AWAY FROM BEIRUT

Lebanon 2013 | REAL ESTATE & CONSTRUCTION | REVIEW: CONSTRUCTION

As a result of the sluggish economy, the Lebanese construction sector has shown signs of decline in recent years. Still, several major projects are underway in the heart of Beirut, as well as the $2 billion Waterfront City just north of the capital.

The Lebanese construction sector contributed some 15% to Lebanon's economy in 2010, according to the Investment Development Authority of Lebanon (IDAL). However, it only employed some 9% of Lebanon's workforce, as most hard labor is done by some 500,000 migrant workers.

Economic growth, which varied between 7% and 9% between 2008 and 2010, fell to less than 2% between 2011 and 2013. The total construction area authorized by the some 18,000 construction permits issued in 2012, according to data release by the Association of Engineers in Beirut and Tripoli (AEBT), decreased by 11.7%, following a 6.8% drop in 2011. All regions, except the Bekaa Valley, reported a decline. Beirut recorded the biggest fall (18.4%).

The trend continued in the first eight months of 2013. Newly issued construction permits covered an area of 8.52 million sqm, which constituted a decrease of 12.3% year on year. As always, the province of Mount Lebanon issued the most permits (45.6%). Beirut issued the least (5%), while the capital in 2007 was home to 20% of the total area under construction.

The decline is due the increasing scarcity of land in Beirut. Empty lots are hard to find, and come with a hefty price tag. Hence, there is a growing trend to construct outside the capital. A second trend is to build smaller, as 52% of residential permits issued in 2012 concerned apartments of up to 150 sqm, compared to 44% in 2010.

Meanwhile, cement deliveries in 2012 decreased by 4.4% to reach 5.31 million tons. In the first of 7 months of 2013, they made a slight recovery, increasing by 4%. Yet that is still a far cry from an average of 10% annual growth between 2000 and 2010.

The cement sector is dominated by three major companies, Holcim, Sibline, and Cimenterie Nationale, which greatly profit from the government's de facto ban on cement imports since 2010. Total cement production in Lebanon amounts to some 6.5 million tons annually, while domestic demand stands at some 5 million tons. The government regulates the price of cement, which averaged some $110 per ton in 2013.

PUBLIC WORKS

While in most countries large infrastructural works represent the bulk of building activities, in Lebanon nearly all construction concerns real estate. The cash-strapped government has limited means to embark on, for example, major road, port, or airport expansion plans. In 2012, the cabinet did improve a $1.2 billion plan to build two new power plants, a gas pipeline, and a liquefied natural gas terminal. However, apart from upgrading two existing electricity plants, no serious progress was made by the end of 2013. If in the future offshore gas is found, as is expected, major investments in the energy sector are more likely.

“The construction sector in Lebanon relies on private real estate developments," said Georges Hage, CEO of Lebanon's C.A.T. Group—with some 10,000 employees and a presence in nine countries, one of the region's leading contracting firms. "Public projects in Lebanon are very rare and are put on hold mainly because the government does not have the budget to fund them."

“The government has made no significant investments in infrastructure, although Lebanon badly needs to build power plants to cover the country's electricity needs, water treatment plants, and solid waste management plants to preserve the environment, which is seriously threatened," Hage continued. “In my opinion, the cooperation between public and private sectors can help the government to overcome this impasse."

Lebanon has drafted a law concerning public-private partnerships (PPPs) that has been awaiting approval since 2007. In May 2013, the Banque du Liban (BDL) ruled, however, that Lebanon's commercial banks would not be allowed to finance such partnerships.

A lack of initiative is not the only private-sector complaint geared toward Lebanon's public sector. Many contractors and property developers complain about the fact that it takes from six months to a year to obtain all necessary permits.

“Obtaining permits is a nightmare," said Karim S. El-Hajjar, Chairman of H.E.C Holding. “The government is so busy playing the role of 'government' that it has forgotten to facilitate people's occupations, whatever business they are involved in. Usually, and unfortunately, the more you get to know influential people in Lebanon, the easier you get your work done, and avoid dealing with the exhausting bureaucracy."

SOLIDERE

The slump in construction activity is arguably best illustrated by the complex trading position that Lebanon's largest property developer, Solidere, is facing. Founded in 1994, the Lebanese Company for Reconstruction and Development of the Beirut Central District (Solidere) is charged with the rehabilitation of downtown Beirut, which was left destroyed following 15 years of civil war. Today, the heart of Beirut has been largely rejuvenated and offers a home to many of the world's most prestigious brands.

In 2012, however, Solidere's net profits amounted to only $16 million, compared to $162.6 million in 2011. Registered on the Beirut Stock Exchange, Solidere's shares fell to $13 by the end of 2012 and a near historic low of $11 by 3Q2013. In 2012, Solidere invested some $110 million on the ongoing construction of, among other projects, the Souks cinema and entertainment complex.

The company still has some 1.87 million sqm of land for sale, yet external investors have shown little appetite of late, which Solidere attributed to the general economic slowdown and tense political environment in Lebanon and the region. Some of the major projects under construction in the BCD include the residential Venus Towers and Beirut Terraces, the Grand Hyatt Beirut Hotel, and the mixed-use Landmark Project.

WATERFRONT CITY

With an estimated cost of $2 billion, Waterfront City is currently by far Lebanon's largest development. Construction started in 2013 on a vast area of reclaimed land in Dbayeh, just north of Beirut. The project consists of two parts. The first project is a joint venture between Majid Al Futtaim (MAF) Properties and Joseph G. Khoury et Fils Holding. It covers an area of 193,000 sqm and consists of residential units, an office park, and five-star hotel.

The second mixed-use project, developed solely by MAF on some 55,000 sqm of land, consists of a City Centre mall and a business hotel. MAF in 2013 already inaugurated the $300 million Beirut City Centre that, like the upcoming mall in Dbayeh, boasts a Carrefour hypermarket, cinema complex and entertainment area.

“Being aware of these constraints, we are releasing the project in phases," he continued. “We started out with Phase I and I-A, where units offered range in size from 85 sqm to over 600 sqm. Currently, over 90% of the people that have purchased residential units in Waterfront City are Lebanese, and 93% of those are actually living in Lebanon. The remaining 7% are Lebanese expatriates."

Citing the recent lack of foreign interest in Lebanese property, Bank Audi estimated in August 2013 that the bulk of current demand is originates mainly from Lebanese residents. At least 14,000 housing units are demanded annually on the basis of 900,000 resident households with a growth rate of circa 1.5% per annum.