Heading for a correction?

Property prices may have held relatively steady in Lebanon during recent months, but analysts are warning that this won’t last forever.
Heading for a correction?
By Mona Alami
Fri 31 Jan 2014 02:32 AM

Tall luxury towers dot Beirut’s landscape. The gleaming high-rises have popped up across the capital’s neighbourhoods despite Lebanon’s economic slowdown, for, like Lebanon itself, the real estate sector seems to be full of contradictions, as increasing construction coincides with slowing demand for property purchases.

In recent years, Lebanon’s real estate boom has resulted in thousands of buildings being erected all over the country. However, an unstable political and economic situation partly linked to the raging civil war in next-door Syria has dulled investors’ appetites, with the real estate sector reeling as result, particularly the sale of apartments and houses. For example, total real estate sales transactions fell to 8,547 in January and February, 18.93 percent less than the 10,543 transactions recorded in the first two months of 2012. The total value of real estate transactions fell 21.13 percent to $920m from $1.16bn over the same period. Construction permits also showed a significant decline in the same period, falling 26.81 percent to 1,392,033 sq m, down from 1,901,863 sq  m at the end of February 2012.

“Demand is well below supply in the real state market right now, but prices are still relatively stable,” says Guillaume Boudisseau from real estate consultancy company Ramco, adding that the only correction in the apartment market was that more discounts between 5 to 10 percent were given to customers. “Buyers have more negotiation power,” says Mazen Brahim from Jamil Brahim, a large Lebanese developer.

Samar Hassan, a partner at JFK Properties Real Estate, says demand is mostly for properties of fewer than 150 sq m and less than $500,000. “The market for larger units such as villas and high-end apartments is very rare,” she says. “Our big spenders from the Arab Gulf are nowhere to be seen in Lebanon. I have sold only one property to a Gulf national in the last year,” she adds.

However, what is preventing a real drop in prices is the actual structure of the Lebanese real estate sector, in which developers usually finance their buildings with their own funds.  “One large real estate developer has  $100m in stock, but prices are not really dropping because developers made so much money in previous years,” says Boudisseau.

Since 2005, prices of houses and apartments in Lebanon, and especially Beirut, have increased by two to three times. For example, the cost per square metre of an apartment on the first floor in Beirut’s Hamra neighbourhood was $1,300 in 2005, compared to $4,000 now, while the cost per square metre across town on Abdel Wahab Street increased from $1,500 to $4,500. As prices rose, more large, high-end properties were constructed, far out of the purchasing power of the majority of Lebanese.

“Small apartments are definitely the easiest to sell these days,” says Hassan. “Most Lebanese seek apartments worth $200,000 to $250,000, which is impossible to find in Beirut. The target market is the expatriates,” who tend to make more money than most Lebanese nationals, she says.

One area of the real estate market that is faring quite well is land purchases. “This is due to the fact that there is a very limited supply of land left in the Greater Beirut area,” says Antoine Chamoun, general manager of Bank of Beirut-Invest.

Land prices in the posh Beirut Central District (BCD) vary between $3,250 and $4,000 per built-up area (BUA). In the hilly, bourgeois Achrafieh, the price is $1,700 to $2,200 per BUA, and from $1,800 to $2,500 BUA in the Hamra area.

“The land market is not witnessing a crisis, as many investors are still looking to purchase land, particularly in Beirut,” says Boudisseau, adding that land investors tend to spend between $5m and $50m for land purchases. The cost of office space has also stayed stable due to the limited supply of high-standard rentals, with prices in BCD and the Gefinor area around $300 per square metre per year.

Another part of the real estate sector that is thriving is the rental market, which is profiting as a result of Syrians who moved to Lebanon to escape the conflict in their country.  Rent prices have gone up in several areas including in the Metn, which is north of Beirut, and within the capital, says Hassan.

The richer incoming Syrians are seeking housing in areas such as Tallet Khayat and Verdun, and the middle class in Beirut’s Hamra and Clemenceau, according to Baudisseau. Prices in the Ras Beirut area vary between $125 and $150 per square metre per year, with prices higher for furnished houses. But unlike apartment rentals, commercial rentals have seen a major slump in Lebanon.

“With the economic slowdown, many business can’t afford the high rents. As an example, there are hundreds of stores for rent in the Beirut Central District,” says Boudisseau. “Prices are also dropping. In the BCD, restaurants and stores that would be rented for $80,000 have an asking price of $65,000 today.  This trend is spreading to very commercial areas such as Hamra and Verdun.”

Americana, a Lebanese company that holds licences for KFC, Hardees, Krispy Kreme and Costa among others, has closed several outlets due to the high cost of space along with the slowdown in customers because of the economic situation in Lebanon. Malls have also witnessed a drop in sales, and have responded with price correction, with large clients negotiating down their rental prices.

To address the slowdown, in January the Central Bank launched a stimulus package targeting the real estate sector and offered to extend 2.2 trillion Lebanese pounds (LP) ($1.46bn) in credit to banks at a 1 percent interest rate. Over 50 percent of that money is reserved for housing with a ceiling of LP800m ($533,333) per loan, according to Chamoun.

But Brahim underscores that if the economic situation stays in the red zone for two more years there might be more layoffs, which will affect the population’s appetite for property investments.

Faced with a challenging environment, promoters have to be creative. L’Armonial and Greenstone Real Estate Developers are erecting luxury buildings using the facades left over from old French mandate-style house. Another developer is erecting a building in rural Yarze in the middle of a dense tree plantation to appeal to those who love nature, and a building owner in Beirut is offering a car with each apartment bought.

Brahim believes nonetheless that the slump being witnessed by the overall Lebanese market is temporary. “We faced a similar situation in 1998 in which the sector ended with a large stock of over 200,000 apartments that eventually got digested, with new prices coming into effect. I might be pessimistic on the short-term but definitely not on the long-term,” he says.

That optimism also shared by Chamoun, who underlines the “resilience of the Lebanese real estate sector.”

For all the latest real estate news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.

Subscribe to our Newsletter

Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.