Lebanon’s housing market has boomed in the last two years. On the back of a robustly growing economy and large inflows of foreign capital, both housing investment demand and supply increased markedly.
Relatively sound fundamentals
With the economy still growing, Lebanon’s property markets continued to perform well. Demand for Lebanese residential properties remained relatively strong in 2009. As illustrated by the high foreign direct investment (FDI), foreign investors as well as Lebanese expatriates continued to invest in residential properties despite the global economic turmoil. Concurrently, housing demand from domestic buyers was elevated. According to Bank Audi’s estimates, the number of property sales increased by about 2.3 percent to 83,622 transactions in 2009, compared to 22 percent year-on-year in 2008. Mortgage lending continued to expand. Housing loans increased by a staggering 41 percent year-on-year in the second quarter of 2009 (see table inset below), partly because of low interest rates.
On the supply side, construction continued to grow. The first eleven months to November 2009 witnessed an increase in building permits of 6 percent year-on-year, according to the Association of Engineers, and an increase in cement deliveries of 16.5 percent year-on-year. In a business survey conducted by Banque du Liban (BDL), Lebanon’s central bank, in the second quarter of 2009, the number of managers reporting a rise in construction activity exceeded by 16 percent those reporting a decline. The overall housing supply situation in Lebanon is difficult to assess, given the limited data availability. There is currently no sign that the market is either severely under or oversupplied but there may be some risk of excess supply in the future. For instance, numerous residential projects in the luxury segment are currently under construction.
Mortage lending expansion, by year
Softening, but no sharp fall of house prices expected
Taking the average sale value as a proxy for prices, we calculate that property prices increased by about 7 percent year-on-year countrywide in 2009 (see chart on facing page). In Beirut, housing price growth has been stronger, particularly in the high-end segment, where prices increased up to 40 percent year-on-year in 2009.
The surge in property prices raises some concerns about a potential overheating of Lebanon’s housing market. Homebuyer affordability has decreased markedly, especially in Beirut. As a consequence, domestic buyers are increasingly focusing on smaller and more affordable properties on the outskirts of the city. Moreover, foreign demand may also cool down in the near term, given that valuations in Lebanon are rich in comparison with other property markets where prices have corrected in recent quarters. Investor interest may thus start to shift back to other MENA countries with higher residential yields, putting some pressure on the Lebanese residential sector.
In the near term, we expect average housing prices to soften moderately. However, a strong correction is unlikely in our view. Over the long term, our outlook remains benign, as long as political stability can be maintained.
Transaction activity and price changes, by year
Promising long-term prospects
The Lebanese housing sector is structurally sound, in our view. Housing demand should benefit from positive demographic and wealth trends; the population is likely to increase by about one quarter in the next 25 years according to the United Nations.
On the supply side, land scarcity limits new development projects, especially in and around Beirut. This marks a difference to other Middle Eastern countries where land is plentiful. Over the long term, we thus remain positive about the Lebanese residential sector.
Yet, challenges remain. Market transparency is still limited. Moreover, there are some oversupply risks in the luxury segment in the near term due to elevated construction activity and slowing demand. But most importantly, political stability will be vital for continuous growth in the residential sector and the economy overall.
Supported by a resilient economy
The Lebanese housing sector essentially draws its fundamental strength from the country’s robust economic growth. Lebanon’s economy has shown considerable resilience to the global financial crisis, reaching an estimated real gross domestic product growth of 7 percent year-on-year in 2009, according to the International Monetary Fund. The economy was driven by all sectors, the main ones being market services, trade, government, industry and construction, with Credit Libanais putting the construction sector’s contribution to output at some 8 percent. The Lebanese banking sector was relatively insulated from the recent crisis due to a traditionally more conservative approach to banking. The sector is also very well regulated and supervised compared to other economies in the region. Moreover, structural economic drivers such as capital inflows supported the sector. Following the strong growth in 2009, the IMF estimates the Lebanese economy will grow by 4 percent year-on-year in 2010.
Foreign direct investment growth
Contrary to other developed and emerging economies, Lebanon was not exposed last year to extensive liquidity constraints. While credit growth to the private sector was on a downward trend since the end of 2008, it has remained in positive and double digit territory.
Since September 2009, the trend turned towards the upside. Foreign direct investments (FDI), which accounted for about 12.5 percent of output in 2008, are estimated to have reached $4.3 billion in 2009, an increase of 20 percent year-on-year, according to the Investment Development Authority of Lebanon. Most foreign investors in Lebanon are based in the MENA region and more than a half of them invest in real estate properties. While Lebanon’s fiscal stance and its large debt are the main vulnerabilities of the economy, Lebanon has escaped the worst of the recent financial turbulence.
Thanks to a steady rise in budget revenues and sustained economic growth, the BDL recorded in June 2009 that the debt-to-GDP ratio has declined from 188 percent to 153 percent since end-2006. Strong deposit inflows, important for Lebanon’s large financing needs, boosted the BDL’s reserves, which doubled over the last year and a half. Still, the annual inflation rate was relatively low at 4.3 percent last November, compared to 2008.
Dollar peg limits currency risks
Despite the BDL‘s continued commitment to the stability of the Lebanese lira’s (LL) exchange rate against the United States dollar, many Lebanese are still reluctant to hold LL instead of USD. This induced the BDL to maintain fairly stable interest rates throughout the global economic crisis, in contrast to the US Federal Reserve’s aggressive interest rate cuts, without leading to an appreciation of the LL. The higher interest rates mitigate the risk of a liquidity-driven asset price bubble. A gradual de-dollarization has nevertheless taken place in the last two years. The positive interest rate spread to the USD in combination with the fixed exchange rate also spurred capital inflows.
Separately, remittances from expatriates reached $7 billion in 2008, leading to a $3.4 billion surplus in the balance of payments. As of November last year, the BDL recorded a balance of payments surplus of a record-high $6 billion.
Karim Cherif, Martin Bernhard and Adelheid von Liechtenstein are research analysts at Credit Suisse
