Questioning Lebanese real estate as an investment proposition

Que sera, sera

Photo by Greg Demarque | Executive

In the beginning, the land was empty and without borders, but then came people who settled on the land and built upon it. The people divided the land into plots large and small and invented rights of ownership to the land, all that was built on it, the water and resources beneath it, and the airspace above. They drew up title deeds, named the plots and all that was built on them real estate, called them commercial and residential, and deemed that it was a fantastic asset class.

Any thorough understanding of Lebanon recognizes that land in this country, when compared to most other countries and also considering the density of the population, is both desirable and scarce. The Lebanese link their identities to their villages, and ownership of private homes is as pronounced as the inclination to invest in domestic real estate.

But is real estate in Lebanon a good investment today? The ruling assumption for over 20 years in post-1992 Lebanon was that while investments in this asset class might not always appreciate in value, they would never be losing propositions. Property prices, so the assumption goes, might stagnate, but never drop. The investment conditions and views on real estate in 2019, meanwhile, have become more nuanced.        

Nuances about the current state of property investing in Lebanon are, however, far from the message of Beirut-based real estate developer, businessman, and investor Georges Chehwane. “When it comes to any kind of investment in real estate, I, Georges Joseph Chehwane, do not advise anybody to invest a penny in Lebanon,” Chehwane tells Executive. “In terms of investment and business, [Lebanon] is the worst place on earth.” 

In an outburst that appears almost calculated, the chairman of real estate developer Plus Properties and communications media venture Group Plus cites the lack of government support for property owners in Downtown Beirut, alongside persistent public corruption, slow permit processes, and increasing costs of dealing with public administration units. He further lambasts the rising interest cost of bank loans, which he says has risen to 13.5 percent per year for developers like him, and the lack of incentives that Lebanon offers to overseas investors in local real estate.

Chehwane then juxtaposes these with investment incentives for property buyers in Cyprus—specifically European residency advantages—and the reliability and transparency of permit processes for Cypriot real estate. Plus Properties currently owns and develops more than 25 apartments in Cyprus, and the country, according to Chehwane, is attracting Lebanese property investors. “I am selling many apartments in Cyprus to Lebanese who do not want to keep their money in the Lebanese banks,” he says.   

On the other hand, from the vantage points of the financial and wealth management profession in Lebanon, the picture is not fundamentally grim.

Toufic Aouad, general manager of Audi Private Bank, says that MENA investors remain keen to invest in real estate assets in general, and selectively in Lebanese real estate As he explains it, peculiarities of the local market, such as the tendency for real estate prices to adhere to a stairway trajectory of hikes and stagnations “can be explained by the scarcity of land, especially in Beirut, which puts a cap on new supply, and therefore acts as a floor for prices.” He adds that more recent downside developments of property prices can bring benefits to alert investors, “The drop in real estate prices mostly concerned flats, not land, and has been a function of several factors—size, location, developer’s financial situation, etc.,” he tells Executive in an email. “Such conditions present attractive investments especially when dealing with a distressed seller. We remain open to selective opportunities in the real estate sector in Lebanon.”

Fadi Osseiran, the general manager of Blominvest, assures Executive in person that “nothing is fundamentally wrong with real estate in Lebanon.” He continues, “Within the property space, one can discuss many investment plays, but one has to differentiate as some real estate is income generating, and some is not. [Investing in real estate] is a question of timing and of the cycle, a question at which point in time to enter and when to exit. Overall, the value of real estate is preserved over time.”

When comparing Lebanon regionally in terms of attracting investment in real estate, Youssef Dib, general manager of private and investment banking at Saradar Bank, sees no alternative in the Arab world to Lebanese properties if an Arab or expatriate Lebanese investor seeks to find desirable locations with a sea view, not to mention the other numerous selling points. “In the medium- to long-term, I would definitely bet more on Lebanon than on Cyprus,” Dib says, adding that while it is impossible to give wholesale advice on how much of an investor’s total portfolio should be allocated to Lebanon, diversification is key. “Someone who is in Lebanon should, if he can afford it, look at real estate where the market today is a buyer’s market,” he says. 

Mincing no words on real estate’s potential is Jean Riachi, chairman and general manager of FFA Private Bank. “The problem with investments is that people tend to follow trends,” he tells Executive. While he says there is no demand on real estate in Lebanon today, he notes, “It is a buyer’s market. This means you have time, you have choice, and [you] can get very good deals. This is one reason to invest. The second reason is [that] I am contrarian. When everybody thinks that something is bad, it usually is a good sign that things are going to get better.”

According to Riachi, observation of long cycles in Lebanese real estate investments show that despite manifold disruptions of the country’s fortunes, from devaluations in the fourth quarter of the last century to wars and impacts of neighboring conflicts in this century, real estate values have tended to recover after every crisis and improve beyond their readings before the crisis. He acknowledges that recent years have seen the price of real estate in Lebanon go down in contradiction to assumptions that they never do—often heard well into the 2010s. Riachi attributes such losing bets to investor behaviors of succumbing to buying instincts, however. “Everybody wanted to buy real estate from around 2008 to 2011, but it was not the right thing to do,” he says. “[The right move] is the contrary: Do what others are not doing.”

New real estate investment platform beckons

Investors looking to seek out domestic real estate investment opportunities that come attached with a value proposition of beating the interest offers that banks have been extending to their big-ticket depositors do not need to despair. According to Wael Zein, chairman and general manager of Lucid Investment Bank, a new property investments “platform” (the structure is not a fund for reasons of legality in Lebanon) will offer just this opportunity very shortly under the name Legacy 1, for which Lucid is the financial administrator and lead placement agent.

Launched in the Lebanese market under this name in October 2018, a precursor concept of Legacy 1 was being kicked around in the real estate sector for several years and first alluded to by the idea’s fathers, real estate developers and consultants Namir Cortas and Massaad Fares in a 2016 interview with Executive (see end-of-year issue). What, at the time, appeared to this magazine as a vague and rather unstructured plan has since been melded into a structure with two core constituents—an entity called Legacy Central as sponsor and investment manager, and Lucid—plus a complex organization entailing an investment committee, a board of directors, legal counsel, and an external auditor, in addition to a management team that includes known actors from the Lebanese real estate sector.

The platform was licensed by the Capital Markets Authority of Lebanon (CMA) with components of equity and debt bonds and a scalable range, Lucid’s Zein tells Executive. It is designed for buying a number of apartments in Beirut and selling them to a market whose participants are mainly members of the Lebanese diaspora, but also local investors. “They want to buy from a credible platform. They want good prices and possibility for easy loan arrangements,” he says. “We believe that this fund is very important because it will probably be the only sizeable movement on the [real estate investment] front.” 

Since Lucid joined the structure last year, developments in both politics and markets have made it prudent to adjust the business model to attract investors who are faced with the lure of high interest rates on deposits from Lebanese banks. The business model and value proposition of Legacy 1 thus has been upgraded, Zein explains. To hopefully achieve competitive returns, the platform is targeting a specific segment of the real estate market in Greater Beirut, namely two- to three-bedroom units in quality buildings where a majority of units have been sold and have people living in them. Such units, identified by Legacy 1, would be acquired in bulk after approval by the platform’s investment committee. “This is a return-generating model, because you are buying at a discount and selling at prevailing retail price,” Zein says. “The margin created by this practice should create a return to investors, and all the adjustments that we have made are basically designed to create a return to investors that can add a premium above what they are taking [in interest] from deposits. The timeline is raising money, buy, and then start selling. Fundraising will be in multiple phases and multiple closings, and we are shooting for the first closing in the third quarter of 2019 or a little bit later.” 

A twisted jungle

However, despite the broad consensus among local wealth management professionals on the virtues of investing part of a portfolio in real estate and doing so in Lebanon, developer Chehwane has a point in being wary about real estate in this country. The story about Beirut being a buyer’s market for real estate has been bandied around in this country for six or seven years, with growing insistence by those who tell it. Nonetheless, any stroll through the streets of areas such as the “golden triangle” in Ashrafieh or alongside the new complexes in the Downtown vicinity of Martyr’s Square will lead the observer past residential mid- and high-rise buildings that have plenty of empty windows. (Chehwane, whose Plus Towers sits just to the south of Martyr’s Square, says he has not sold a single apartment at the address in the past five years.)

Moreover, many fancy buildings in Downtown and the golden triangle exude all the ostentatiousness and charm of million-dollar ghettos. They do not breathe the air of urban productivity that Beirut would need. Similar vibes of emptiness and sub-optimal property designs waft freely through districts of Beirut that are less prominent and pricey than the aforementioned core districts. Furthermore, all the districts of Greater Beirut appear to remain cloaked in pollution and congestion, undesirable for any buyer or tenant when measuring this city by standards for a livable metropolis in the 21st century. The lack of green spaces and safe walkways, which are not just for improving the health of an urban environment but also make good sales arguments when dealing with conscious investors, is as overpowering as ever, and the new parks that could be developed exist merely as architectural landscape design studies.

On the fronts of urban planning and information on real estate prices and occupation rates, economic planners, real estate industry players, property investors, and information seekers remain in the dark of data deficiency and obfuscation (many numbers that Executive were given to questions about the real estate sector for this report were described as “estimates,” just as they had been five and six years ago), infrastructural gray zones, and buildings that are hidden in shades skirting the law, ducked away from transparency and legal clarity.

All these problems, plus the sociopolitical diseases of administrative inefficiency and corruption, have been weighing down the minds of property owners, developers, and real estate investors for decades of post-conflict reconstruction and urban growth in Beirut. And for more than six years now, property owners, developers, and investors have been bearing these pressures mostly without the relief that comes from making an honest buck or a big sale. 

It further stands to reason that not every landlord and investor with commitments in Lebanese real estate, never mind how determined a contrarian, is able to shrug off operational costs and temporary losses. FFA’s Riachi concedes in his interview with Executive that real estate, while representing 10 to 15 percent of the group’s revenues, currently produces a measurable drag on profits. “The consolidated profit is very good, but the real estate activity in Lebanon is losing a lot of money,” he says. “We are covering the losses [because] we are committed to service our clients. We therefore do not care [if we lose money on real estate operations for a time]. We make enough money in other areas of our business.”

Even if the scheme of Legacy 1 were to score high on its aim of providing a profitable platform for investors with the envisaged rate of return that can compete with deposit interests, it will only indubitably benefit those investors. According to Zein, the buildings targeted for acquisition of apartment units by Legacy 1 will number in the lower double digits—compared with a count of buildings examined for investment opportunities that is at least 20 times larger. “Legacy 1 have reviewed 504 buildings in the Beirut area and will select probably between 20 and 25 buildings [to buy units in],” he informs Executive. An enticing initiative and exhausting exercise, but small numbers indeed when hearing him say that estimates see vacant apartment units for sale in Greater Beirut as running into several thousands.

Distortions old and new

From the history of the territory and communities in Lebanon, one can easily surmise that barriers against the formation of a halfway efficient urban real estate market in Beirut have long created distortions by ways of external pressures, bombardments, and invasions, as well as homespun biases and communal fragmentations. Wandering anywhere in the compact city of Beirut, moreover, strongly supports the judgment that distortions of the Beirut real estate market have been exacerbated over generations, and that these distortions at the current pace of market development will need further generations of conscientious detoxification before they will recede and eventually vanish.

In the perception of Blominvest’s Osseiran, speaking on this issue as an economist rather than a banker, a specifically fateful development in the Lebanese real estate market started as far back as the legislative intervention in the rental market that froze rents, and thereby gradually eliminated incentives for developing rental properties in the last century. “That created a distortion,” he says. “Later, because of what happened with the [rent] law, we substituted rent with incentives to buy housing. As an economist, I am of the view that this was wrong in the sense that [by incentivizing home buying] your target is to make everybody an owner.” 

Considering the economic positioning of people in relation to real estate under a life cycle theory of economics, tilting of the market toward ownership in Osseiran’s analysis placed unnecessary burdens of seeking to buy larger homes on couples at very early stages of their economic lives. Young income earners were stuck over-paying for living space and led onto a path of increasing household debt. “Rental solutions are accepted all over the world, [whereas] we in Lebanon are substituting rental-based economy with one where the primacy is buying houses, which are not affordable,” he says. “If we want to solve problems in housing, we definitely first need a housing policy that does not lead to [wrongly] subsidizing whoever wants to buy a house or even several houses.” 

This analysis leads back to the need of a housing policy, informed institutions, and coherent policy-making in the interest of a functioning society and functional economy, before the proposition of investing in real estate, however beneficial or risky for the investor, can be ascertained to be economically smart, or at least not be to the detriment of productivity and quality of life in the country.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.

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