Property sector sees short-term gains in Lebanon

Signs of a recovery in Lebanon’s real estate and construction sectors may just be temporary as a new political vacuum is denting investor confidence. Published in MEED, 23 July 2014

There has been an unusual run of good news for Lebanon’s construction and real estate sectors in the early months of 2014. After several years in which both property sales and the issue of construction permits were on the decline, there are now signs that activity may be picking up. Whether that proves to be the start of a long-term trend or something more short term remains to be seen, but it has at least engendered some cautious optimism.

The value of property sales was up by 36 per cent in the first quarter, compared with the same period last year, increasing from $1.5bn to $2.1bn, according to the local Bank Audi. At the same time, the number of property transactions climbed 16 per cent to 15,834, including a rise of 7 per cent in the number of sales to foreigners. The average value of a sale reached $130,000 in the first quarter, up from $111,000 the year before. According to Bank Audi, all parts of the country have been benefiting, although prices in Beirut have been rising the fastest.

These increases follow several years of tougher conditions. The number of property sales has dropped quite sharply over recent years, from about 83,000 in 2011 to 69,000 in 2013, not least because of lower demand from international buyers.

There were also signs of improvement in the construction sector this year. The local Blominvest Bank reports that new construction permits were up 15 per cent in the first five months of 2014 to 6 million square metres, compared with 5.2 million sq m in the same period last year. Although this is still below the comparable figures for 2011 and 2012, the increase is a positive sign. “This possible shift in investors’ tendency towards larger plots for their projects implies they have brighter expectations for the country’s future,” the bank said in a report issued in mid-June.

Cement deliveries have also been climbing, which Blominvest says is probably due to a combination of higher public spending, including work to expand the Port of Beirut, along with previously licensed schemes moving ahead and illegal construction activity.

Adding to the sense of optimism, Beirut was even named as one of the 12 most attractive places in the world to invest in real estate, in a report issued in May by UK property services firm Savills, UK-based developer Candy & Candy and Deutsche Asset & Wealth Management. Taking its place alongside cities such as Tel Aviv, Dublin and Melbourne, the Lebanese capital was deemed to be cheap by international standards, with strong potential for residential prices to rise.

Demand for office space also looks reasonably healthy. According to local real estate firm Ramco, occupancy levels in the Beirut Central District were running at about 80 per cent at the end of last year, with grade A modern offices having nearly full occupancy. Some 35,000 sq m of office space was under construction in the district at the end of last year, adding to the existing office space of about 430,000 sq m.

The authorities would prefer the property and construction markets to be growing steadily rather than booming, so the current pace of growth probably suits them quite well. The central bank, Banque Du Liban, for one is keenly aware of the risks that can come from over-exuberance in property markets.

“Most of the banks’ problems come from the growth of the real estate market,” said Riad Salameh, governor of Banque du Liban, in a speech to a London Business School conference in the UK capital on 3 June. “So in Lebanon, we have required that real estate promoters do not get loans that are more than 60 per cent of the value of the project.”

It is too soon to know how sustainable the recent growth is. Positive data from the start of this year may be linked to the optimism that was prevailing at the time. The country’s politicians finally seemed to be making progress when a government was formed in February under Tammam Salam, following 10 months of negotiations. Since then, however, the inability to agree on a new president has pushed the economy back into limbo.

“We are in another political crisis that is more complicated than the formation of a new government,” says one local economist. “So there’s a wait-and-see approach by investors, firms and banks. This is another opportunity cost for the economy. You need a boost to consumer confidence to generate investment and encourage projects.”

At the moment, the political problems within Lebanon and the civil war in neighbouring Syria appear bound to affect the prospects for government finances, the overall economy and the willingness of expatriate Lebanese or foreign nationals to invest in the country.

“Lebanon’s fiscal deficit is one of the five worst of all the countries we rate,” says Paul Gamble, director of sovereigns at the US’ Fitch Ratings. “It really reflects the impact on revenues from the Syrian crisis, which has caused a significant slowdown in the Lebanese economy.”

On the other hand, while Syria’s war has dragged the Lebanese economy down overall, it has also, to some extent, boosted the property sector. Huge numbers of refugees have crossed the border to escape the fighting – as many as 1.4 million according to some estimates – leading to higher demand for rented properties, particularly one and two-bedroom apartments.

The construction sector has also been affected, although whether it has benefited or suffered probably depends on whether one is more sympathetic towards employers or the local labour force. Syrian nationals have proven themselves willing to take on jobs for lower wages than others, which has kept costs down for employers.

“They are desperate to work and they are getting paid less,” says the local economist. “You see them increasingly employed in construction and manual labour. Because of the high operating costs in Lebanon, companies are looking for ways to reduce their costs, so they have recruited Syrian labourers at much lower wages – not just lower than the wages for Lebanese workers but lower than for Egyptians and Palestinians.”

As the war drags on, it seems unlikely that those workers will be returning home any time soon. The conflict also looks certain to keep activity in the construction and real estate sectors muted.