The government is committed to improving Lebanon's infrastructure to counterbalance economic headwinds from regional strife.

Without encroaching too far into our economy chapter, it is pertinent here to mention certain realities that impact Lebanon's built environment, along with a recently approved remedial program. Pressing geopolitical realities have seen 1.5 million Syrians cross Lebanon's border, accounting for 25% of the population. By World Bank numbers, congestion is estimated to have risen 15-25% as a result, exacting its own economic penalties, roughly 10-15% of GDP no less.

For 'CEDRE' Read Growth

The toll on existing infrastructure demands urgent enhancements that the government alone cannot provide, but which have now materialized elsewhere. April's CEDRE Conference in Paris, a reference to the cedar tree that appears on the Lebanese flag, has yielded aid pledges north of USD11 billion to boost the Lebanese economy. The package comprises approximately USD10.2 billion of concessional loans with grants of USD800 million. USD4.4 billion stems from the World Bank and USD1.35 billion from the European Bank for Reconstruction and Development (EBRD), while a USD1 billion credit line from Saudi Arabia was renewed.

State commitment

Moody's has labeled the aid package “credit positive" in supporting resumed public investment in growth recovery. And now donors expect to see Lebanon commit to long-stalled reforms. Prime Minister Saad al-Hariri's subsequent commitment to donors to cut the budget deficit as a percentage of GDP by 5pp over the next five years from a budgeted 8.5% in 2018 was also a nod to would-be investors in real estate. The IMF is awaiting concrete fiscal reforms capable of tackling a mammoth debt-to-GDP ratio of roughly 150% that could yet surge above 180%. The government has also pledged to launch a construction and restoration program of 250 infrastructure projects on a total investment of USD16 billion. It is calculated that each USD1 billion investment in infrastructure generates 3% GDP growth and 50,000 jobs.

The Real Estate Sector

The heady period of 2007-2010 saw Lebanon's real estate sector become an economic staple, with property seen as a familiar safe haven among locals and Gulf Arabs alike. Yet, the same realities since 2011 have seen construction project delays and investor cooling even among the diaspora, whereby a property glut has ensued. Indicative of real estate market activity, in 2017, cement deliveries shrank by 2.21% YoY to 5.15 million tons. A noticeable rise in demand in December likely indicated stockpiling ahead of a prospective VAT rise to 11% at the start of 2018.

Credit and Permits - The Numbers

Sector data reveals that real estate deals accounted for around 16% of national income in 2016, recovering from the five-year trough of a year earlier, and rising 5% to USD8.4 billion. For that year, the total volume of transactions was at 64,248. Moving forward to 9M2017, the value of loans extended to the contracting and construction sub-category had slid 1.2% YtD to USD11.42 billion accompanying a 2.9% YoY decline in total construction permits on bearish investment appetite. Note, too, that permits are regularly issued at least six months after applications are registered, with execution valid up to five years from the date of issuance. As of September 2017, general contractors, commercial buildings contractors, and residential buildings contractors accounted for 90% of total loans within the segment: general contractors (34%), commercial buildings contractors (32%), and residential buildings contractors (24%). Loans for residential contractors were the sole sub-segment to have appreciated YtD, rising 8.8% to USD2.7 billion. However, this rise could not offset the 6.1% and 1.7% YtD downticks in loans granted for general and commercial contractors to USD3.88 billion and USD3.65 billion, respectively. Still more recent data shows that the number of construction permits had fallen 6.58% YoY to 2,316 by February 2018. Construction area authorized by permits (CAP) also shed 6.53% YoY to 1.77 million sqm. The largest share of construction permits by February 2018 was Mount Lebanon on 874, down YoY from 943. This was followed by 451 permits in the region of South Lebanon down YoY from 405. Beirut printed 103 permits down YoY from 110. Meanwhile, to the north, permits slumped 29.25% YoY with CAP down 6.09% to 356,192sqm, confirming a depressed market. In February 2018, foreign buyers realized 76 transactions, down YoY from 86, while their share of total transactions remained similar at 1.7%. Regionally disaggregated data reveals Kesrouan claiming the lion's share of total transaction value at 26.41% (USD166.7 million) for the month, with Baabda and Beirut respectively at 20.83% (USD131.5 million) and 19.83% (USD125.2 million).

Central Bank Takes the Initiative

Banque du Liban (BDL) has fostered sector growth by raising the ceiling on subsidized housing loans from LBP800 million (USD530,679) to LBP1.2 billion (USD796,020). For 9M2017, real estate loans reached USD21.25 billion YoY from USD19.68 billion, leading individual credit on 61% of the total, having risen 9.8% YtD. Duly the real estate market posted a 14.49% higher transaction number of 95,856, while transaction reached USD10.15 billion last year, besting the USD8.53 billion of 2016. Duly, the average value of a real estate transactions appreciated from USD101,142 to USD107,062. General Directorate of Land Registry and Cadastre (LRC) data indicates sustained real estate sector recovery in February 2018 boosted by the BDL's expatriate mortgage initiative of late 2017.

A Stock Issue

In a TBY interview, Carlos Chad, the Managing Director of Demco Properties, explained how, “Historically, the sector here never encountered a bubble (although) we are currently on a flat line." He compared the local market, which he labels “oversupplied" to that of Paris, “where there are 20 neighborhoods, each with its own market (where) there is a segment, budget-wise, of residences over USD1 million, of which there are 2,000-3,000 apartments on the market." He notes, too, that while foreign buyers negotiate discounts of up to 20-30%; such purchasing power is not a local phenomenon. With a reported 1,200 unsold units in central Beirut at an average price of USD1.5 million, Demco Properties benefits from being “the only developer in Lebanon to offer residences starting at USD88,000, with penthouses rising to USD15 million." The firm's 240-unit RedRock project was, at time of interview, 78% sold. It is twice over an exemplar in terms of pricing, “What we offer at this development for USD400,000 can only be found elsewhere for over USD1 million." Secondly, it will be the “first project to rely 100% on solar energy in the country, (whereby) residents will not pay for energy."

Data availability is patchy, yet real estate prices have reportedly shed 30% over the past two years on average. In Beirut, according to sector players, a premier two-bedroom apartment will currently set you back around USD1.2 million, with a four-bedroom apartment going for USDD2.2 million. The average price per sqm by one estimate starts at around USD5,500, while up-market first-floor properties go for USD8,000 per sqm. With the local currency being pegged to the dollar, prices are regularly given in USD.

In short, then, the conflict over Lebanon's border is doing the economy no favors. That being said, as the government prepares to fuel the economy through infrastructural improvements, competitive firms catering to the built environment ultimately stand to benefit.