What that means is any­one’s guess

Executive Magazine - - Front Page -

In the ab­sence of hard data, anec­dotes and spec­u­la­tion be­come the ba­sis of anal­y­sis. Take, for ex­am­ple, the ques­tion of whether or not there is a real es­tate bub­ble in Le­banon. From the re­sults of a Google search for the terms “Le­banon real es­tate bub­ble,” the sec­tor seems like it is in real trou­ble. The al­leged bub­ble has a Wikipedia en­try, and plenty of news re­ports — both lo­cal and re­gional — over the past cou­ple years have claimed that dis­as­ter is on the hori­zon. Some even drew par­al­lels be­tween Le­banon and the United States circa 2007 (when banks in that mar­ket were hand­ing out hous­ing loans like candy to un­qual­i­fied bor­row­ers, who un­sur­pris­ingly be­gan to de­fault en masse, dec­i­mat­ing both the US hous­ing mar­ket, and the global fi­nan­cial sec­tor in one fell swoop).

The un­de­ni­able truth is that be­tween 2005 and 2010, the prices of built prop­erty in Beirut — and, anec­do­tal ev­i­dence sug­gests, the rest of the coun­try — rose sig­nif­i­cantly. Ex­act num­bers are dif­fi­cult to find, but cur­rent ask­ing prices in Beirut have not changed much since 2010. The av­er­age Le­banese young cou­ple look­ing for their first home can­not

dream of rais­ing kids in the cap­i­tal. The lat­est price-per-square-me­ter for res­i­den­tial units in the ground floor of a Beirut apart­ment build­ing ranges from $2,180 sur­round­ing the Beirut Arab Univer­sity in Tarik al-Ja­dideh to $8,500 along the coast in Ma­nara, ac­cord­ing to Ramco Real Es­tate Ad­vi­sors, which has been re­leas­ing price and units-un­der-con­struc­tion data since 2013. Many ad­vo­cates of the bub­ble the­ory point to these ex­clu­sion­ary prices as proof they are cor­rect, al­though this as­pect of the bub­ble ar­gu­ment of­ten rings more of ide­ol­ogy than eco­nom­ics. De­vel­op­ers with ex­po­sure to Beirut — such as Michel Ge­orr, CEO of GCI — ar­gue London and New York (or any other ma­jor global me­trop­o­lis) are sim­i­larly ex­clu­sive and that the scarcity of avail­able land in Beirut (with a sur­face area around 20 square kilo­me­ters) means higher prices are nor­mal, if not nat­u­ral.

Bub­ble-back­ers pivot from Beirut prices to un­sold units in jus­ti­fy­ing their cries of com­ing calamity. Again, num­bers are elu­sive. De­vel­op­ers read­ily ad­mit that sales have taken a se­ri­ous hit since 2011, but quan­ti­fy­ing this is dif­fi­cult. Masaad Fares, pres­i­dent of the Real Es­tate De­vel­op­ers As­so­ci­a­tion — Le­banon (REAL), told Ex­ec­u­tive in Novem­ber 2016 that, a few years ago, he thought there were around 1,000 un­sold units in the cap­i­tal. How­ever, he now es­ti­mates the to­tal value of un­sold units at be­tween $3 and $3.5 bil­lion (or around 3,000 to 3,500 units if the av­er­age new apart­ment costs $1 mil­lion, as Ramco re­ported in 2014). Both REAL and Banque du Liban (BDL), Le­banon’s cen­tral bank, con­ducted in-depth mar­ket stud­ies on the sub­ject, Fares said at the time, ad­ding that the re­search will be avail­able pub­li­cally some­time soon. BDL did not re­spond to an in­ter­view re­quest for this ar­ti­cle. The Min­istry of Fi­nance pub­lished the num­ber of real es­tate trans­ac­tions, how­ever, this fig­ure in­cludes prop­erty sales (res­i­den­tial and com­mer­cial) as well as in­her­i­tances, with­out any break­down in fig­ures. Fur­ther, “sales” are reg­is­tered with the min­istry when the built prop­erty is de­liv­ered, mean­ing that units “pur­chased” (i.e., buyer pays project owner) off-plan in a build­ing that takes five years to be de­liv­ered can be recorded years af­ter the phys­i­cal trans­ac­tion. Those caveats aside, 2016’s 64,248 trans­ac­tions are down com­pared to the boom years (over 75,000 trans­ac­tions at the peak in 2010), but still up com­pared with 2005 (48,847).


Real es­tate bub­bles are in­flated by un­sus­tain­able de­mand. Typ­i­cally, econ­o­mists blame bub­bles on spec­u­la­tors. Spec­u­la­tion seems to have played a large role in the rise and rapid de­cline in prices in Dubai nearly a decade ago. In the US, it was ar­guably a mix of spec­u­la­tion and the above­men­tioned ex­ten­sion of loans to the un­qual­i­fied (some of whom were also pay­ing off mul­ti­ple prop­er­ties). When that de­mand dis­ap­pears, prices plum­met. Look­ing back on real es­tate mar­ket devel­op­ments in Beirut over the past decade, it seems clear there was at least some un­sus­tain­able de­mand, even if it is im­pos­si­ble to pin­point where it came from — spec­u­la­tors, Gulf Arabs turn­ing a cold shoul­der to Le­banon, Le­banese ex­pa­tri­ates who saw wealth erased in the Great Re­ces­sion, or some com­bi­na­tion of the three. While ask­ing prices in Beirut have only come down 1.8 percent ac­cord­ing to the lat­est Ramco fig­ures, de­vel­op­ers are of­fer­ing 20 percent dis­counts, the or­ga­ni­za­tion wrote in Ex­ec­u­tive at the end of 2016.

Ge­orr, of CGI, says that the Beirut up­mar­ket is cer­tainly hurt­ing. CGI — a real es­tate in­vest­ment com­pany founded by Mario Saradar in 1998, which counts Bank Audi, the coun­try’s largest len­der, as a 20 percent owner — re­cently de­liv­ered one of the cap­i­tal’s more trou­bled as­sets — the three-tower Ab­del Wa­hab 618 in Ashrafieh near the ABC Mall. Ge­orr says that CGI has a set devel­op­ment model: iden­tify land and strike a deal with the owner to pur­chase it on-op­tion; draw up plans for a project and se­cure in­vestors; seal the land deal once in­vestors are lined up, with the land owned by a special pur­pose ve­hi­cle (an sal com­pany with share­hold­ers re­flect­ing the project’s’ in­vestors). He ad­mits in­vestors will have to ac­cept a de­creased ROI from what they signed up for on projects that are com­pleted but re­main un­sold (he doesn’t di­vulge the ex­act ROI, but uses 20 percent as a the­o­ret­i­cal ex­am­ple), and says a planned mixed-use tower in Karantina is on hold (CGI will sit on the land un­til mar­ket con­di­tions make mov­ing for­ward with pre-sales and con­struc­tion more ap­peal­ing).

The in­creas­ingly loud talk of dis­counts in Beirut sug­gest the bub­ble has burst, with a price cor­rec­tion of 20 percent or more in the cap­i­tal — even if the only semi-of­fi­cial in­dex, Ramco’s, says ask­ing prices have barely budged. What re­mains un­clear and largely un-in­dexed is the price sit­u­a­tion in the rest of the na­tion.


As­sum­ing the bub­ble has now burst in Beirut, what will be the im­pact to the mar­ket over­all and the coun­try’s fu­ture? The quick an­swer: Who knows?

De­vel­op­ers read­ily ad­mit that sales have taken a se­ri­ous hit since 2011, but quan­ti­fy­ing this is dif­fi­cult

Since the slump be­gan in 2011, BDL has is­sued sev­eral ini­tia­tives aimed at help­ing the sec­tor. Per­haps the most wel­come was a re­cur­ring stim­u­lus pack­age launched in 2012, with an ini­tial amount of $1 bil­lion. Not all of the stim­u­lus money was uti­lized, and the re­main­der rolled over for another gross $1 bil­lion in stim­u­lus avail­able for 2013. That stim­u­lus money is still avail­able, but the to­tal amount on of­fer (not to men­tion the to­tal amount de­ployed to date) is not pub­lished on BDL’s web­site. What BDL of­fi­cials have said pub­licly is that 75 percent of the stim­u­lus money went to hous­ing loans. There are stip­u­la­tions on these loans, how­ever. They must go to first-time home buy­ers and come with caps that de­vel­op­ers in­ter­pret as mean­ing the mid­dle-in­come mar­ket. BDL loans are largely be­ing used on prop­er­ties in the range of $250,000$350,000 — which is what many are build­ing out­side Beirut.


These hous­ing loans are clearly not meant to help de­vel­op­ers strug­gling in Beirut. For real es­tate com­pa­nies with too much lux­ury stock on their hands, BDL of­fered to let banks re­struc­ture their debt with lo­cal banks (cir­cu­lar 135 of 2015). The cir­cu­lar laid out in de­tail what a hat-in-hand de­vel­oper needed to do in or­der to rene­go­ti­ate “a new re­pay­ment sched­ule based on the client’s cash flow” if the client had loans from more than one bank. The re­quest for cle­mency re­quires that banks must have “Iden­ti­fied the weak­nesses that led to the de­te­ri­o­ra­tion of the client’s fi­nan­cial sit­u­a­tion and the way to ad­dress them.” Two years on, de­vel­op­ers say the cir­cu­lar is all but unuti­lized (de­spite a sweet­ener al­low­ing banks to take own­er­ship of built prop­erty that they can keep for 20 years in­stead of the le­gal two), and, with buy­ers get­ting 20 percent dis­counts on listed apart­ment prices in the cap­i­tal, one guesses re­fus­ing to budge on mar­gins that grew a re­ported 400 percent be­tween x and y might have been one of the pri­mary “weak­nesses that led to the de­te­ri­o­ra­tions of the client’s fi­nan­cial sit­u­a­tion.”

No one knows if de­vel­op­ers with too much ex­po­sure to Beirut are on the brink of bank­ruptcy. What is even less clear is how first-time home buy­ers who bought out­side of Beirut are far­ing af­ter the price cor­rec­tion in the cap­i­tal. With­out solid fig­ures on prices, or the num­ber of out­stand­ing loans, it is un­cer­tain how many peo­ple now own prop­erty worth less than they paid. What is clear is that while Beirut may be left with ur­ban scars from the boom years (the aban­doned Bab Beirut project in the heart of down­town, for ex­am­ple), ev­i­dence to sup­port the no­tion that Le­banon is on the brink of a civil war sparked by the pop­ping of a real es­tate bub­ble is se­ri­ously lack­ing.

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