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The thrill is gone

Wild love between banks and real estate cools

by Maya Sioufi

The happy marriage between Mr. Bank and Ms. Real Estate seems to have lost some of its luster of late, becoming more of a relationship that both parties are resigned to accept for the sake of keeping the house — Lebanon — together.

On the surface, if we do the math, there is no need for the couple to seek counseling over the current exposure of Lebanese banks to the real estate sector. Out of the $44 billion which was lent to the private sector by Lebanese banks last year, a total of $13 billion was handed to the real estate sector in the form of housing loans or construction loans — that is around 30 percent of the total private sector loan book of banks and 19 percent of the total loan book. By comparison, the Spanish real estate and housing market, which is under severe pressure, accounts for 54 percent of the total loans of their local banks, forcing the banking sector to ask for a hefty bailout. Demand in Lebanon, according to experts Executive spoke with, is also primarily based on end users as opposed to speculation; given this, the banking sector’s exposure may not be worth rattling about. Of the $6 billion the construction sector added to economy last year, according to Bank Audi estimates, developers received $1 billion from banks and had to fund the rest themselves either through presales of flats or their own capital. “The real estate sector relies on around 80 percent of their own financing so it is not highly leveraged and it is not pressured to sell,” says Marwan Barakat, chief economist at Bank Audi. “That’s why there isn’t much pressure on [housing] prices.”

Omar Shantouf, general manager at FFA Real Estate, concurs: “Developers are not that highly leveraged and they can afford to sit on projects. They might sell one or two apartments at lower prices but they won’t advertise this, there is no such thing as a fire sale in Lebanon.”

As for housing loans, 36 percent of total property sales were funded by loans from the banking sector in 2011, up from 9 percent in 2007, and the remainder was funded by homeowners’ capital according to Bank Audi research. “That’s a moderate level even though it increased in past years,” says Barakat.

The honeymoon is over

Many heated debates at the dinner table, however, have centered on whether Lebanon’s lady of real estate has gotten a little big for her britches in recent years. Indicators of activity within the real estate sector are starting to paint a gloomier picture. Cement deliveries, an indicator of current construction activity, dropped 4 percent in the first quarter of 2012 after increasing 6 percent in 2011. Construction permits, an indicator of future supply, dropped 4 percent in the first quarter after dropping more than 6 percent in 2011.

Economists and financial experts Executive spoke with played down any concerns: “95 percent of our projects are sold to end users, people buying to live in it and not to speculate,” says Ziad Maalouf, chief executive of Capstone, a private investment firm. “Today, there is no risk of seeing a bubble in the market explode.”  In the construction sector, banks have handed out a total of $7 billion in loans, which represents 16 percent of total lending to the private sector. “The share of the construction sector to total loans is similar to the one of the construction sector to GDP so we didn’t over lend to [real estate]” adds Barakat, given that the share of the construction sector to the country’s gross domestic product stood at 15 percent, according to the 2010 National Accounts of Lebanon, the latest official breakdown of figures for GDP available.


While banks may lend according to the economic logic they devise, they are now faced with developers who are finding it more challenging to offload flats, which a few years ago were selling like hotcakes. “Banks are becoming more selective because of the situation in the real estate market today. They are worried about demand and supply,” says Maalouf.  As banks become pickier, they look for trendier projects. Demand has shifted from large-sized apartments, over 200 square meters, to medium-sized apartments, between 100 and 200 square meters, and from Beirut to the suburbs according to Bank Audi research.  “If you go to the bank and ask for financing for a project with flats of 600 square meters in size, no one gives you a loan. You have to go with the right project and the right sizes,” adds Maalouf.  With land prices still increasing and flat prices in tow — albeit at lower levels than in previous years — homebuyers are finding it more and more difficult to pay for a roof over their heads (see page 56). “Homebuyers can’t afford to buy houses anymore because the prices of land have gone up in the lift and our income is going up the stairs,” says Antoine Chamoun, general manager at Bank of Beirut Invest.

Competition on the rise

Homebuyers have also been visiting bankers more regularly in recent years. Housing loans leapt by 33 percent last year — receiving the bulk of the increase in private claims — to reach $6 billion. The central bank had a significant role to play in giving banks incentive to lend their liquidity and in helping the Lebanese folk fund their pads. The central bank’s circular of May 2009 provided an incentive for banks to lend in Lebanese lira by reducing their reserve requirements as long as rates applied to clients are within a certain limit — 40 percent of a one year Lebanese Treasury bill plus 3 percent. “It created a boost in terms of supply and demand,” says Basil Karam, head of retail at BankMed.

“The central bank helped us developers by helping home owners buy flats, helping banks to lend and helping activity in the country,” adds Maalouf. “It is the best thing that happened to the sector.” This has fueled the development of a love-hate relationship between homeowners and bankers. For bankers, it became a lucrative business. Struggling to deploy their excess liquidity — deposits stood at $120 billion, or around three times GDP, in the end of the first quarter — with interest rates globally at record low levels and a dearth of investment opportunities within Lebanon and in the shaken region, extending loans to the housing sector became a thriving business and everyone jumped on the bandwagon. Yet what that also meant was that the central bank indirectly propped up a housing market, where prices were continuously rising and thus impacting the affordability of housing in the country.

“Banks have been under pressure on their interest margins in the past few years because their liquidity is not yielding [returns] anymore both outside and inside Lebanon, so they are having to lend more,” says Barakat. As banks increase their offering for home loans, competition is getting fiercer and along with it, the advertising wings of the banks are becoming more active to lure clients their way. Billboards for home loans seem to be popping up on almost every corner. 

With rates on loans in Lebanese lira being controlled by the central bank, the competition is now on the dollar loans. “Some banks are reaching their allowable limits in extending subsidized loans in Lebanese pounds,” says BankMed’s Karam. “They will have to focus more on dollar-based loans and cut prices to attract more loans. In dollars, there is price competition, big time.” 

Chamoun agrees, saying that, “The competition on loans in Lebanese pounds [subsidized loans with the central bank and with the Public Corporation for Housing] is low because the features of the loan are imposed and there is very little difference among banks on these loans, but on the dollar, banks are putting their own features.”

While there is room to increase lending further to the housing sector, growth is unlikely to be as significant as in previous years given that it was coming off a low base, according to Barakat.  This could lead to continued competition in the sector and “it should be like this and the best offer should win,” adds Chamoun.

Increasing competition would be a welcome respite for homebuyers struggling to keep up with the elevated real estate prices. As for developers who have funded their current projects with low leverage, they are largely sitting on their pile of stock, putting  upcoming projects on hold and staying firm on prices. For developers quick to adapt to the changing dynamics, projects outside Beirut with smaller flat sizes are being developed, and thus those selling homes will likely have to do with transactions that were not as large as they previously enjoyed.

As BankMed’s Karam points out: “Lebanese will continue to borrow to buy homes but the average ticket size wont be the same.”

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Maya Sioufi

Maya is a research consultant on Arab youth entrepreneurship and employment. She headed Executive's banking, finance and entrepreneurship sections from 2011 to 2013. Previously, she worked at JP Morgan in London in equity sales for three years. She holds an MSc in Accounting and Finance from the London School of Economics (LSE) and a BA in Economics from the American University of Beirut (AUB).   
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