The Hayek Group Newsletters and Reports

What Next for Lebanon's Real Estate Market - July 2018

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BEIRUT: Amongst major challenges faced by the new Lebanese government is the stability of the real estate and housing sector, with questions being raised on the possibility of avoiding a price crash and survive amid the current market fundamentals? 

Property developers and contractors are facing their own challenges as well where the margin of adaptation with the market fluctuation is narrowing and competition is increasing due to the scarcity of financing and the reduction in consumer purchasing power. 

The media coverage for the latest collapse of major developers is intolerable; it is not reflecting the actual status of the real estate sector rather than focusing on the mismanagement and unethical performance by some companies.

Banking Role 

The stability of the market mainly depends on the growth sectors including banking, real estate, hospitality and the business environment. It is clear that when the economy suffers, the real estate sector will be directly affected, but hopefully not in the same ratio. The Central Bank and the banking sector are the major persuasive players; they are in an unavoidable situation where new innovative strategies have to be proclaimed to upkeep the market in a stable condition including lowering interest rates, new financing facility tools and the partial unlocking of the $113 billion of bank deposits which include Legal Reserve Requirements. The $21 billion total housing ($13.0B) and construction loans ($8.0B) from local banks, which represent less than 30% of total bank loans to the private sector, is not a critical number at all.

Interest Rates

Higher interest rates are basically due to the higher trade deficit which used to be shielded by an allocation of expats, foreign direct investments, especially from GCC citizens, and tourism. Expats are still able to transfer especially from troubled regions worldwide, but the foreign direct investment and tourism are contributing less to cover the trade deficit. Although this rise in interest rates will attract foreign wealth into Lebanon as a 9-10 percent interest rate is too attractive for a country that has an impeccable track record in currency stability. However, such high interest rates will also force domestic and international investors to drift from real estate into treasury bonds for 3 to 5 years. Therefore, real estate investments should consider a return on a yearly basis of at least 10-15 percent for investors to consider reinvesting in real estate instead of bank bonds and notes, given that the risk profile is similar between both but real estate investment is slightly riskier. The rise in interest rate will also explain the increase in the bank deposits for the next 2-3 years at least.

CDS : Credit Default Swaps

A CDS is a contract in which the seller agrees to pay the buyer the entire security premium along with interest in the event that the debt issuer defaults or experiences another credit event. Generally, a higher CDS represents a higher risk that a country could default. 

Clearly, the CDS price has increased in 2018 to reach 711.4 bps compared to 390 bps in 2017 which represent an increase of 82%. This is a clear indication of the weakening of the economy. The price, however, is still low enough for Lebanon to be considered dangerous as it requires a much higher spike to believe otherwise. As for those who are skeptic of Lebanon and are arguing that a price crash is approaching, they are advised to enter into the CDS contract instead or target a successful real estate project with proper IRR alongside professional market leaders.

Order of Engineers Data

Order to Commence, a measure by the Order Of Engineers and Architects in Beirut, is a direct indicator of the current construction activity in Lebanon given that landlords can hold onto building permits without actually initiating the construction process. For instance, if we compare the OTCs in regions, we notice the following:

Beirut has a comparatively small area compared to the rest of the Lebanese Cazas so it would be expected to have a lower total OTCs compared to the rest. However, what is clear is that the OTCs in Mount Lebanon decreased by 12.1 % in 2017 relative to 2016, which is an acceptable rate relative to the increasing state economic problems.

The OTC across Lebanon is also subject to a reasonable drop of 25% since 2012 which is also a mild drop in our expectations.

The total area of registered new building permits recorded a 2.6% increase in March, April and May of 2017 relative to the same period in 2016, and reduced by 23.9% in the same period in 2018 which is also a reasonable figure within market expectations.

Civil Status Data      

In theory, most newlyweds are expected to buy a residential house in Lebanon, so analyzing the number of newlyweds would determine to some extent the minimum housing consumption needed.

By looking at the table by Directorate General of Civil Status, if we eliminate the outliers, we can say that an average of 40,000 residential units per year on average from 2006 to 2017 of registered marriages, equivalent average value of $750M, which is the amount of subsidized housing loans by the Central Bank, using the 15 and 25 percent legal reserve requirements for deposits in USD and LL respectively; the central bank current priority is subsidizing loans to the state debt and let the government deal with the housing crisis.                         

Political Stability

One of the hardest data measurements are the qualitative aspects of the government. The new government has to provide attractive incentives for foreign investment; even though, the investment environment suffers from complicated rules and regulations, corruption, arbitrary licensing decisions, complex customs procedures, high taxes, tariffs, fees, archaic legislation, and weak economic growth. The new government should build on the positive aspect of the current political stability and the expected new reforms under the leadership of president Aoun, the head of the council of ministers Mr. Hariri, the speaker of the parliament Mr. Berri and all major political parties. The new parliamentary elections were successfully completed and the new coalition cabinet is expected to reflect all the political parties.

The current security measures are well controlled by qualified leadership and professional officers, freedom of speech and democracy are preserved and well protected in a troubled region where these rights are not often afforded. So to some extent, it is safe to say that Lebanon’s political environment is attractive for foreign investments.

Market Temptations

The market enjoys some positive indications including affordable and attractive construction costs given that general contractors are accepting minimum profits due to competition, and the availability of the Syrian workforce. The new rental law is currently applicable and if buyers converted to rent, then the current stock of vacant apartment will slowly diminish. Leasing and renting with an option to buy should also be considered by owners.

Investor's attraction to rented buildings is getting more considerations; while private banks have a good appetite to mortgage rented properties with payment facilities rather than traditional housing loans with high interest rates.


The spillover from the Syrian conflict, including the influx of more than 1.2 million registered Syrian refugees, has increased internal tension and reduced economic growth to the 1-2 percent range in 2011-17, after four years of averaging around 8 percent growth. 

Weak economic growth lower tax revenues, while the largest government expenditures remain in debt servicing, salaries for government employees, and transfers to the electricity sector. These limitations constrain other government spending, limiting its ability to invest in essential infrastructure improvements without the involvement of international donors. The role of the new government is to issue proper legislation to speed up the process without any unnecessary bureaucratic delays.

The government should secure a soft landing for real estate prices, by providing innovative legislations for new financing tools to be implemented by the private sector to inject funds into ongoing projects at convenient terms, and attract foreign investment by building trust and provide incentives for overseas investors and Lebanese diaspora.

New regulations by the Central Bank are urgently needed to provide new licenses to attract private investors to the distressed property market, including the formation of private funds to invest in distressed properties (BDL Circular 427 – 2017). The Central Bank should also instruct local banks to ease on grade 6 loans to avoid the bankruptcy of the building industry and should encourage new banking instruments for investors. 

The parliament should process all pending laws related to the building and housing sector especially the Insolvency law for real estate developers, city planning regulations and taxation.

The Ministry of Finance should also present the state financial budget on a monthly basis. It must also adopt transparent statistical reforms and support the Central Administration of Statistics to provide periodical indices for economists, researchers and other government bodies.

Final Thoughts

The main challenge for the new government is corruption and structural reforms of the public sector; this will lead to a gradual correction of the trade deficit and lower public debt, commercial interest rates and increase consumer’s purchasing power which will affect all sectors including that of real estate. Even though the current market statistics are indicating a surplus of available apartments with a total value exceeding $3.8 billion, changes must be made in the housing culture by adopting smaller units similar to most EU countries. Meanwhile, developers should reconsider nominal profit margins.

The main concern is whether the current political system can handle the critical economic problems, given that same parties who have ruled the country for the past 25 years were re-elected. Fortunately, they have their work cut out for them; otherwise, the country is in grave danger. 

Despite the regional dramatic conflicts, the international umbrella protecting this country from any serious security measures is likely to continue in the future, given that no one will benefit from any military conflict in the foreseen future, which will then cause the migration of refugees into troubled EU countries. 

Financial rating agencies are considering many risks for the Lebanese economy, but still have a non-crash status. On the contrary, the IMF is expecting a growth of 1.5 to 3.0 percent in the near term. 

For the past 3 years, real estate prices were subject to a correction in an acceptable pace within a margin of 30 to 35 percent which is normal under such severe state debt and corrupt economical structure. 

Government spending in infrastructure is not an option any longer, instead, it is a necessity, with an amount of $2 billion per year needed to tackle the market liquidity and increase the influx of foreign currency at international low rates (3%-5%)

The new government has to act immediately to restructure the state’s public sector to have a transparent balance sheet complying with rules and regulations as set in Cedre conference and to apply reforms using the wise control of the central bank, the potential of the local banks and the capabilities of the private sector, not to mention the expected income from the oil and gas exploration and the power of expats.

Doing so will prevent any price crash in the real estate market for the next couple of years. 

Abdallah Hayek is the CEO of Hayek Group, a leading civil engineering, procurement and construction (EPC) company for buildings and infrastructure projects established in 1951.

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