Despite the malaise affecting Lebanon’s economy, there’s still some life in the real estate sector. Developers are building, and people are buying new apartments – at least in some market segments. Stagnation is the sector’s buzzword, as it has been for the past few years, and market players are resting on demand related to population growth, hoping the boom years will return.
Executive sat down with Massaad Fares, president of the Real Estate Syndicate of Lebanon (REAL), and Namir Cortas, head of the Real Estate Developers Association of Lebanon (REDAL), to talk market conditions and challenges facing the sector. Both Fares and Cortas are also top managers at property development companies, and Fares also heads a brokerage firm.
E REAL has been running courses for real estate brokers with an aim to professionalize the sector for the past three years now. Can you tell us more?
Fares: We’ve developed a fundamental course about real estate brokerage. The next session will be in March. We are in the process of developing another course, a more advanced course, that will focus on assessing and determining the best use of land. This is to educate brokers, so if a client wants to build a school, the broker shows a plot appropriate for a school, not just any plot.
E What do the existing courses
focus on?
Fares: The fundamentals of brokerage: zoning, how to read a title deed and how to understand the notes or encumbrances on a title deed. We brought experts to teach about how to do proper due diligence on a piece of land. We taught marketing and sales techniques because here, we know the unprofessional brokers can tell you anything. So we had sessions on the ethics of sales. You can’t just tell a client anything. This could be his or her life savings or a young couple who have borrowed money from their parents. We also taught them how to deal with developers. It was hard choosing what to teach because the courses are only for six weeks.
E How many students have taken these courses to date?
Fares: [ A total of] 104.
E Are you doing anything to institute a licensing process for real estate brokers?
Fares: We are working on two tracks. First, we’re working with the minister of economy to create a registrar at the ministry so anybody who wants to be a real estate agent must register. He’ll have to put a symbolic bank guarantee. And this only needs a ministerial decision, not a law. We’ve prepared it and sent it to the Shoura Council [to review its legality]. After the council, it will have to go to cabinet for final approval – and these days that can take some time. Registering at the ministry will mean that brokers have an identity card, and clients will be able to file complaints against brokers at the ministry. Also, in order to register at the ministry, a broker will need the visto bueno [or unofficial approval] of the syndicate. If we tried to require the official approval of the syndicate to register, we would need a law instead of a ministerial decision. On a second track, we have also drafted a law on real estate brokerage that we’ve presented to the Ministry of Economy. We still need to fine-tune it before it is sent to Parliament. We’re pursuing both tracks because the law will take a long time. The law will also make the syndicate an order, and then brokers will need the official approval of the order to register with the ministry.
And Minister [of Economy and Trade Alain] Hakim sees registration as a way to protect the consumer.
E How does this protection work?
Fares: We promised the minister that, once the decision is approved, we’d do a campaign focused on: ‘Know[ing] your broker.’ And the minister said he will support us and make a public statement about the importance of using a licensed broker. Why should you buy a home from the concierge? So you don’t pay 2.5 percent? You are paying it, believe me. The broker can get you a better deal and better payment methods.
Cortas: And the concierge charges you too. At least get the service for the charge.
E What else is the syndicate doing now?
Fares: We have a recruitment program covering all of Lebanon, but we are waiting for the decision to be approved because if we go to any city outside of Beirut and want to have an open meeting, we want to be able to say they have to register. We need to have that to have a focus for the recruitment.
E So your members are only from Beirut?
Fares: No, we have members from all over, but we have not done active recruitment. We had our members compile data from all over Lebanon and found there are around 600 real estate brokerage offices in the country.
E How many recruits are you aiming for?
Fares: Today, we have 153 individual members representing a bit more than 60 percent of the total sales in Lebanon. We have the most important brokerage companies as members already. All of the big deals are happening through these brokers. Our aim is to have 400 individual members from the 600 existing brokerage offices.
E How about REDAL; what are you up to?
Cortas: This year we had two workshops on the 18 major taxes developers pay during the lifecycle of a project, which contribute around 30 percent to the cost of a development. Government officials don’t even look at these taxes comprehensively. They view each as an individual transaction so they don’t appreciate the damage it can do [to developers] and the importance of the sector to the economy. With these workshops, we’ve started a dialogue with officials from the Ministry of Finance. We’ve built very good relationships and are holding regular meetings and prioritizing a program. The problem is, most of the items on our wishlist require major legislation. We’re telling them 10 percent of a million is better than 20 [percent] of $100. And, we’re telling them that if the development sector suffers, 70 other occupations and trades suffer too.
E What else are you working on?
Cortas: We still want to streamline administrative procedures related to actually building a development, but after consulting with different ministries and conferring among ourselves, we’ve reduced our ambition from a one-stop shop for everything to a pilot project for e-permits in Beirut. For this, we held a workshop at the Chamber of Commerce early this summer that was attended by the [governor] of Beirut. We highlighted how this would allow tracking [of permits], improve communication and effectively empower the applicant by letting him or her know exactly what stage the permit is at and exactly what paperwork is needed. We’ve told both the governor and the head of the municipality that developers would be willing to pay a premium to get fast-tracked through the permit process because it currently takes so long.
E What’s the progress on this?
Cortas: We’re working with the World Bank and the International Finance Corporation (IFC) because they’ve helped implement programs like this in other countries. For the World Bank to help implement this in Lebanon, they will pay part and the government needs to pay part to show commitment. And the whole thing is not a lot of money; it’s around $1.2 million. And half of what the Lebanese government needs to pay is already committed by the Office of the Minister of State for Administrative Reform. But the governor has a problem. The money will come from the municipality, but he needs to sign.
E Why is he dragging his feet?
Cortas: I don’t know. We need to follow up. We were lobbying on the one hand and the IFC was pursuing this independently. When we discovered that, we began working together. It will get done, but it takes time. For every small step of reform, there is so much rejection in this country. Taxes and bureaucracy are the two biggest challenges facing this sector.
E Back to the taxes for a second; you said there needs to be a lot of new legislation. Have you drafted any of this legislation?
Cortas: We’re trying to make progress on important matters that do not need legislation or need less legislation. For example, we’re lobbying for a single body for valuation. This does not need a lot of legislation. Today there are too many committees that have the power to do valuation. We’re lobbying to have a role for our members in the valuation process to avoid over-simplification – for example, not every apartment in Solidere is as expensive as Platinum Tower, which has a direct sea view. And values can go down too.
E Can you elaborate on the need for a single valuation body? How does valuing an apartment work today?
Fares: Let’s say, for example, you buy a unit in Sama Beirut. You buy on the 40th floor and the price is $10,000 per square meter. When you go to register it, you have to pay 6 percent on $10,000. Another customer bought an apartment on the first floor two years ago for $2,000/sqm. They will both register the property at the same time because registration happens not when a unit is bought, but when it is delivered. The real estate registry can tell the person who bought on the first floor that their apartment is worth $10,000/sqm because they saw what the other customer paid. They have the power to do this, imposing a price on someone coming to register. And they have the ability to call people back if they get registrations in the same area for a higher price. We need a price index (see overview page 120).
E Aside from regularizing the valuation process, what else is REDAL working on to help improve life for developers?
Cortas: We hope to do something about the fact that we pay value added tax without being able to recover it. We’d also like to have first-time buyers exempt from registration taxes. But these last two things need legislation. We’d also like to increase the loan size available from the Public Corporation for Housing (PCH).
Fares: Today it’s $180,000. If we could double that, for example, this would cover a nice portion of the first-time buyers.
E Last year at this time, the new rent law had just been passed. It has still not been implemented. What are your thoughts on the law?
Cortas: It’s a joke. The truth of the matter is there is no housing component to the economic policy of the government.
Fares: There must be a ministry for housing. Solving the old rent problem is easy. It would take maybe $2 billion to fix this problem and build the old [tenants] new housing. Let them keep paying their old rents in the new developments. Why not solve this completely? And our biggest problem as developers looking at Beirut is the scarcity of land. Solving the old rent problem would release so much property that would be available for redevelopment in areas that are so poor and so ruined. We could re-vamp these areas completely. Officials always want to solve economic problems with laws. If we had a ministry of housing, at least there would be new ideas.
Cortas: And there needs to be a planning component for real estate at the government level. Had the central bank not had the governor, with his understanding of the importance of housing and importance of subsidized loans, no middle-income person would be able to afford a house. This culture needs to come to the Ministry of Finance and the whole cabinet.
E Given that prices are high today, especially in Beirut, who is buying?
Cortas: The need for housing is enormous. Especially at the lower and middle income level. There’s a mismatch. There isn’t enough property to meet the aspirations of young, educated people who are independent enough and wish to move out and get on the housing ladder. We have a duty as developers not only to create the right product but to create the right awareness. People do not know [enough about this]. We were in a meeting with journalists last year, and they were skeptical about whether they could afford to buy a new apartment. A colleague asked one of them, ‘What kind of car do you drive?’ He said, ‘A BMW.’ My colleague said, ‘If you can afford a BMW, you can afford a house.’
E What do you mean by middle income, in terms of figures, and how do you plan to build for the middle-income buyer when there are no reliable statistics on what salaries people are earning?
Fares: We know [how to identify a target market by income] because we live here. We are used to knowing things, not in a scientific way, but in a gut feeling way. Today, [for an apartment costing] up to $250,000 or $300,000, there is such [high] demand that you cannot meet [it].
E Can a couple earning a combined monthly salary of $3,000 afford this type of apartment?
Fares: Yes, between the central bank’s subsidies, some family savings and the PCH, they can. This segment of the market is about 25 to 30 thousand units per year, and this is from the normal growth of the population.
Cortas: The total shortage in this segment is around 80,000 units today.
Fares: And given the economic situation today, developers are hesitant to begin new projects but people are still getting married.
Cortas: And the buyer profile is changing [for example].
Fares: I have two single female customers who are buying apartments alone. They want to invest in a house; they don’t want to just rent.
Cortas: Because if you are a salaried person, how else are you going to save? How else are you going to build capital?
Fares: And it is difficult as a company to make money in this segment. I cannot compete with a mom and pop operation. A gentleman with his son who is an architect can park his car next to the development [site] and use it as an office. They don’t have to hire project managers and they can build to lower quality specifications because they don’t have a reputation to worry about. So for professional developers to compete with them, we have to go for large-scale developments – 80 or 100 units – to reach an economy of scale. So you’re buying 500 doors, for example.
E You’ve spoken about the middle-income segment, but what about the high-income segment? Is there a significant amount of unsold stock?
Fares: I believe there are more than 1,000 units exceeding $2 million unsold on the market: about $3 billion [in total]. But this is not a big amount of money. The average of the sector is $6 or $7 billion per year – not this year – but in an average year. And no one is building these types of units anymore. There’s a window of opportunity here for investors.
Cortas: We were going to launch a campaign titled, ‘Now is the best time to invest in this beautiful country despite all its problems.’ We’ve decided to be sensitive to the ugly scenes and ugly garbage, demonstrations and delays.
E Will this campaign focus on the local market or abroad?
Cortas: I think it will be [everywhere] once we stop harassing the world with our bad images.
