Lebanon – A boom where others bust
Property development defies logic while banks thrive in global crisis
If one thinks about how political unrest might damage the real estate sector in a country and then looks at the demand and price figures in Lebanon, there is a sense of awe, if not confusion. “You cannot follow your textbook in real estate in Lebanon,” said Elie Harb, president of Coldwell Banker. “Comparing Lebanon to my knowledge in different markets … here the opposite always happens. What drives markets? Why does the real estate market go up? What is the trend and what do you follow? It does not apply in Lebanon.” Harb also explained that whenever there is political instability in Lebanon, prices do not go down, but only stabilize. Whenever people start to buy again, prices soar. With that in mind, all the political turmoil that the country has faced did not lower prices, but will a world financial crisis also fail to do so?
Two to three years ago, prices were increasing by around 30% per year on average, said Karim Makarem, director at RAMCO. He added that this year, prices in the first seven to eight months have increased by around 40% and it is expected that the average growth in prices will be from 40- 50% by the end of 2008. “There was a type of craziness and rush for increasing prices that did not follow a logical pattern … Potentially, it is dangerous for the economy,” he asserted.
Although property prices escalated in all Lebanese areas, some prime locations in Beirut witnessed a hefty increase reaching $3,500 and $4,500 per square meter in Gemmayze and Verdun, respectively, compared to $1,000 and $2,000 back in 2004. Prices even increased in Tripoli where in some places a square meter of land is now sold for $2,000.
There are several reasons for this increase, but what all experts agree on is that the main driver is the ongoing demand of Lebanese expatriates for real estate, while supply was finding a hard time keeping pace. During the first half of 2008, people thought that the price boom surpassed rational boundaries and this subject became an important part of people’s daily discussions. The price explosion is ascribed to many factors, the most important being the Doha Accord and construction costs.
The property boom that Lebanon has witnessed in the last couple of years is attributed to the Lebanese expatriates who represent around 85% of the real estate market. Makarem called them “the new middle class of Lebanon.” He explained that Lebanon had lost its old middle class during the civil war, and that people who are going to the Gulf, while leaving their families here, still have strong ties with the country. As a result, this new middle class that is working hard to make money would prefer buying property in their home country rather than anywhere else.
Moreover, “we do not have a lot of availability,” according to Abdallah Hayek, chairman of the Hayek Group. “The country is too small. The area of Beirut is around 18 million square meters, while in Riyadh it is 450 million square meters and in Cairo 312 million square meters.” Thus, low supply coupled with rising demand had a major effect on prices.
One turning point that led to this rush was the Doha Accord signed in May 2008. The market witnessed a minor slowdown during May because of the internal military conflicts and regained its propulsion after the accord was signed. Christian Baz, the owner of Baz Real Estate, explained that before the agreement, many people were on stand-by, waiting to see what will happen. When the agreement was signed, they rushed to buy property since the political situation had stabilized. Consequently, sellers started to increase their prices even before buyers came. “After Doha, the word was also spread among foreign companies, so now the demand started to increase for offices,” he added. Bank Audi’s economic report stated that around 15% of the increase in price took place in June, immediately after the Doha Accord.
Additionally, Antoine El Khoury, general manager at Byblos Real Estate Investment Office, believes that expatriates were holding on to their money since 2006, waiting for political turbulence to calm, thus post-Doha demand to acquire real estate surged. “We believe that the demand witnessed at the end of 2007 and beginning of 2008 was the pent-up demand since the 2006 July War,” he said.
The increase in construction costs created a buzz in the market and most sellers used it as an excuse for boosting property prices. However, opposed to what people might think, the effect of construction material cost on this year’s end product price rise is minor. “The rise in construction cost contributed to the rise in prices. But, if we were in 2000 or 2001 and we had this sudden increase in construction costs while demand was lower, we would not have seen this rise in prices, so it is mainly about the demand,” explained Chahe Yerevian, chairman and general manager of SAYFCO. He added that had the prices risen mainly because of the construction costs, it would not have happened so fast.
During the first half of this year, the rush in demand drove the number of property sales transactions to increase by 23.7% year-on-year, according to an economic report by Bank Audi. Moreover, the number of sales operations to foreigners rose by 8% in the first half compared to the same period in 2007 and totaled 721 operations out of 34,995. Construction permits, which are a main indicator of the real estate activity, also rose by 25.4% from the same period of the previous year. Cement deliveries also saw a month-on-month increase in accordance to the construction activity. In the first four months of this year, they grew by 8.3% and then witnessed a drop by more than 38% in May due the political unrest. Consequently, the first five months of 2008 recorded a 3% lower cement delivery than the same period in 2007.
Since the beginning of the global financial crisis there has been a slowdown in demand as a large portion of Lebanese expatriates living in the US are likely to be impacted by recession. “We have seen a slowdown in the number of requests for new properties or flats in the last two months,” said Makarem, adding that “expatriates are uncertain of their own future, they do not know if they are going to be in a job in two, four, or six months, [and] until end buyers feel safe about their future, they won’t start buying again.”
“My Dubai phone has stopped ringing and no one is buying now,” said Baz. A number of expatriates who had been planning to purchase property in Lebanon, have now postponed their investments waiting to see what will happen abroad. He also explained that some of these expatriates might even sell their property in Lebanon depending on how severely they have been hit by the crisis. Although this outlook is rather gloomy, it cannot be denied that this global crisis has been going on for quite a while and the final effect on foreign markets, especially in the US and the Gulf, is yet to be discovered.
The fact that the Lebanese banking system is one of the most solid in the world largely contributes to the benign effect of the crisis on the country. A large proportion of Lebanese buying real estate rely on bank loans. Contrary to the UAE, where banks are tightening credit causing demand to decrease, “it seems that there is no risk that a liquidity crisis will occur in Lebanon and so we will still see banks providing buyers with housing loans,” said El Khoury. Although the Lebanese central bank issued a new directive on July 21, 2008, stating that banks should not extend real estate loans whose values exceed 60% of the desired property or real estate projects under construction, there is no concern that it might affect demand. It mainly targets speculators since it exempts housing loans intended for the acquisition of a first home, those extended by the housing bank, as well as loans extended by the Public Housing Institute and those allocated to army volunteers. The directive also states that any bank who fails to abide by these stipulations will be reported by the Banking Control Council to the central bank and will then be subject to penalties.
Since a slowdown in demand has already started to take place, real estate experts said that prices started to stabilize rather than decrease. This is good for the market since it will slow down the excessive inflation and ultimately avoid the burst of a real estate bubble. “Perhaps what is happening in the world economy worked in our favor slightly, since it made everyone realize that there needs to be a logic in everything we do,” said Makarem.
El Khoury thinks that the Lebanese market will soon cope with the situation and regain its original strength. “I believe that the prices will now become more stable for a few months as I do expect the market to regain its activity once the global crisis and the new market conditions are stable again,” he said.
Hayek expects prices to remain stable until March 2009. “There will be dramatic changes in the global market but the flow of funds and capital to Lebanon will carry on. More money in banks will lead to higher lending [and] real estate prices will begin to rise again next spring,” he said. He also explained that the next parliamentary elections will be accompanied by an increased confidence in democratic rule and therefore a rise in foreign direct investment as well.
Another way to look at the effects of the crisis is to predict that investors who still have some money would rather invest in the Lebanese real estate than in other financial instruments that might be risky. “The real estate sector always maintained its robustness [and] I believe that maybe this crisis will let a lot of Gulf investors and Lebanese expatriates inject their equity into the Lebanese real estate sector which they see now as a safe haven. If security prevails … it will be another opportunity to let investors invest in a more secure and stable industry, which is Lebanese real estate,” said Yerevian.
Harb agrees that Gulf investors who invested already in Lebanon will not retreat even if they are significantly affected by the financial crisis and therefore this market segment, even if small, will not be disturbed. “If an Arab investor invests $1 million in Lebanon, it means that he has billions abroad. If he invests $1 billion, it means he has trillions back home,” he asserted.
Thus, while some might direct their funds to a ‘safer’ Lebanon, others might not have funds to direct at all. Expatriates and investors are sitting tight and waiting for the global recession to slow down. Moreover, while buyers are waiting for the Lebanese real estate prices to drop, sellers refuse to lower their prices either because of greed or other psychological boundaries. So what will prevail? Will Lebanese real estate prices experience their first dramatic fall or will we be benefitting from a market correction? “We have faith in the Lebanese real estate sector that has proven its resiliency to the very severe crises we have faced during previous years,” said El Khoury. While experts hold optimistic expectations, these answers are yet to be discovered since it all depends on the length of the current global crisis and the ability of the Lebanese real estate sector to cope with its consequences.