December 16, 2016

Why real estate prices in Lebanon are falling

Beirut – The real estate sector and its derivatives represent 20% of Lebanon’s gross domestic product. This makes it reasonable to assume that what happens in that sector provides a strong indication on the direction of the Lebanese economy.

Many argue that the real estate bubble in Lebanon has burst. They point to empty apartment buildings as proof that the property market that once thrived in the heart of the Middle East is no more. Optimists deny there was a bubble in the Leb­anese real estate market, insisting the drop in prices is exaggerated.

Technically, a “bubble” occurs when there is a wave of frantic buy­ing, mostly involving borrowed money, which drives the prices up without a reasonable explanation. This is true for real estate and most other commodities.

“The asking prices of apartments under construction in Beirut has dropped 1.2% in 2015,” said Karim Makarem, director of Ramco, a property agency in Beirut that has been in the business since 1973. He dismissed talk of a bubble as unre­alistic.

The elements of a bubble are not there, he said, adding: “There is no serious leverage in the prop­erty sector and demand will always be there, even if it slows down at times. Life will go on.”

Makarem recalled how the mar­ket survived the 1975-90 civil war and recovered stronger than before. “The same will happen now,” he in­sisted.

Dan Azzi, the former chief execu­tive officer of Standard Chartered Bank, stated a far less optimistic view recently. He told a July con­ference in Beirut on the Lebanese economy that the real estate sector was a classic bubble and that “it is at the beginning of a major correc­tion”.

There is excessive supply and lim­ited demand. Demand, he added, is split into three sources: local, Leba­nese expats in the Gulf countries and Gulf nationals.

Azzi said that myths and over-optimism played a major role in cre­ating the bubble. “Today we are at the start of the curve, which I will call the destruction of myths and dreams. Such myths include the il­lusion that ‘this never happened here before’,” Azzi said.

Apart from the fact that a real-es­tate crash has happened in Lebanon before, he said, people forget that there is always a first time.

Azzi gave the ominous example of a Japanese in Hiroshima who was convinced on the eve of August 5th, 1945, that his city would not be dev­astated by a nuclear bomb “because it never happened before”.

Azzi described how the local de­mand for property was restricted by the limited income of Lebanese people, while the demand by ex­pats in the Gulf countries had been adversely affected by the drop in oil prices, which resulted in lay-offs of many Lebanese workers in those countries. The third source of demand, from Gulf nationals, has eased as many of them put their properties on the market, having lost interest in Lebanon altogether.

Leverage is an important element of any economic bubble. It was the major cause of the 2008 housing crisis in the United States that led to global recession. Optimists in­sist that restrictions imposed by the Lebanese Central Bank on mortgage lending prevent leverage from be­coming too dangerous. Others are critical of the bank’s policy, while some dismiss such restrictions as easy to circumvent.

The Central Bank demands that the buyer provide a down pay­ment of at least 30% of the price of property while commercial banks provide the rest as a low-interest loan. To help move the market, the Central Bank also offers subsidised loans as high as $500,000, which are subject to certain restrictions aimed at preventing speculation.

Jihad al-Hukayem, a real estate expert, is critical of the Central Bank policy “Why offer such high subsi­dised loans to one person while the same loan can be divided among three buyers to purchase less ex­pensive housing?” he asked.

Still, some developers offer mortgage plans outside the bank­ing sector that are less restrictive, yet more dangerous. One develop­ment company initiated a program in 2014 that offered so-called teaser loans. With a down payment of 5,000, clients could purchase apart­ments under construction valued at $300,000, provided 30% of the price was settled by delivery date, scheduled for the end of 2017.

Azzi maintains that some lenders get around the law by accepting less than 30% down payments while on paper they maintain that 30% had been paid. This is not only leverag­ing but sub-prime lending, he said.

Hukayem said property prices are not determined by the asking price, but by the last selling price. He said the reason for the fall in prices was the reduction in the costs of build­ing material and the drop in value of the euro.

“However, the main reason is the drop in oil prices below $65 a bar­rel,” he said, adding that the effects of the fall had not yet been felt in Lebanon. He agreed with Azzi that the market was at the beginning of a downturn in prices.

“Prices in Lebanon in general, not only in real estate, are on the way down for the coming five years,” he said, adding it was better to rent rather than purchase an apartment.

Source:

http://www.thearabweekly.com/Economy/6041/Why-real-estate-prices-in-Lebanon-are-falling

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