For savvy investors who jumped on the downtown train and bought off-plan properties in Beirut’s first high-rise towers, it isn’t uncommon to hear cigar lounge stories of 300 percent re-sale profits. Around 2005, prices per square meter hovered near $2,500 and the cost of construction was still relatively low, making Beirut cheaper than the capitals of Egypt, Syria and Jordan.
By 2009, prices in Beirut had jumped 250 percent. The average registered real estate sales value also showed a 47.2 percent increase in the first five months of 2010, according to a Bank Audi report in June, though most of these sales were likely initiated during the frenzied buying spree of 2009.
Nassib Ghobril, head of economic research and analysis at Byblos Bank, sees the hand of speculators in the meteoric price rises.
“Speculators have been increasingly active, especially in Beirut… the price increases cannot be justified only by demand,” he told Executive.
Given that most developers use their pre-sales to finance the bulk of their projects, problems can arise when a building is partially sold and construction has started, but then sales (and thus financing) dry up as the market cools, leaving the project at risk of stalling and investors out of pocket.
As of June, there were nearly 350 residential buildings under construction in Beirut, with the 24 in Beirut’s Central District (BCD) experiencing the most difficulty selling, according to Bank Audi’s report.
While this type of news has prompted some to wonder whether the golden property bubble may be about to burst, Emilio Khoury, owner of brokerage MetreKarre, said: “‘Bubble’ is a very big word. Prices are freezing and the market is adjusting… but there will always be demand,” especially for smaller luxury apartments of around 200 square meters in downtown or Ashrafieh.
Speculators? What speculators?
Many brokers and developers disagree with Ghobril, arguing that speculation is near zero in Lebanon, or at least it is so minimal that it does not affect property prices.
“Even if speculation accounts for 20 percent of the Beirut market, that… is only 10 percent of the whole real estate sector,” said Elie Harb, president of Coldwell Banker; therefore, short-term flipping does not significantly drive up prices. He added that Beirut prices have risen to appropriate levels, given the limited land area and intense demand by expatriates. The 500 or so flats being constructed now are nearly the last residential segments of the reconstruction.
As of the end of September, off-plan starting prices in downtown rang up at an average of $6,000 per square meter, largely due to the increase in land prices as plots run out, according to a source at Care Group, the real estate sales and marketing firm.
Patrick Geammal, chairman of Ascot Real Estate brokerage, said estimates are difficult to formulate without proper information. “In every large project in Lebanon, there are usually 10 to 20 associates that go into a project… if each one reserves one or two flats, they say in the beginning that half of the project has been sold, so to know how much was really sold [to end-users] is difficult to assess in Lebanon. Sometimes the same company resells to its own directors.”
Mireille Korab, head of sales and marketing at FFA Real Estate, says that resales mostly occur when there are no more units available in the project; at that point, the developer is nearly out of the picture, thus they have little information regarding the resale market — or, by association, the scope of speculation in Lebanon.
Although Georges Chehwane, chairman of real estate developers and marketers Plus Holdings, believes about half of the off-plan buyers in the BCD were not end-users, he argues that they are “hardly speculators,” particularly in comparison to the Dubai market at the height of its bubble in 2008. “In hindsight we know that 75 to 80 percent of those buying homes in Dubai were speculators,” he pointed out. These speculators only put down a 5 to 10 percent payment on pre-launch price tags before flipping the properties as prices rose — for those who got out before the party ended.
“There is no speculation in Lebanon in terms of people who don’t have enough money to pay for the apartment,” said Chehwane. “There are some investors, yes, but these people have the full capacity to pay” between the pre-launch down payment and the time of project delivery, at which point they either rent out the property or sell it for gain.
Chehwane says this behavior is not risky like the speculators of Dubai, and in fact guarantees that speculation in Lebanon hovers around 1 or 2 percent of the market. Of the half-sold Plus towers under construction in downtown, he says 80 percent of the buyers are end users and 20 percent are investors. In September 2008 during the “aggressive pre-launch campaign,” investors made up 35 percent of the buyers.
As proof that resales emanate from investors and not speculators, Chehwane said “of the 60 units sold in Plus Towers 1 and 2, only one party applied for a bank loan,” and the contract obliges them to pay nearly 40 percent of the full unit price before reselling the unit, minimizing risk.
Others, such as Karim Bassil, chairman of Byblos Real Estate Investment, also said that while they have been approached by speculators, they try to limit speculative activity. Bassil said speculators account for only 1 percent of buyers in his residential projects in Faqra and Gemmayze.
Massaad Fares, founder of Prime Consult and president of the Real Estate Association of Lebanon, said he has not allowed the bulk sale of flats in the upcoming 50-story Sama tower in Ashrafieh, which is already 30 percent sold. He claims that units are being bought up entirely by end-users, and that the same is true for all of his project portfolios. So far all buyers in Sama tower are Lebanese (though some 65 percent reside outside the country) with the exception of one Gulf national.
One Lebanese investor wanted to buy three floors in the upcoming landmark tower in Ashrafieh, but Fares said he did not allow the sale, noting that there was no need to sell in bulk since the owner Fadi Antonios is well capitalized.
Like Harb, Fares believes speculation in the market is less than 10 percent and “only occurs in specific situations whereby the developer himself has promoted it in such a way.”
Geammal of Ascot Real Estate said speculation in Lebanon is mainly related to land, not apartments, but adds: “Some entrepreneurs have come to Lebanon with a ‘Dubai mentality’ where they encourage speculators by telling them to buy off-plan as an investment, without even seeing the flat, telling the buyer that he can sell it later for a 50 percent profit.”
“There is no speculation in Lebanon in terms of people who don’t have enough money to pay for the apartment. There are…investors, but these people have the full capacity to pay”
It’s all money in the end
Salim Tayssoun, chief executive officer of Ascot, rebuffed the idea that developers would refuse to sell to speculators: “I hardly think that anyone in Lebanon [would] reject a check because he thinks the buyer is a speculator and not an end-user.”
Chehwane took a similar line, saying that developers often claim not to deal with speculators “to give an impression that we are so sure of our project… that we choose our clients.”
Fares insisted that: “It’s not wrong or right… It’s another way of financing a project. As an economist, I have to say it depends on their financial situation to tell whether [selling to speculators] is wrong or right.”
Real estate investment reached $7 billion dollars in 2009, according to Bank Audi, and Fares claims only some $500 million of those transactions are somewhat speculative in nature. This, he argued, means speculation is not a problem for Lebanon’s economy. Indeed, re-sales keep the market stimulated, said Fares, adding that: “If the area becomes dead, there is no reference as to how much units are worth, because there’s no more buying or selling in that area, and the lack of transparency hurts everybody.”
The hotspots
Brokers say the most resale activity in the last two years occurred on Beirut’s downtown coastline, specifically in the vicinity of Marina Towers.
“I would do the same if I was in their position,” concedes Fares. “The people who bought there bought for very cheap prices, for $2,500 if bought at the time of launching, when there was so much hype because it was the first mega project… now the square meter is at $7,000 there.”
Christian Baz of Baz Real Estate is currently trying to re-sell three 300 square meter apartments in Ashrafieh’s Le Patio, still under construction, as their respective owners bought units during off-plan sales and now hope to make a 20 percent profit margin in their resale. With the starting price at $4,200 per square meter, each has an asking price of about $1.26 million and more for higher floors. The problem, he says, is that most buyers in today’s market stop well short of the million-dollar mark. Baz adds that in most high-profile towers under construction in Ashrafieh, 10 to 20 percent of the units bought are to be resold before the building is delivered to market.
Marcus Marktanner, assistant professor in the economics department at the American University of Beirut, suggested that the focus should be on the sustainability of speculation in the Beirut property market, rather than the actual amount of speculation taking place.
“Whenever in the history of Lebanon money flushed into the economy, it was because of speculation,” he said, adding that the current state of the housing market is sustainable because Lebanon is in the fortunate position of having high demand from wealthy buyers coupled with inelastic local supply. Marktanner added that those investors still in the market are more cautious and well capitalized enough to withstand the cooling period the market has recently entered.
Rachid Tawk, owner of Victoria real estate company, says the real problem is the influx of inexperienced builders who price units higher than they should be, rather than using legitimate market studies to price their projects. The oversaturation of builders resulted in an oversupply in the market, especially in Ashrafieh, and as a result, the market needs two to three years to reach stability between demand and supply.
