon until it undertook a restructuring beginning in 2003.

July 13, 2004 0 comments
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Italian furniture, made in Lebanon?

by Executive Editors July 13, 2004
written by Executive Editors

Lebanon has untapped potential to serve Italian furniture makers as a manufacturing base for medium-range lines for the Middle East market. Paying a visit to Lebanon, the president of the Italian federation of wood, cork, furniture and furnishing manufacturers, Roberto Snaidero, told Executive that he is envisioning increased collaboration between members of his association and Lebanese enterprises.

To open more opportunities for Lebanese companies for joint ventures with Italian furniture producers and manufacturers in general, Snaidero organized meetings with industry leaders here and in Italy. “As the president of our association, I now want to go deeply into this matter here in Lebanon,” he said. “This process cannot be resolved in the short term but it is important to begin. I think it is important for us and for Lebanese companies.”

Developing the skill base of engineers and staff in partner firms here would be essential, while large investments would not be a guarantee for success. “Lebanon is not a big market and some countries around it cannot buy the top class of furniture. We have to move into these countries with medium-range furniture, so we can start with investments in the range of $1.5 million to $2 million,” he said.

He pointed to Snaidero Middle East, a kitchen manufacturing joint venture between the Italian Snaidero Group and local partners (Indevco) as a model for such partnerships. Snaidero Middle East, established in 1995 with an investment of $1.3 million in equipment and training, succeeded in marketing its products in 14 countries of the region and today contributes 5% to 6% to the total turnover of Snaidero Group, according to Maro [OR MAURO?] Matiussi, general manager of Snaidero Middle East. “We estimate to have around 10% market share in Lebanon, which we estimate makes us leaders in Lebanon and in the region as a whole,” he said.

July 13, 2004 0 comments
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Little progress after Allawi

by Executive Editors July 13, 2004
written by Executive Editors

The recent visit to Lebanon by Iraqi Prime Minister Iyad Allawi produced little in the way of progress on three pressing economic issues: the fate of $500 million deposited by the previous Iraqi regime in Lebanese banks (now in the custody of the central bank); alleged losses incurred by Lebanese exporters who say contracts with Iraq, or Iraqi trade pledges, were not honored once the war ended; and the drastic drop in Lebanon-Iraq trade because of security concerns, which were accentuated by the harassment and kidnapping of truck drivers and businessmen, some of them Lebanese.

For example, the Port of Tripoli has registered a 50% drop in Iraq-bound trade, while road transit from Lebanon to Iraq has plummeted by 70%, denting any optimism generated by Lebanon’s $197.1 million cumulative balance of payments surplus for the first five months of 2004.

“Up until now, there has been nothing on the economic issues,” said Fadi Abboud, president of the Lebanese Industrialists Association. Although the oil, gas, transport and currency sectors were all discussed, observers said Allawi’s visit was primarily of a political nature, designed to improve diplomatic relations between Syria and Lebanon on the one hand, and Iraq on the other. “As long as the security situation in Iraq remains as it is, nothing will be done with respect to the economic matters discussed during Allawi’s visit,” Abboud added.

“I don’t think the issue of the Iraqi deposits will be resolved in the near future,” opined economist Kamal Hamdan. “It will depend on the political situation in Iraq. We may have to wait for elections there, and a legitimization of the political structure.” Hamdan predicted that Lebanese exporters would, eventually, be compensated for actual contracts not honored by Iraq. But he said that Lebanese exporters hoping to be compensated for investments they claim they undertook in response to informal import agreements could be disappointed, in part because of the difficulty in verifying such claims.

July 13, 2004 0 comments
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Politics and pension funds

by Executive Editors July 13, 2004
written by Executive Editors

The creation of a viable social security net in Lebanon inched a step forward as the cabinet adopted a plan for a national pension project, under which retirees would receive continuous monthly pension payments and be insured for medical services. If passed into law, the plan would gradually replace the one-time end-of-service indemnity payments scheme managed by the National Social Security Funds (NSSF).

The plan’s provisions stipulate that participants can receive pension payments after a minimum employment of 20 years, during which the retiree and his employer would contribute a total of 12.25% of the retiree’s salary: 5% deducted from the salary and 7.25% payment by the employer, up to a salary ceiling of $3,340. Employers would also be responsible to pay a contribution to their employee’s retirement health insurance, amounting to 5% of the salary without a ceiling.

Participation in the scheme would be mandatory for all new employees entering the job market (more than two-thirds of the Lebanese workforce is younger than 35) and all those currently enrolled in the NSSF who were born after 1969. Working persons born before 1969 may participate on a voluntary basis, on condition they do not withdraw their end-of-service indemnity and will have at least 20 years of insured employment at their retirement.

Pension advisors and insurance actuaries Muhanna group, who drew up the pension project for the Lebanese government, set the minimum monthly pension at $120, based on an employee earning a minimum salary of $200 [CORRECT?] over 20 years of membership in the scheme. If he or she is registered for 40 years, the minimum monthly pension would be $240. [CORRECT?] Under the model, a person starting to contribute at a salary of $600 and average annual salary increases of 3% would reach a pension of $642 after 30 work years, or 44% of his final salary.

Given the political stakes involved in the plan (and it was largely depicted in the local media as a defeat for Speaker Nabih Birri, who has considerable influence over the NSSF), debate over the plan is far from complete and adoption of the plan in parliament is anything but certain. After being passed into law, it would take at least two years to implement the scheme.

July 13, 2004 0 comments
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Speared by roadwork

by Executive Editors July 13, 2004
written by Executive Editors

From August 3 to 17, the main artery leading to the Murr Tower from Sanayeh and the Hamra district, Spears Street, was closed. As a consequence, many shops were forced to close down temporarily. A leading victim was the Barbar sandwich outlet, which had to close for two weeks, sending home 85 employees and reporting an estimated loss in sales of some $100,000.

“For 23 years Barbar never closed,” said Abed Serwan, the manager of Barbar’s Spears outlet. “But now we did not have a choice.” Serwan complained that for one year there has been work on Spears Street almost every month. Unlike its outlet in Hamra, the Spears outlet depends more on drive-by customers.

Other shops, mainly small groceries and souvenir shops, are estimated to have suffered losses of roughly up to 70% during the period of roadworks. Mustapha Yamout, who runs a tourist pension on Spears, also said that in the past year there have been eight major works and at least 20 minor ones. “Couldn’t that have been done in a more efficient way?” he asked.

The works on Spears are part of an overall project to refurbish some 90 streets in Beirut. “The whole infrastructure for sewage, water and electricity needed changing, after which the road needed re-asphalting,” said the engineer in charge of the operation, William Debs, who works for Elie Selwan contracting company.

According to him, “people always complain,” even though normal procedures were followed in an attempt to reduce discomfort to a minimum. “So, normally we always work on one side of the road, keeping the other side open to traffic.”

But why close Spears Street in the middle of the tourist season? “According to the traffic police,” Debs said, “there’s less traffic in summer, as schools and many offices are closed. Also, the municipality asked us to work during school holidays.” So are the works finished? “We need to put just one more layer of asphalt next month,” Debs said. “But that’s only one night of work.”

July 13, 2004 0 comments
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Resorting to luxury: Lebanon’s new tourism

by Thomas Schellen July 1, 2004
written by Thomas Schellen

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.”

July 1, 2004 0 comments
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Q&A: Nasser Chamaa

by Executive Contributor July 1, 2004
written by Executive Contributor

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.

July 1, 2004 0 comments
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Society

Convergence interrupted

by William Long July 1, 2004
written by William Long

2004 is already shaping up to be the year that “converged networking” (CN) – the merging of voice, data and video communications into one seamless system – truly came of age. Although the concept is not particularly new, it can now be said, with confidence, that the technical problems surrounding CN have finally been solved for the serious enterprise user and casual consumer alike. Most significantly though, both the capital and operating costs of convergence have declined substantially while, in the process, even the corporate telecom behemoths, whose profits were largely dependent on a segregated voice and data market, have come around to accept, market and even welcome the inevitability of CN.

Former incumbent telephone monopolies like Verizon and AT&T in the US, among others internationally, have recently rolled out an array of new services that turn the trend into an even more viable alternative for small and medium sized enterprises (SMEs), individuals, and multinational goliaths. “There is a shifting in the market from corporate based [clients] to now also include individual based [clients],” said Samer Halawi, regional director of Inmarsat, a $500 million firm that provides mobile voice, data and video transmission services to major news networks around the globe. “We are not a telecom company anymore,” he added, “we are an IT telecom conversion company.”

Chief among the new CN products, and perhaps the most exciting from the perspective of markets traditionally overburdened by heavy regulation and high voice tariffs, is commercial internet telephony, or Voice over Internet Protocols (VoIP) – a technology that employs internet-based standards to send and receive voice traffic as if it was data traffic. At its most radical – and this is where government resistance, especially in the Middle East, comes into play – VoIP completely sidesteps the old Public Switch Telephone Network (PSTN) to make use of the new high-speed data networks that have been built up around the world (see diagram I).

In a clear indication of where CN is headed, last month the market research firm Insight Research predicted that VoIP phones in the enterprise will outnumber traditional phones by 2009. Meanwhile, in the Middle East and Africa regions, retail sales of VoIP technology are expected to grow by 50% over the next two years (from $260 million in sales in 2004 to $390 million in 2006), a development which, in part, has led the UN to reduce the weight given to fixed phone lines when it calculates a country’s “teledensity.”

“IP is the way the world will be connected in the next phase of communication history. The idea of switched networks like the one we have now is so old, and so archaic that it is going to end, exclaimed Said Ghazzi, Information and Communication Technology (ICT) associate technology expert at the UN’s Economic and Social Council for Western Asia (ESCWA).

When it comes to just the VoIP part of the CN revolution, according to a report from independent market research group Gartner Dataquest, traditional service providers “can benefit by positioning VoIP services among their retail offerings at the earliest opportunity; in this way they get a new source of revenue and reduce the amount of voice revenue they lose to alternative operators.” All of which is why the ministry of telecommunication’s (MoT) apparent fear of VoIP in Lebanon actually seems, at first glance, like a baffling position. Even if one were to take at face value the oft-assailed fact that Lebanon’s telecom sector is still a state-run asset, operating for the revenue benefit of the government and not the service benefit of consumers, fears of losing the old PSTN revenue should be balanced out by the increased revenue possibilities that exist with the provision of a whole new range of CN services, like VoIP.

After all, that’s what former monopolies have realized – replacing telephone revenue losses with data revenue gains – so one would think, logically, that an actual monopoly like the MoT, who controls regulation, data pricing and telephone pricing, would have even more of an incentive to push the trend. And since the government is also increasingly forced to compete against illegal VoIP calls from home PCs and internet cafes, leading the charge as soon as possible rather than fighting back would make more sense.

But, of course, the state-run telecom monopoly is not an independent company and it doesn’t adhere to conventional cost-benefit calculations. Indeed, the MoT is necessarily more risk-averse and change-averse than any corporate behemoth since it values the ultimate prizes in Lebanon, short-term stability and survival, above all else.

This is perhaps why, even though revenue from regular phone lines has dropped by 9% over the last five years in Lebanon – due mostly to illegal VoIP usage as well as the growth in the cellular sector – the government persists in projecting rosy assumptions about the growth in revenue from regular phone lines: last year the ministry of finance was off in its estimate of such revenue by 56%.

“The solutions are simple,” said Ghazzi. “Everywhere else in the world, the incumbents saw that the growth of voice revenue has slowed down or decreased, and their attempt to respond to that is to build converged networks that create completely new revenue streams for the incumbent.”

Unfortunately though, unlike Morocco’s Maroc Telecom, Bahrain’s Batelco, and others in the region like Jordan and Saudi Arabia that have begun to come to terms with CN and VoIP, Lebanon has not addressed what Gartner calls “the sensitive issue” of how far VoIP will “cannibalize” their PSTN revenue.

“The Middle East region is split,” the report said. “The lack of deployment… results largely from fear and a reluctance to change a market structure that works, even if it is not ideal.”

Even though the MoT itself now uses VoIP solutions internally to reduce the rate it pays for international calls (by as much as 70% over the last four years, according to an MoT source), Lebanon insists on holding court with the diminishing number of countries where most commercial VoIP services are illegal. The irony, and the beginning of a downward spiral really, stems from the fact that while the government uses VoIP for its international call routing, individuals are prohibited from using the technology. Thus, as more and more people use VoIP services under the table like Net2Phone – employed at many internet cafés in Lebanon to save callers almost 70 cents per minute on calls to the US – the MoT predictably digs in even more against the technology. Instead of seeing a market opportunity bolstered by its unique stance as both regulator and monopoly service provider, the MoT even goes so far as to prevent well-established corporations from using all but the most basic of VoIP applications.

A statement from one high-level source at the MoT captured the government’s predicament: VoIP technology “is supposed to achieve significant cost savings for businesses. When used by telecom operators, most probably new entrants, it will significantly reduce service costs and therefore charges on consumers. [However,] the incumbent [government] will normally be forced to practice lower prices consequently.”

Although the source explained that the MoT was considering the revenue effect of calling cards and some other limited VoIP services to offset declining call revenue, he made it clear that the government was primarily looking backwards at “recovering the investment cost of the traditional infrastructure.” This positioning has led to the awkward arrangement, whereby the government forces VoIP to stop at a company’s walls: the data is switched back to regular voice traffic and sent along to the PSTN, as any other normal call would be.

Despite the limitation, some companies in Lebanon are still doggedly pushing forward with VoIP deployment, and realizing cost savings and efficiencies in the process.

In fact, Cisco Systems, a major global supplier of internet technologies, recently sold a 2,500 VoIP phone system to a large company in Lebanon that now has a fully converged network: its four separate networks – surveillance cameras, administrative network, data internet, and the voice system – were all successfully collapsed into one unit.

The company had been paying $120,000 per year just for maintaining the voice system.

According to Hussam Kayyal, general manager Levant at Cisco Systems, the company was able to realize an 80% drop in annual operating telecom costs with the new system – even though the full power of VoIP is effectively cut off at the company’s door-step.

While the initial investment for such a solution is significant – IP phones are more expensive than regular phones – the generally accepted value proposition is that costs are more than recouped over time. Moreover, a whole new range of service enhancing applications moves into reach – voicemail and phones that can easily move across positions, call monitoring and profiling, the integration of email, voicemail and other messengering services. Indeed, the list keeps expanding with the march of technology. Added to this is the fact that, “they’re ready,” said Kayyal of his client. Ready for when Lebanon joins its peers in the region to recognize the potential that CN holds.

Although it is said that some major Lebanese banks have received waivers for VoIP, legality, not infrastructure or cost, is still the most immediate stumbling block for large enterprises, like the company which Cisco Systems outfitted. “Look, the infrastructure could be made almost immediately available, and all would love to join the converged network…it’s a no-brainer, but they do not want to be prosecuted,” said Imad Taraby, the CEO of FiberLink, a leading provider of corporate internet services in Lebanon.

Of course, the extremely high cost of broadband connectivity in Lebanon is still a significant problem hindering VoIP growth – especially for SMEs who can little afford the $12,000 – $24,000 that it costs to procure the minimal amount of bandwidth needed for CN. “Even if they did allow VoIP over the current infrastructure, it is not commercially justifiable to do it,” said Kayyal. Either way, time, it seems, is running out. According to an April 2004 report from the independent market research firm Datamonitor, “The Middle East, Eastern Europe and Africa are to become the main beneficiaries of Western Europe’s outsourcing of its call centers,” Already, Tunisia and other country’s in the region where international calling rates have been liberalized are seeing an explosion in call center employment.

Lebanon, with its high international calling rates and outright prohibition on international VoIP, has entirely shut itself out of this growth industry – despite the fact that the country suffers from an unemployment rate thought to be as high as 20%. This is perhaps one reason why, as Gartner put it: “Having no VoIP strategy is not an option. It is time that participants in the Middle Eastern market devised one.”

July 1, 2004 0 comments
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