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The view from Beirut

Closing 2016 on an ambivalent outcome

by Karim Makarem

All of the figures revealed by RAMCO’s research department confirm a slump in Beirut’s real estate market. A finer analysis of these figures yields some hopeful – and other more worrying – conclusions.

Actual drops are higher than recorded

The RAMCO price index, published for the third consecutive year earlier in 2016, reveals two years of consecutive drops in the asking sales prices of residential projects under construction at the time of the study.

Not only have prices dropped two years in a row, they are dropping by a higher rate year-on-year. While prices dropped by a mere 0.7 percent in 2014 (compared to 2013), the recorded drop in official, listed asking prices in 2015 compared to 2014 was of 1.2 percent.

It might be argued that 1.2 percent is negligible. This is certainly no proof of a meltdown in the market, as was often predicted. In no way does the price dip portray a market in crisis or the bursting of a real estate bubble – a term often used to describe the frantic price hikes and activity in the years that preceded the current market stagnation.

Yet these figures are to be taken with extreme caution. It may be that official prices have stayed relatively stable. The fact remains that this is only the second time in the post-Civil War history of the country that prices actually registered a drop. Typically, prices stagnate. The fact that they have been dropping for two consecutive years points to a very real unease in the market.

These figures also hide a deeper, more disturbing truth. The above drops in prices are of official asking prices listed by developers. They do not take into consideration discounts that developers effectively extend to buyers when negotiations reach an advanced stage. RAMCO’s sales & lettings department is involved in sales transactions on a daily basis. The reality is that developers do offer a discount on their official list prices – sometimes a little too eagerly. Discounts vary between five percent and ten percent. In some extreme cases, they can reach up to 20 percent. In reality then, prices have dropped by anywhere between ten percent and 20 percent.

Large stock

The drop in prices is an obvious direct result of the poor economic situation in the country and the region at large. It can also be explained by the growing size of the vacant stock on the market. There were about 385 residential projects under construction in municipal Beirut in 2016, representing a stock of slightly more than 2 million square meters (sqm) of built-up area or about 10,340 residential units. This is a huge stock, 98 percent of which is offered on the sales market. Around 40 percent of it is available for sale as of the end of 2016. There is an additional, non-negligible stock on the market (for which we, unfortunately, don’t have reliable data): unsold units in projects completed prior to 2016 and new units placed on the secondary market.

The full stock of residential units offered for sale is thus much larger than the units accounted for in the study covering residential projects currently under construction. The stock on sale counts units still under construction, unsold units in recently completed projects, and resale units offered on the secondary market.

Latent repercussions

Very few new projects are being launched, but the numbers don’t yet make that clear. In years past, average sized projects in municipal Beirut took between three and four years to be completed. However, beginning in 2011, some projects began remaining “under construction” for six or seven years – sometimes even longer. Market data covering “ongoing projects” thus accounts for all of these projects, even those that should have been completed several years ago, but are still “under construction.”

There were 385 projects currently under construction in 2016, the same as in 2015. The vast majority have been “under construction” for years, and when these projects are finally delivered, the number of “ongoing projects” on the market will begin dropping to reveal the limited number of truly new projects beginning each year, reflecting the real slump in the market.

A few positives

The market hides some high-performing niche pockets. While the general trend is clearly downward, it is not across the entire market. Some projects perform extremely well despite the general gloom. Projects that cater to available budgets in neighborhoods in high demand, offering innovative, functional designs and floor plan layouts at fair market values sell off-plan.

Professional developers with a good sense of the market have adapted well to the market. The figures clearly reveal that apartment sizes have been shrinking as a result of shrinking budgets. The number of projects has remained relatively stable between 2015 and 2016. The overall built-up area that was offered in 2016, however, was 7.4 percent lower than in 2015. At the same time, the number of apartments increased by 2.3 percent between 2015 and 2016. Average apartment sizes have dropped by nine percent between 2015 and 2016, from 238 (sqm) in 2015 to 215 sqm in 2016. In 2010, 3.4 percent of residential projects under construction in Beirut (12 projects out of a total of 350 projects recorded that year) offered apartments smaller than 100 sqm. In 2015, this ratio increased to 7.8 percent (30 projects out of the total of 384 buildings under construction in 2015).

Another encouraging observation is the continued interest professional developers display when looking for new opportunities. Interest in land purchase has never waned, although prices of raw land have remained relatively stable. Landowners are still reluctant to drop their prices. Developers are much more careful about investing in new land, however, as the current market doesn’t forgive mistakes. In a particularly price-sensitive market, any small mistake is fatal. Developers are thus very careful about purchasing land at a price that would make a potential development financially viable. Overpriced land yields expensive apartments that would not find takers on today’s market.

Today, only land posted at financially viable prices, reflecting a financially viable cost of land on the overall project, is interesting to potential developers. Typically, the cost of land used to account for about 30 percent of the overall cost of the project (along with 30 percent of construction costs and the rest as profit margin). Today, the cost of land accounts for around 40 to 50 percent of the total cost of the project, while developer profit margins have shrunk to around just ten percent in some cases.

The high price of land plays a major role in the decreasing number of new projects launched in recent years. An adjustment is needed to make replacement costs of land purchase feasible.

Unequal price changes

Land prices also explain why the price of residential stock has generally remained more stable or even increased in some areas. Neighborhoods in which land prices were still low, either because they were in lower demand by home buyers or because they have a large stock of raw land, keeping prices low, have seen residential prices remain stable or even increase slightly.

Neighborhoods such as Sagesse, Geitawi, Kobayat, Ras el Nabah or Sodeco offer excellent value for money. They are traditional middle-class neighborhoods that are being slightly gentrified with the introduction of new real estate projects. They typically offer projects with the right combination: small family apartments, good quality construction, functional floor plan layouts and basic amenities – all at the right market value.

Some neighborhoods have ample land supply for development, such as Sodeco or Corniche el Nahr. These neighborhoods have seen the introduction of new mega-projects that are modern, innovative and cater to a middle-market clientele.

Other areas retain their value because they are in consistently high demand. Neighborhoods such as Ain el Tineh, Koreytem, Ain el Mreisseh or Manara have a continuous flow of buyers. They are established neighborhoods that attract buyers either for the quality of living they offer, the quality of the views or the surrounding supply of services, particularly schools.

Buyer’s market no longer

2016 was the ideal time to buy. With average discounts standing at around ten percent, buying at a bargain was indeed possible. The price of the average new apartment in municipal Beirut today stands at $1 million. It was therefore possible to negotiate a cut of $100,000 during 2016.

Whether this remains true in 2017 is questionable. Although it is still too soon to detect a real shift in the market, the latest loosening in the two-year-long political stalemate has already injected an air of optimism on the market. While the presidential elections have not yet yielded any tangible change, people are expecting an improvement in the local political scene. It might take a few more months before a change is effectively felt on the market, but the mood is already shifting. And that is often sufficient to encourage landowners and developers to stick to their asking prices. Discounts may not be as easy to negotiate in the coming few months as they were just a few weeks ago.

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Karim Makarem

Karim Makarem is director of Ramco Real Estate Advisers

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