Amid plots of unsold, multi-million dollar reclaimed land, on what was 30 years ago an uncontrolled garbage mountain rising from the sea, Downtown Beirut now features more completed buildings than cranes. However, the Beirut Central District (BCD) has been hit hard by stagnation in the real estate market that began in 2011. While projects launched at the beginning of the decade have been delivered or are nearing completion, sales ratios mean investors have still not realized gains.
Solidere, the company created by Parliament in 1991 and founded in 1994 to oversee rebuilding of the BCD, in the past handily published project updates throughout Downtown in its annual report, but the company’s most recently published review of yearly performance on its website is from 2014. Interviews and desk research, however, confirm that three residential towers on the western flank of the BCD were delivered in 2017: Beirut Terraces, the DAMAC Tower, and 3 Beirut, all launched in 2010. Other large-scale projects—such as the GC Towers south of the Martyrs’ Square statue, first announced in 2008, and District S, launched in 2010—are still at least 12 months from completion. The very ambitious Phoenician Village never broke ground, while the fates of the Landmark mixed-use project at the foot of the Grand Serail and Beb Beirut residential tower, just north of the ring-road on the Martyrs’ Square axis, are unclear. Meanwhile, Beirut Gardens—between Rafik Hariri’s burial site and the Virgin Megastore—looks closer and closer to completion, even as one contractor on the project still advertises a 2014 delivery date on its website.
But even as construction continues, the pace of sales for developers who bet big on BCD is still struggling to keep up.
The good ol’ days
Since 2011, developers operating in the central district have struggled to attract clients to buy their properties. But times were not always so difficult. Following the summer 2006 war, Lebanon experienced an economic boom, and pent-up demand drove construction activity to heights not seen since the 1990s. From 2007 until 2010, developers built as quickly as possible, targeting the expensive tastes of Lebanese expatriates and foreign clients, based mainly in the Gulf.
“When the boom started in 2007, 2008, and extended until 2010, almost all of the supply was life-sized, luxury apartments because it was targeting the expatriates,” recalls Nassib Ghobril, chief economist at Byblos Bank. “People here, the developers, thought that every expatriate was a multi-millionaire that had a briefcase full of cash to throw at real estate. That’s what they saw. They built 400, 500, 600 square-meter apartments.”
Amid seemingly insatiable demand, a profusion of amateur developers entered the market, inflating the availability of housing in Lebanon. Speculators chased after these residential offerings, encouraging even more construction. Carlos Chad, managing director of Demco Properties says that a lack of professionalism and due-diligence during this period led to problems in the market later on. “There was an oversupply that was mainly due to the fact that a lot of pseudo-developers went, built buildings, and proposed a lot of units without making any [kind of] market study. [They] didn’t [investigate] the market to understand what was the real need, what was the purchase power, what were the budgets, what were the sizes,” explains Chad.
[pullquote]Clients from the countries of the Gulf Cooperation Council (GCC) were some of the first to lose their investment appetites[/pullquote]
The good times proved to be short-lived. Clients from the countries of the Gulf Cooperation Council (GCC) were some of the first to lose their investment appetites. Nimr Cortas, a co-founder of Estates, says that he noticed a downturn in foreign acquisitions as early as 2009 when oil prices fell, impacting wages in the Gulf. This coincided with tension in the relations between Lebanon and the GCC over Iranian influence in the country, which alienated even more non-Lebanese clients.
Then, in 2011, uprisings throughout the Middle East eventually took root in Syria, pushing the Lebanese economy into a uniquely long period of economic stagnation. Wary of the investment climate in Lebanon, expatriates curbed their purchases in the country. This put many of the developers in the BCD area in a bind. Previously, development companies tended to acquire land with liquid capital and then finance the construction of their products with presale revenues. When turnover slowed down developers had to find alternative methods of paying for the completion of their projects. As a result of the crunch on liquidity very few new buildings have been initiated within Downtown, and progress on projects launched before 2011 has been slow, with developments taking five or more years to complete.
Thousands of unsold units
The legacy of the boom years today is an overabundance of luxury residences in the downtown area, often with a price tag over a million dollars. Ramco Real Estate Advisors estimates that there are now 3,600 unsold apartments in the BCD alone. The excess supply has forced property owners to reduce their margins and offer discounts of 20 to 40 percent in order to move their inventory.
In recent years, several large buildings have been delivered and others are near completion in the downtown area. Most projects of this generation were started just before 2011 and were therefore able to capitalize on the final months of the boom period. The timing meant developers could collect presale revenues that helped make the projects economically viable. Still, these purchases were generally well below the approximate 60 to 70 percent sales ratio that is required before developers begin to turn a profit on their investments.
The case of the luxurious GC Towers, near the Mohammad Al Amin mosque, aptly demonstrates the difference a few years time can make. When the project was launched in 2009, Ghada El Khatib, COO of Plus Holding, reports that 40 to 50 percent of the apartments—between 6,000 and 10,000 square meters—were quickly bought up. However, the discovery of ancient ruins on the site required that construction be halted until the Department of Antiquities secured the artifacts on the ground. By the time the project was resumed years later, the market had turned and many investors pulled out. “We have sales yes, but not like [before 2011] because of the stopping of the project. If the project didn’t stop, we could have been sold now 100 percent.”
Eying delivery dates one and two years down the road, Khatib says that the towers still have a long way to go before they begin to generate profits as only 55 and 60 percent respectively have been bought up. “We have to continue what we have started, even if we have a shortage of money. We need to deliver because there are many people who need to be given their apartments. It’s not about revenues, it’s about credibility.”
Several recently completed developments in the BCD area managed to sell out completely prior to 2011, according to Mohamad Sinno, managing director of Vertica Realty Group that consults with companies operating in Downtown—including the Platinum, Marina Towers, and Karagulla buildings. Benchmark’s Beirut Terraces and 3Beirut by SV Properties and Construction, are currently being handed over to clients and are believed to have sales ratios of between 50 and 70 percent.
Where are the people?
As for occupancy rates, Carlos Chad, says many developers are moving into office construction to diversify their portfolios and hedge against stagnation in the residential market. “In Solidere it happened a lot because there was an oversupply, and the other problem was that Solidere was becoming a ghost city because a of lack of investors, the locals couldn’t afford it, only the expats could afford it. The wealthy expats who come once or twice a year. So you have 50 weeks of vacancy, so it’s a dead city.”
While much of Solidere’s Downtown sits uninhabited, property taxes and service fees eat away at developers’ revenues. In 2017, Sinno noted that a number of new service companies are making their way into the downtown market and are helping reduce the cost burden on vacant units. “Before, it was a monopoly in Solidere. Now you see new players coming into the market, which means competition, which [also] means better prices. So it’s changing a bit,” says Sinno.
On the whole, both developers and consumers have grown increasingly indebted to banks since 2011 through building and purchasing accommodations. “Their [banks’] exposure to the sector has increased during the previous years, and if you measure it by, say housing loans plus construction loans, their exposure to the real estate is about 40 percent of the whole credits to the private sector,” according to Marwan Mikhael, head of research at Blom Bank.
A controversial solution
In an attempt to house some of the real estate sector’s non-performing assets Estates’, Cortas, along with colleague Massaad Fares, are attempting to launch a billion-dollar investment fund. Intending to make use of a 2016 central bank circular, they hope to attract enough capital to launch the fund within a couple months.
Yet many economists remain skeptical about the feasibility of the fund and its implications for the real estate market. “These are not distressed properties simply because they are vacant, and there is no demand for them,” says Ghobril. “[It] is distortive to the market, in my opinion. What prices will they pay? How much will they have leverage over the developer? How will that affect other segments of the residential real estate? And the other question is: Are they going to be able to raise one billion dollars?”
With or without the fund, much of the BCD will remain as it is today: abandoned. For most Lebanese who cannot afford to live in the area, the downtown lost its only appeal in 2015 when garbage protests and the ensuing security crackdown led to the closure of bars and businesses along Uruguay street and in Place de L’Etoile. Despite the modern structures, high-end retail, and luxurious apartments, a nighttime stroll through the area shows that, while the Downtown may have been built, the lights still are not on.