- Prior to October 17, 2019, the real estate market was suffering from high developer debt and low interest rates on deposits.
- Lack of trust in banks has since then lead to an uptick in real estate investments, which in turn has allowed developers to pay back their bank loans.
- Long-term implications on the sector are dependent on the performance of the new government.
The 1st century Arab poet Al-Mutanabbi could be describing a current scenario in Lebanon when he wrote “masa’eb kawm ‘and kawm fawa’id,” that what is seen as a catastrophe by some is an opportunity for others.
The real estate sector in Lebanon has been suffering from a slowdown since 2014, although hard data is largely unreliable and anecdotal (see Executive’s December 2018 article). Reasons behind the sector’s woes include increased interest rates on the bank loans of real estate developers—which reached up to 13.5 percent—and the market slowdown, largely brought on by the high interest rates on deposits that made people reluctant to invest in real estate (see article in Executive’s September 2019 issue).
“The hike in our interest rates when the market was slowing down at first, and then became stagnant for several years, made it impossible for developers to pay their loans,” says Mireille Korab, head of business development and communication at FFA Real Estate. Korab estimates the debt owed to banks at around $20 billion. Massaad Fares, chairman of investment management firm Legacy Central, told Executive the same figure, breaking it down into $11 billion owed by developers and $9 billion by homeowners.
Adding to difficulties faced by indebted real estate developers looking to lessen the burden of their loans, according to Fares, was the high interest rates on deposits over the past two and a half years. He tells Executive that the majority of Lebanese were tempted by these interest rates—reaching up to 12 percent—and so kept their money in the banks rather than diversifying their investments.
When, in early September 2019, Lebanese began to fear for those deposits—with the first warning signs of the current financial crisis manifesting through gas strikes and difficulties obtaining dollars at ATMs—Fares says this sparked renewed interest in real estate investments. “Our phone started ringing after a couple of years of not ringing once,” he says. “I had people from all walks of life calling me to ask for my opinion about investing in real estate as a means of saving their life’s earnings from the banks.” He adds that following the 15 days of bank closures that started on October 18—the second day of the still ongoing thawra (revolution)—this initial interest turned into panic as consumers’ distrust of banks grew.
This created what those in the real estate sector Executive spoke with characterize as a mutually beneficial cycle. Lebanese wanting to withdraw their money from a banking system they no longer trusted opted to invest in real estate, which benefited real estate developers seeking to lessen their debt burden, which, in turn, benefited banks as these developers began repaying their loans. “It’s a healthy situation where the investor is taking his money out of the bank and is happy; the developer is taking the investor’s money and transferring it—maybe in the same day—to the bank while making sales from his unsold stock of property, and so is very happy; and the bank is also happy because money is coming into [borrower] accounts,” says Walid Moussa, president of the Real Estate Syndicate of Lebanon. Executive reached out to several banks for this article but received no response to interview requests.
The need to buy
Lebanon’s current financial crisis has arguably been exacerbated by the lack of unified banking policies and clarity over capital control measures, leading many Lebanese to continue a slow drip run on the banks. Increasingly restrictive withdraw limits, however, have made those wishing to remove their deposits from the banking system more creative.
Some Lebanese are using bankers’ checks to invest in high-value items as a means of converting deposits into tangible assets that they hope they can eventually resell. In this scenario, the real estate sector is one of their only options, Moussa says. “Even investing in gold, jewelry, or art is no longer feasible since those sellers are asking to be paid in cash and not check,” he explains. “The real estate sector is one of the few value investment channels that is still accepting checks.”
According to Korab, there are precedents to investing in real estate during times of crisis, which could explain why Lebanese are turning to the sector now. She says that investor profiles range from high-net-worth-individuals looking to buy buildings in Downtown valued at millions of dollars to those who have worked all their life and want to protect their retirement finance through a medium-sized investment in real estate (in the range of $100,000 to $150,000).
Paying the price of real estate
Speaking from his perspective as a real estate investment manager, Fares tells Executive that some buyers are playing hardball, holding out for very large—and to his mind not feasible—discounts, as they assume that indebted developers will make concessions to close the sale. He says that potential investors are also benefiting from this situation and should take advantage quickly, lest the tide change. “Eventually your purchasing power may decrease even further,” he warns. “You can afford the apartment that is $250,000 now, but maybe in a while, you cannot buy it at this price anymore because there might be a haircut or your money may be exchanged to Lebanese lira at LL1,500 [to the dollar], and lose its value. If you want to invest in real estate, waiting is losing.”
However, developers are also guilty of milking the situation, according to Fares, lowering discounts on properties from pre-thawra rates because demand has increased—and they know potential investors have an added incentive to move quickly. Prior to the October 17 protests, he says that properties were being sold at a 30 to 40 percent discount—now they are being sold at an average discount of 25 percent in prime areas like Solidere. The more that developers repay their debts, the less the urgency they have to sell, and so they become greedy, he explains. It is worth mentioning that investment shares in Solidere have gone up from $6.6 at closing in January 2019 to $7.9 at closing in January 2020. It is notable that the only real estate related stock on the Beirut Stock Exchange (BSE) improved in December 2019/January 2020, even as overall BSE market cap dropped.
Moussa advises developers not to play with prices nor be overconfident of demand. “Developers have to be careful not to lose this opportunity to sell—if they increase their prices, this will halt the trend,” he says. “People will not evade a potential 20 percent haircut in the banks to go invest in the retail sector at a high price because at the end the result will be the same for them.”
All those interviewed told Executive that only developers indebted to the banks are selling property in today’s market; non-indebted developers do not want money from sales to be trapped behind the ongoing capital controls at the banks and so are holding off for more favorable conditions.
What lies beneath
This uptick in demand for real estate investment, however, has not directly translated into actual sales. “Demand is crazy,” Moussa says. “People want to buy, but they don’t know what to buy—they know they want to get their money out of the bank and are acting more out of panic than conviction.
“So what happens is that we are receiving hundreds of demands per week, but the transactions are not in the hundreds [but in medium double digits].” He explains that the uncertainty about a financial solution is causing cold feet—from both buyers and sellers—before many deals are closed.
Both Fares and Moussa agree that the number of transactions in the last quarter of 2019 have increased in comparison with the fourth quarters of both 2018 and 2017. “From all that we are hearing, 30 percent of that has materialized in transactions,” Fares says. “Out of every 10 people who walk through our door, three are buying, but it is better than before the thawra when only one was buying.”
And then what?
As long as mistrust in the banking system continues, Fares believes that this increased interest in real estate investment will remain. Although it is still too soon to assess the impact Lebanon’s newly formed government will have on the banking system, speaking before its formation, Fares tells Executive that its credibility will have a strong impact on the recent real estate trend. “If a worthy government is formed, then the mistrust will decrease, and this enthusiasm [for investment] will decrease,” he says. “But if we get an unworthy government, this enthusiasm will continue. And this is when I ask both developers and buyers to not be greedy to save their money and their property.”
Moussa believes this phase of investment in real estate is transient as uncertainty over haircuts on deposits and the long-term solvency of banks remains. He advises that developers keep prices reasonable or risk negative long-term implications on the sector. “We have to see what will happen to the real estate sector in terms of prices,” he says. “If prices go up now and the bank situation deteriorates further, prices might go down again and we will have to wait for a decade to be able to resell at good prices and recover investments.”
Korab says this trend of investment in real estate will continue until developers pay off their debts. Once free of debt, developers will be able to wait until the situation stabilizes before selling. This is when, according to Fares, prices will start to increase. “When the debt is entirely repaid and developers enter the capital making phase, they will no longer make discounts and prices will eventually go up by percentage increments—although this will take many months to happen,” he says.
In the long term, given the volatile financial situation Lebanon is in, those Executive interviewed say that it is impossible to make predictions with any degree of accuracy. They foresee that a lot of property will be up for sale or rent, but, whether there will be a market for them is unclear. Investment in real estate is one option to withdraw money from the banks—and may be the answer to an indebted developer’s prayers—but it remains a risky proposition for the investor, as no one can predict if they will be stuck with a non-liquid asset down the line.