Taxation is at the heart of an economy. It cannot be seen
just as an “add on” that scoops revenue for the government.
Worldwide experience has shown that taxation policy
can either help the economy – or harm it. We all need government
investment in infrastructure from roads to telecommunications.
But if too high, taxation can be an impediment to
the private sector, especially during a recession when companies
are experiencing liquidity problems.
By international standards, property taxes in Lebanon are
high. This harms not just the real estate market, but all those sectors
that need to rent or buy property. The purchase tax, for example,
is 6.5%, or 16% in the case of foreigners. This compares to
the UK where the rate is l % for property valued under
$350,000, rising to 3% for properties valued above $700,000. In
Kuwait, it is just 0.5%.
This means that anyone buying a property in Lebanon at $1.0
million will face an immediate tax bill of $650,000. A foreigner
will face a whopping $1.6 million, a major disincentive to
investment and the reason why so many foreign investors go to
elaborate, time-consuming lengths to establish holding companies
to minimize their tax liability.
The high purchase tax is one reason why people delay reporting
their purchases to the land registry or seek a sworn expert
(khabeer muhallaf) willing to underestimate the price paid.
This encourages malpractice within the market and contributes
to the existing lack of transparency.
The tax on rental income in Lebanon is up to 17%, lower than
the British rate, which begins at 25%. But there is more than just
one tax on rental income. The built property tax, levied by the ministry
of finance, ranges between 4%, for rentals less than $13,300
in value, and 17%, for rentals valued above $120,000.
But there is also a stamp
duty, paid- usually
by the
owner – at 0.3%
the value of the
contract when it
is registered.
There is the
municipal tax,
paid annually by
the tenant. This
varies according
to the municipality,
but is generally between 5% and LO% of the rent. In
Beirut it is currently 6.5% on residential and 8.5% on commercial
leases. For property companies, the situation is even worse.
In addition to the taxes on rental incomes, they must pay an additional
15% on any profits earned from property owned, meaning
that they are effectively being taxed twice. This is a major
impediment to the development of property companies in
Lebanon, which is unfortunate. They could be a valuable way of
attracting foreign investors who would generally be put off by the
restrictions placed on the foreign ownership of land: specifically
the 5,000m’ cap for land owned outside Beirut and the
3,000m’ cap for land owned within Beirut.
A Lebanese colleague has demonstrated to me that on a rent
transaction, the fiscal and municipal authorities may gobble up
as much as 39. 7% (or 38.2% in Beirut) of the total amount. It’s
a worst-case example, but staggering nonetheless. This does not
include other costs, such as time away from work, that may be
involved in registering the rent contract with the municipality and
the ministry of finance. This is very high for a supposedly low tax,
free-market country.
Michael Dunn is the Beirut general manager of Healey & Baker, international real estate consultants.
The large hole being dug just down
from Sassine square, Ashrafieh
reflects the size of the ambitions of ABC which
plans a substantial shopping development
there. Phase one, to be completed
by 2002, will be an 8,000m2 ABC department
store. The 1,500 car spaces at surface
and underground levels will serve both the
ABC store and whatever retail is included
in the subsequent phases.
ABC has not yet released plans for
anchor tenants (other than themselves) or its
target prices, or whether the development
will include a supermarket. The 20,000m’
plot should: allow at least 35,000m’ of
retail floorspace.
With the project worth upwards of $40
million, the company has carried out
detailed feasibility studies during the five
years since it began investigating such a
development in Beirut. It has commissioned
as architects the British company,
Building Design Partnership, whose credits
include the world’s largest Marks &
Spencer in Manchester, England, and
NikeTown in Oxford Circus, London.
Accessibility is a key issue in any large
shopping development, says an ABC
insider: “The roads in the Sassine area
have improved dramatically, especially
with the new link past Hotel Dieu hospital
to Abraj and Hazmieh. You can also be in
Hamra or downtown in five minutes.”
With many schemes under study or at the
planning stage for large-scale retail developments
in Beirut and its surroundings,
ABC wants to stay at the forefront.
The Dbayeh store opened in the
1980s when few would risk the
investment involved in a large
department store. ABC has eight
stores in Lebanon and will soon
reopen its flagship store on Idriss
street downtown.
At 35,000m’ the Sassine mall
would not fall too far short of the
49,000m’ Agora development
scheduled to open in Furn el
Chebak next year. It would be a
sizeable step forward for ABC,
whose Dbayeh store is l 4,000m2
,
including units let to big-name
retailers like Next and Starbucks.
Real estate rising?
Good news at last. The total number of
real estate transactions recorded in
July by the Land Registry was 9,609, up
29% from 7,419 in July 1999. The number
of sales reached 3,710, up 35% from 2,747
in July 1999.
The value of the transactions, too, seems
to have risen. The yield from property
taxes for July was LL18.4 billion, 25.7% up
on July 1999, and also an increase on
LL14.5 billion in June 2000.
Economist Marwan lskandar advises
caution before rushing to celebrate the end
of recession. ”This may reflect Arab visitors
buying during the summer and the
improved expectations following the
Israeli withdrawal,” he says.
The wider record remains bleak. The first seven months of 2000 saw total
property taxes at LL 110.2 billion, a
decline of 11.8% on the LL125 billion
in the first seven months of
I 999. Figures from the Order of
Engineers show that new permits
covered 3.21 1nillion m2 in the first
eight months of 2000, down 32% on
the same period last year (the fall
was a massive 60% in Beirut).
Cement deliveries for the first eight
months of the year totaled 1.6 million
tons, down 17% from the same
period in 1999. All this means we
have to wait and see. “Much will depend on the policies of the new government,”
notes lskandar.
Good news too for Solidere with
Transmed, the Middle East agents for
Proctor & Gamble, buying a new headquarters
downtown. The company has paid
around $5 .5 million for a renovated 2,500m2
building on the east side of Foch Street at Azmi
Bey street. The previous owner was a company
owned by Abdul Hafiz Itani, the chairman
of Lebanon and Gulf Bank, and the
property has substantial ground-floor retail
that Transmed would have the option of leasing
as shops. The price of $2,200 perm’ (for
a whole building) is a little below Solidere’s
target prices, of $2,500 perm’ for office and
$5,000 for retail, which many experts have
criticized as too high. ”Things are starting to
move,” says a Solidere official.
Up for grabs
The move of the Italian embassy to the
prestigious Assicurazione Generali
building in Place de l’Etoile has left their old
building at Rome and Rbaiz streets on the
market. There is surely room for negotiation
on an asking price for the 1,000m’ two storey
property of $3 million, especially
as the suggested annual rental is $150,000.
“It could be used for either residential or
offices,” says broker Abdo Salem.
But even the rental figure -$150 perm’
per year – would put the building at the top
end of the Hamra office market, which can
go as low as $50 per m2 a year. The residential
value would be lower, especially as
the building is at a busy interchange.
