Lebanon’s real-estate sector is struggling to maintain its appeal as a safe haven for investment, as sales stagnate against a backdrop of domestic political tension and regional turmoil.

The uprising in Syria, which began in mid-March, has had a knock-on effect on Lebanon’s property market, with real-estate sales slumping, compared with to the same period in 2010. The value of property sales reached $3.85bn in the first half of 2011, down by 18.3 per cent on the previous year, according to the local Banque Audi.

…It’s become very difficult for developers to buy property at fair market value … because land prices are high

Karim Makarem, Ramco

There were 230 fewer transactions to foreigners in the first five months of 2011 compared with 2010 and analysts see this as evidence of a huge reduction in foreign appetite for Lebanese real estate, with political events having the decisive impact.

Property reality

There are two distinct themes at work. A period of domestic political bickering delayed for five months the formation of a government under prime minister Najib Mikati, until June 2011. More acutely, the outbreak in neighbouring Syria of anti-government protests may have encouraged potential buyers to take flight from Lebanon as well.

“The reality is also that foreigners are not buying in Beirut and haven’t been for quite a while, be it Gulf nationals or even expatriate Lebanese,” says Karim Makarem, a director at Beirut-based Ramco real-estate advisers. 

The regional turbulence – particularly that in Syria – has eroded some of the ‘safe haven’ element that Lebanon’s real-estate sector has traditionally benefited from even when Beirut has been afflicted by outbreaks of political violence and instability. 

The current problems have limited investors’ desire to expose themselves to the Lebanese market, in part because of a perception that neighbouring Syria would normally act as a source of eager purchasers.

“The view was that Syrians would always be buying in Lebanon,” says Makarem.

Now, he says, the market is spooked by uncertainty. “Perhaps what is happening now will make Syrians buy even more in Lebanon, or perhaps it will make them take money outside the Arab world – nobody knows for sure the true consequences of what is happening,” he says.

Anecdotal evidence suggests Syrians of Christian denomination may be acquiring properties in East Beirut, a Christian-dominated area of the capital, out of concern at the turn of events back in Syria.

As yet, however, the stagnant Lebanese property market has not seen a collapse in prices. The average value of each property sale in the first half of 2011 actually went up, albeit by only 0.4 per cent, compared with the same period in 2010, to $103,000.

Although some developers are prepared to compromise over price to shift sales in a slow market – sometimes by up to 10-20 per cent say real-estate sources – vendors are not yet convinced that prices have peaked. Most are holding firm, particularly in the residential sector.

Buyers are becoming more selective, says Banque Audi, but there are other factors at work. With low financial leverage, there is no pressure on developers to repay debt. In Lebanon as in Syria, cash is used for the vast majority of real-estates deals.

Many buyers were paying well above fair market value one year ago and if they were to value their property today to put on the market, it quickly becomes clear they might not be able to recover their investment.

Positive spin

Within the wider real-estate sector, the residential space is suffering most. Realtors are putting a positive spin on developments “

Retail and offices are doing fine while the residential sector has just plateaued a bit,” says Michael Dunn, who heads the Beirut office of real-estate consultant Cushman & Wakefield. 

Retail is witnessing steady demand, with occupancy rates stable, underpinned by the relative resilience of the food and beverage sector to the adverse political climate.

Retail space in the prime areas of Beirut – Ashrafieh and Gemmayze in East Beirut, and Hamra and Verdun in the west of the city – are experiencing occupancy rates close to, or exceeding, 95 per cent, says Ramco.

Hamra, the cosmopolitan heart of Beirut, has seen double-digit rent rises over the past year with increased numbers of hotels and restaurants establishing themselves there. The Beirut Central District (BCD) has seen strongest activity in the Beirut Souks area, while secondary streets have seen lower occupancy rates.

The BCD has the most concentrated area of office space in the city, with 120 office buildings, but it has seen a gradual decline in new supply. The shortage of adequate stock has helped to support rental levels, with occupancy rates staying healthy at about 80 per cent. The main demand is coming from corporate clients looking for headquarters in the capital.

Further supply

More mixed-use property supply is in the pipeline. UAE developer Majid al-Futtaim Properties teamed up with the local Societe Joseph G Khoury et Fils Holding this year to launch the first phase of Waterfront City, a real-estate development located on reclaimed land near the coastal town of Dbayeh north of Beirut.

The project will include residential, commercial and leisure facilities including 5,000 residential units of varying sizes, in addition to a commercial district, a shopping mall and a hotel, as well as dining and entertainment facilities. 

No developers have scrapped their projects as yet. The problem is acquiring land at the right price.

“The situation now is that it’s become very difficult for developers to buy property at fair market value, which is the only way they can do a project that will achieve for them the returns they are looking for because land prices are very high,” says Makerem.

The market for land remains healthy in terms of demand and prices are holding up. “[It is] widely viewed that whatever land is worth today, will one day be worth a lot more, and that’s been true up to now,” says Makerem.

Developers will be hoping that land and real-estate values come back into alignment – and that Beirut, for once, will come to benefit from instability elsewhere in the region.