The real estate bubble has burst

In the absence of hard data, anecdotes and speculation become the basis of analysis. Take, for example, the question of whether or not there is a real estate bubble in Lebanon. From the results of a Google search for the terms “Lebanon real estate bubble,” the sector seems like it is in real trouble. The alleged bubble has a Wikipedia entry, and plenty of news reports — both local and regional — over the past couple years have claimed that disaster is on the horizon. Some even drew parallels between Lebanon and the United States circa 2007 (when banks in that market were handing out housing loans like candy to unqualified borrowers, who unsurprisingly began to default en masse, decimating both the US housing market, and the global financial sector in one fell swoop).

The undeniable truth is that between 2005 and 2010, the prices of built property in Beirut — and, anecdotal evidence suggests, the rest of the country — rose significantly. Exact numbers are difficult to find, but current asking prices in Beirut have not changed much since 2010. The average Lebanese young couple looking for their first home cannot dream of raising kids in the capital. The latest price-per-square-meter for residential units in the ground floor of a Beirut apartment building ranges from $2,180 surrounding the Beirut Arab University in Tarik al-Jadideh to $8,500 along the coast in Manara, according to Ramco Real Estate Advisors, which has been releasing price and units-under-construction data since 2013. Many advocates of the bubble theory point to these exclusionary prices as proof they are correct, although this aspect of the bubble argument often rings more of ideology than economics. Developers with exposure to Beirut — such as Michel Georr, CEO of GCI — argue London and New York (or any other major global metropolis) are similarly exclusive and that the scarcity of available land in Beirut (with a surface area around 20 square kilometers) means higher prices are normal, if not natural.

Bubble-backers pivot from Beirut prices to unsold units in justifying their cries of coming calamity. Again, numbers are elusive. Developers readily admit that sales have taken a serious hit since 2011, but quantifying this is difficult. Masaad Fares, president of the Real Estate Developers Association — Lebanon (REAL), told Executive in November 2016 that, a few years ago, he thought there were around 1,000 unsold units in the capital. However, he now estimates the total value of unsold units at between $3 and $3.5 billion (or around 3,000 to 3,500 units if the average new apartment costs $1 million, as Ramco reported in 2014). Both REAL and Banque du Liban (BDL), Lebanon’s central bank, conducted in-depth market studies on the subject, Fares said at the time, adding that the research will be available publically sometime soon. BDL did not respond to an interview request for this article. The Ministry of Finance published the number of real estate transactions, however, this figure includes property sales (residential and commercial) as well as inheritances, without any breakdown in figures. Further, “sales” are registered with the ministry when the built property is delivered, meaning that units “purchased” (i.e., buyer pays project owner) off-plan in a building that takes five years to be delivered can be recorded years after the physical transaction. Those caveats aside, 2016’s 64,248 transactions are down compared to the boom years (over 75,000 transactions at the peak in 2010), but still up compared with 2005 (48,847).

What’s in a bubble?

Real estate bubbles are inflated by unsustainable demand. Typically, economists blame bubbles on speculators. Speculation seems to have played a large role in the rise and rapid decline in prices in Dubai nearly a decade ago. In the US, it was arguably a mix of speculation and the abovementioned extension of loans to the unqualified (some of whom were also paying off multiple properties). When that demand disappears, prices plummet. Looking back on real estate market developments in Beirut over the past decade, it seems clear there was at least some unsustainable demand, even if it is impossible to pinpoint where it came from — speculators, Gulf Arabs turning a cold shoulder to Lebanon, Lebanese expatriates who saw wealth erased in the Great Recession, or some combination of the three. While asking prices in Beirut have only come down 1.8 percent according to the latest Ramco figures, developers are offering 20 percent discounts, the organization wrote in Executive at the end of 2016.

[pullquote] Developers readily admit that sales have taken a serious hit since 2011, but quantifying this is difficult [/pullquote]

Georr, of CGI, says that the Beirut upmarket is certainly hurting. CGI — a real estate investment company founded by Mario Saradar in 1998, which counts Bank Audi, the country’s largest lender, as a 20 percent owner — recently delivered one of the capital’s more troubled assets — the three-tower Abdel Wahab 618 in Ashrafieh near the ABC Mall. Georr says that CGI has a set development model: identify land and strike a deal with the owner to purchase it on-option; draw up plans for a project and secure investors; seal the land deal once investors are lined up, with the land owned by a special purpose vehicle (an sal company with shareholders reflecting the project’s’ investors). He admits investors will have to accept a decreased ROI from what they signed up for on projects that are completed but remain unsold (he doesn’t divulge the exact ROI, but uses 20 percent as a theoretical example), and says a planned mixed-use tower in Karantina is on hold (CGI will sit on the land until market conditions make moving forward with pre-sales and construction more appealing).

The increasingly loud talk of discounts in Beirut suggest the bubble has burst, with a price correction of 20 percent or more in the capital — even if the only semi-official index, Ramco’s, says asking prices have barely budged. What remains unclear and largely un-indexed is the price situation in the rest of the nation.

Will the country collapse?

Assuming the bubble has now burst in Beirut, what will be the impact to the market overall and the country’s future? The quick answer: Who knows?

Since the slump began in 2011, BDL has issued several initiatives aimed at helping the sector. Perhaps the most welcome was a recurring stimulus package launched in 2012, with an initial amount of $1 billion. Not all of the stimulus money was utilized, and the remainder rolled over for another gross $1 billion in stimulus available for 2013. That stimulus money is still available, but the total amount on offer (not to mention the total amount deployed to date) is not published on BDL’s website. What BDL officials have said publicly is that 75 percent of the stimulus money went to housing loans. There are stipulations on these loans, however. They must go to first-time home buyers and come with caps that developers interpret as meaning the middle-income market. BDL loans are largely being used on properties in the range of $250,000-$350,000 — which is what many are building outside Beirut.

Sacrificing on margins

These housing loans are clearly not meant to help developers struggling in Beirut. For real estate companies with too much luxury stock on their hands, BDL offered to let banks restructure their debt with local banks (circular 135 of 2015). The circular laid out in detail what a hat-in-hand developer needed to do in order to renegotiate “a new repayment schedule based on the client’s cash flow” if the client had loans from more than one bank. The request for clemency requires that banks must have “Identified the weaknesses that led to the deterioration of the client’s financial situation and the way to address them.” Two years on, developers say the circular is all but unutilized (despite a sweetener allowing banks to take ownership of built property that they can keep for 20 years instead of the legal two), and, with buyers getting 20 percent discounts on listed apartment prices in the capital, one guesses refusing to budge on margins that grew a reported 400 percent between x and y might have been one of the primary “weaknesses that led to the deteriorations of the client’s financial situation.”

No one knows if developers with too much exposure to Beirut are on the brink of bankruptcy. What is even less clear is how first-time home buyers who bought outside of Beirut are faring after the price correction in the capital. Without solid figures on prices, or the number of outstanding loans, it is uncertain how many people now own property worth less than they paid. What is clear is that while Beirut may be left with urban scars from the boom years (the abandoned Bab Beirut project in the heart of downtown, for example), evidence to support the notion that Lebanon is on the brink of a civil war sparked by the popping of a real estate bubble is seriously lacking.