Real estate in the Middle East currently looks like a Greek drama unfolding in twists and stages. Most recently, market assessments for the Gulf region have shifted from a ridiculously positive analyst project to an Emo-fashion sized wave of doom-saying. As observers are viewing the second act, it is not possible to ascertain whether the whole thing will end as tragedy or find happier resolution in a comedy of errors.
The stage for the drama’s current act, that has been unfolding before amazed eyes since July and erupted into a crescendo of action in September, is the region’s stock exchanges. For Lebanese watchers, the actor to keep in focus of attention was the country’s lonesome real estate stock, Solidere, which — by standing in sixth place by market cap among real estate stocks between Cairo and Kuwait City — also is the country’s sole large-cap corporation in regional comparison.
Tightly tied to the surge in security and national stability, Solidere’s share price had defied the tempest of Beirut’s downtown political quarrels in 2007 and the first quarter of 2008. Liberated from the corset of demonstrations after a last test by violence, the stock ascended on the wings of the Doha Accord to unprecedented share price levels in June.
Its price level of well above $30 per share and by local standards good volumes of trade led some pundits to say that this stock has still room to rise further and with the start of the second half of 2008, the stock scraped the $40 per share — but did not go higher.
Instead, the scrip lost almost 30% between the end of the first July trading week and the end of the first week in September. After dipping to a low on September 4, the stock regained its footing but the momentum in the two weeks that followed was not strong enough to return the company on consistent basis to share prices above $30.
Slipping stock
A loss of 30% in eight weeks’ time is more than enough to raise questions on any stock but a closer look suggests that the situation is not a simple response to threats from the usual culprits, namely national politics or security worries. Some of the pressures on Solidere are normal market mechanics. Additionally, as the company has morphed into a regional economic animal with both regional investors and regional projects, it has to be seen in context of regional market trends.
Firstly, the Solidere share peaked just ahead of its dividend date and, quite in line with investor behavior anywhere, the stock would be oversold ex-dividend. This goes towards explaining the rise from $35-36 per share to $38 in the first week of July and the reverse motion in the second week, following the July 8 dividend date.
Later on, local analysts surmised that another setback in the merger discussions between Lebanon’s Bank Audi and Egypt’s EFG Hermes Group exerted downward pressure on Solidere when Lebanese stock market investors shuffled positions.
Other likely factors in the sell-off relate to the region and to global market drivers. Investors who see their portfolios come under stress often consider it their best choice to draw profits from liquidating investment positions in which they can book a gain and use this money to fill holes in their holdings.
Cautious and downcast sentiments can also influence decisions; when investors see that their real estate stocks take a beating in a large market, they may prefer to reduce their exposure to real estate stock, irrespective of the questions if the malady of one stock or one market is going to afflict the other.
Solidere fits the ticket both ways. Investors who bought the stock at any point between November 1998 and May 2008 could realize a lovely return when selling in July and August 2008, using the profit to go fishing, shore up their positions, or relieve the pain of losses elsewhere, for example in US banking or insurance stocks. Smart-money investors equally might have decided that the rally of Middle Eastern real estate stocks just might have been close enough to its crest to liquidate positions.
While Solidere had its steepest loss in many years in July and August, comparison with other large cap real estate stocks in the Middle East shows that seven of its peers also lost 20-30% each. To capture the weakness or strength of Lebanon’s real estate leader more accurately in regional context, it is helpful to compare the performance of Solidere shares in the months of July and August with happenings in the first two weeks of September.
Compared in context
The average (mean) drop of large cap real estate stocks between Cairo and Kuwait City in the two trading weeks between September 4 and September 18 was 15.6% across 18 companies, with 16 losers juxtaposed by only two gainers — one of them, and the stronger gainer, was Solidere. In one word, it did better than anyone could predict. It advanced 5%, demonstrating no correlation with regional real estate stocks or with global equity trends.
This does not imply any secret immunity of the Lebanese company to future market downturns. Solidere, by way of its Solidere International affiliate and the participation in the Al Zorah mega-project in Ajman, UAE, has become subject to real estate developments in the GCC. Plus, the company has subjected itself to exposure to Egyptian market sentiments through its collaboration with Sodic in the suburbia projects surrounding Cairo.
The move abroad appeared compelling when it was engineered in 2006/2007. War on Lebanon and political occupation of downtown Beirut, whatever euphemisms company executives could find to sweet-talk the situation in regards to investor interest, were not good for business in the city.
Given that the logic of the original Solidere charter mandates a diminishing role in the Beirut city center in the best-case scenario, reaching beyond the downtown horizon was clearly enticing as it offered double escape from Lebanon’s unstable situation and Solidere’s inherent limitations into the exciting realm of the MENA real estate boom.
But what if the boom goes plop? GCC stock exchanges have been betting on foreign investors to shore up their market caps, on foreign corporations as employers who can’t deny the fact that the GCC is a growth market with growing role to play in international business and finance, and — at least in part — on foreign labor to supply the demand for apartments and homes that is the prerequisite for the GCC real estate boom.
All of this is based on assumptions, and some of them have just been tested with negative results.
According to a research note by investment bank EFG Hermes, foreign capital has exited GCC markets en masse. Whereas non-Arab investors held 13-18% of market capitalization in the UAE bourses in June 2008, their net sales of stock through the first half of September cut the Dubai and Abu Dhabi shareholding by foreign investors to significantly less than 10% in the two national bourses. With 7% in Dubai and 4% in Abu Dhabi, the presence of international money in the exchanges was the lowest since 2006, EFG Hermes observed.
The reasons for the withdrawal can be manifold and specifically do not need to be local issues in the GCC. Shifting of portfolios by international investors can be related to performance problems in developed markets where positions need to be balanced. Some exit of foreign cash can also be related to the currency market and a reversion of speculation that GCC central banks would de-peg from the greenback. But in a wider sense, the way the global economy is going makes the Middle East real estate outlook unpredictable and suggests that the shares of regional developers are not as safe as many thought earlier in the course of this year.
On the sidelines of current markets volatility — or, if you wish, quite at the center but ignoredly so — is the minor matter of integrity. Transparency is another word for it, governance another just as appropriate, but one has to keep switching words as weapons in the war against wasta. This is true for Gulf stock markets (quod erat demonstran- dum) and also the Beirut Stock Exchange. To begin with, the BSE is yet to emerge as a paragon of timely disclosures and one can argue, neither has Solidere on the corporate level.
What about new life?
There are opportunities out there, optimists declare. True. But the structural issues of regional economic culture have to be solved. This is not about sharia-compliance or prohibitions against gambling. The challenge is about earning trust and developing a homegrown platform of institutional expertise.
Attempts at predicting share prices have been proven futile many times under many different situations. With share prices now in the trough, regional smart money can be expected to seek out opportunities that follow upon a panicky market. However, there are real estate stocks out there that look cheaper than Solidere at the current level of valuations.
