Beirut real estate witnessed never-before-seen levels of building activity in 2010. The average value per property sale shot up a staggering 22 percent in the first nine months of last year compared to the same period in 2009, according to Bank Audi, pricing much of the middle class out of the market.
But calm came after the storm and property sales started to slow in August and dropped 9.3 percent year-on-year in October 2010. Experts agree that the market has reached a plateau, and prices will remain steady for at least a year, specifically in Beirut. For the long term, it’s a different story; the scarce supply of prime land, increasing demand from locals and expats and underlying legal issues threaten to bump builders’ costs. The result is another storm brewing in the distance, as developers will likley pass their higher costs on to the consumer, pumping up prices yet again. The only question is when.
Elie Sawma, who says he represents nearly 1,400 developers as president of the Building Promoters Federation of Lebanon (BPFL), said the group is “making efforts to keep construction at a steady level to keep a window of opportunity for citizens to buy, because the price will experience another wave [upwards] after this period of calm, at the end of 2011.” Sawma says the rising prices seen since 2008 were a fully expected “natural market correction.”
Problems on the horizon
Land costs have shot up in the past two years, estimated by some developers to have risen from 30 to 50 percent of their project costs. Thus, despite surging overall home sales and prices since 2008, the proportion of developers’ profit margin per project has generally decreased.
In addition, the BPFL say the 2011 budget proposal crafted by the Ministry of Finance could mar their bottom line. Developers may face a tax increase from zero to 1 percent on the total revenue amount of a transaction, a proposal that is expected to bring Lebanon’s cash-strapped government between $133 million and $200 million in revenue, according Minister of Finance Raya Hassan. The BPFL says taxes like this proposed by the finance ministry are weighing heavily on the minds of industry players.
“In every other country, the government imposes a tax on the seller’s profit, but not on the total sales amount,” says Sawma, who is working with the ministry and cabinet to block this clause.
There is also a proposed new tax on unoccupied apartments developers own (as, commonly, when a developer’s asking price is not met for a new unit, rather than lower the price to market value, he will hold on to the flat and wait until the market value increases). Though details are murky, Sawma says, “[the tax] could reach as high as $10,000 a year on some of the larger apartments downtown.” Developers are unlikely to absorb these charges out of their own profits, and will instead charge the end-user the extra costs.
Nader Obeid, partner at Lebanese law firm Alem and Associates, believes the initiatives will help the “real users” of residences. Though the proposals may hinder some types of real estate investment, the authorities should control investment, via taxes, when it burdens the citizens. “[Lebanon] is barely big enough for housing its people; accordingly the community’s need to provide accommodation for… citizens is greater than its benefit from investment in real estate,” said Obeid. “The solution to this dilemma is to give priority to housing and to force the real estate owners to use it for this purpose, not for speculation.”
Whether the proposals break through or not, many experts agree that prices can only shoot up in Beirut. When they do, it’s likely they will rise at a faster rate than we have witnessed this year due to the scarcity of land supply.
