As Lebanon tries to rebuild its economy after years of political instability, the construction sector is playing a key role. The real estate market has been an anomaly of confidence in a political climate long characterised by uncertainty. Political concerns have been belied by growth in a market where there are little or no restrictions on ownership.

The figures are impressive. Construction accounted for 9.4 per cent of gross domestic product (GDP) in 2007, while housing represented another 8.5 per cent of economic output. Cement deliveries were up by 7.7 per cent in the first quarter of 2008 from the same period in 2007, according to Banque du Liban (BDL), the central bank.

Construction permits issued in the first quarter of 2008 cover 2.1 million square metres of new developments, according to a report by the local Bank Audi. In the first three months of this year, the report shows that permits were up by 33.4 per cent on the 1.6 million sq m in the same period of 2007.

In April, Levant Holding, a subsidiary of the Kuwaiti Al-Sayer Group, announced one of the biggest real estate projects in Lebanon’s history, covering 205,000 sq m in the Solidere district of Beirut.

A 19 per cent rise in the number of properties sold in the first five months of 2008, compared with the same period in 2007, was accompanied by an increase in value of 72 per cent, or almost $2bn, according to a report from the directorate of real estate at the Finance Ministry.

Undervalued market

Despite this strong growth, the market still has plenty of potential. The growth in property prices in Lebanon still lags behind global and regional markets, according to Banque Audi, leaving investors feeling that the market is still undervalued and promising continued interest in the sector’s development.

The recent upturn is a result of a combination of factors, from relatively low inflation rates to the wide availability of long-term mortgages.

Underpinning the strong demand is a liquidity boom in the wider Middle East region resulting from high oil prices, an undervalued local real estate market and earnings from the Lebanese diaspora. More recently, the calmer political situation that has followed the Doha Accord in May has given an extra boost to the confidence of investors interested in launching new projects.

But reservations persist about the ability of the economy to sustain the growth enjoyed over the past year. By August 2008, inflation was at 6 per cent and most analysts forecast it will be 10-13 per cent by the end of the year. Fears of an overheated real estate market are beginning to emerge.

BDL maintains that the rise in property prices is supported by market fundamentals, but it is still concerned to prevent a bubble forming in the market. After the US housing bubble burst in late 2007, concerns over a similar situation emerging in Lebanon spurred Riad Salameh, governor of BDL, to warn in July that lenders may have to ask borrowers for a downpayment of up to 40 per cent of the value of any property for which they require a loan.

Economic growth

While the property market may be laying the foundations for economic growth in the country, it is important for the government to look beyond real estate to ensure a sustainable future. “We have significant expertise and leadership in this country, more than just real estate,” says Alain Balian, vice-governor of BDL. “This is always the first sector to benefit from a boost to Lebanese confidence. But it does not create enough jobs for us.”

Although the real estate market is in the middle of a second major boom, large-scale infrastructure projects are being held back by bureaucracy and a lack of funds.

“The boom of the 1990s was intimately associated with the vision of [former president Rafik] Hariri,” says Riad Mneimneh, general director of real estate consultant Dar al-Handasah (Shair & Partners) in Beirut. “These people do not come every day.”

In the aftermath of Hariri’s death, many are less confident about the country’s reconstruction prospects. “We don’t have the means for some projects,” says Mneimneh. “Roads and power stations are very expensive.”

“We had the opportunity during the 1990s
to take advantage of the boom, and we are enjoying [the fruits of] those projects now. Just imagine how much it would cost to build Beirut airport today.”

Those responsible for the current phase of reconstruction admit to serious political obstacles. “In the absence of parliamentary meetings, we are not seeing any new loans being ratified,” says Nabil al-Jisr, president of the Council for Development & Reconstruction (CDR), which is responsible for planning and securing finance for projects.

“We have had close to $1bn in signed loans for almost a year and a half, just waiting for ratification. We also have previous loans of $1.7bn [that] require a local counterpart to directly cover a portion in the loan agreement or expropriations, which requires a further $1bn in local funds.”

Without an approved budget for almost three years, such local funds seem a far-off prospect. In a tight global contracting market, the country is also facing a shortage of construction expertise. Lebanon suffered an exodus of contractors in the early part of the decade as the construction market slowed and companies began to look beyond its borders, particularly to the Gulf region, where opportunities abounded. But this migration has its flip side, as contractors with prior experience of the Lebanese market come back to contribute to its latest reconstruction efforts.

Increasing stability

“I think we are on the right track,” says Maher Merehbi, whose own firm, Arabian Construction Company, has worked in the Gulf since 1967, only returning to the Lebanese market after the end of the civil war in 1995. “The country is coming under control and we have a healthy trend in the real estate market. A few months’ stability will confirm this status.”

However, the industry faces other serious obstacles. High construction costs are the most challenging, the exposure of contractors to risk becoming an increasing concern. “Cost is the issue,” says Merehbi. “The difficulty is that it is impossible to pin it down.”

The problem is particularly acute when dealing with the public sector, which most contractors have tended to neglect, due to its reputation for being difficult to work with. “Decision-making is slow,” says one contractor. “I know of sidewalk projects that have stretched out for seven years. As long as this is the case, it will not be attractive, as we cannot tie down our costs for that long.”

The cost of building staples such as steel and cement has risen dramatically in recent months. Steel prices more than doubled to $1,580 a tonne in August 2008, compared with $760 a year earlier. Diesel prices rose from $0.60 to $1.33 a litre over the same period, an increase of 121 per cent.

Over the past three years, labour costs have also risen sharply. In 2005, a labourer would expect to be paid $11 a day, but today the figure is $14.50 a day, an increase of 32 per cent, according to industry sources.

As costs increase, so too does contractor risk. “There are none of the models for risk-sharing [in Lebanon] that we see in the Gulf,” says one contractor.

Retention of labour is also a problem. While estimates vary, up to 70 per cent of the country’s construction workers come from neighbouring Syria.

Movement across the borders is relatively free, which can be a major problem during times of heightened political tension. “At the first sign of trouble, they are off,” says Merehbi. “Getting them back to work is an enormous task. In the last war, all of our workers left and it took us three or four months to get them to come back.”

Construction contract models must be examined to find ways for contractors to reduce their exposure to risk, say industry sources. In July, the problem threatened to spill over into industrial action. The Order of Engineers & Architects of Beirut joined the Lebanese Contractors Syndicate in calling for a one-day strike, blaming rising commodity prices for disruptions to contracts with the government.

According to Al-Jisr, the CDR has introduced clauses allowing for the fluctuation of prices and has requested the necessary funds to implement the policy. “The major impact is the decrease in the rate of progress in works under execution,” he says.

One contractor sums up the situation for public works. “Government, by its nature, ties you down and does not allow for initiative,” he says. “Al-Jisr is a good guy and they work as fast as they can, but they are held back by what is going on around them.”