Restructuring Lebanon's Real Estate Sector - Aug. 2018
- Thursday, October 17, 2019
It is a well-known fact that the public authorities lack the readiness to contribute due to the politically entrenched corruption of the unqualified administration.
Despite the Lebanese economy's current market stagnation, reviving the real estate sector is an achievable and necessary task if each of the Lebanese citizens, property developers, banks, investors, and government help to achieve that goal.
It is a well-known fact that the public authorities lack the readiness to contribute due to the politically entrenched corruption of the unqualified administration. However, this newsletter wills the role each party needs to play to avoid an unnecessary crisis.
A. New homeowners
In every restructuring process, the major player is always the local homeowners who time and time again kept faith in the real estate market no matter the country's odds.
Dual home ownership
Engraved in the Lebanese culture is the mentality that every family enjoyed a winter and summer house whereby transitioning in summer to the mountains is a luxury most families can afford to undertake. This was feasible in the 1950-1970 era for the average Lebanese family, however, it is close to impossible today for the average middle-income citizen to buy a house that is somewhere between the city and the mountains, which is why rural areas close to the coast are booming.
Diminishing housing areas with minimal luxuries
Another luxury Lebanese people tend to have are houses of massive areas, high ceilings, and multiple stories. Every person given the option would prefer large houses with a sea view. However, the new Lebanese culture should resemble the new living housing standards in European cities and Western countries with minimum common expenses and good amenities. Currently, the most successful projects in major cities are small apartments (less than 100 m2).
B. Property Developers
Developers are the major players in the housing sector, contributing $22.0 billion to the construction industry and motivating the market to attract foreign investments.
The construction sector is subject to major transformation which is triggering technical improvement. The long-term sustainable future of many major businesses within this market segment is being shaped by their ability to create new and modern built-asset solutions that customers would want to buy and/or invest in whilst optimizing the operational performance and efficiency with which such products and services are delivered.
Most property developers rely on personal experience in their projects; it is crucial today to perform all necessary precautions to avoid any unwanted surprises during and after the development process.
Some of the major considerations are:
Data Analysis
Property developer’s key strategy to a successful new real estate venture is having a long-term vision based on real market data analysis. It is imperative to hire real estate professionals that will perform the following tasks prior to initiating a project.
Property Evaluation Report: this would include a detailed market overview from neighborhood description, order of engineer’s data, real estate directorate data, and unique demographic community values. Then a site development analysis must be performed where one would analyze the project summary details, building structure and MEP, google location map along with surrounding existing projects location map, estimated construction cost evaluation from hard cost, civil works, and MEP. Lastly, an evaluation analysis must be performed by using single factor valuation, multi-factor models, cost income analysis, Monte Carlo simulations, and matrix evaluation method (peer comparison). This would provide an accurate estimate of the actual present value of the asset to be studied.
Feasibility study: this entails an in-depth financial analysis that would cover multiple scenarios (best to worst) where the IRR should fall within 17 percent to 20 percent on a yearly basis. The key variables in these scenarios would be presale, troc deals, and financing.
Execution Process
The market is characterized by a very poor project delivery performance, which is often accompanied by wasteful and very costly actions of dispute. A new order must be designed which will realize a fundamental step change in the overall approach to capital project delivery and new values that integrate the views of enhanced partnership, smart procurement & supply chain management, cooperative working arrangements, unified data management practices, justifiable risk sharing, and ‘open-book’ contracting with transparent performance-based motivations.
After studying carefully the minimum requirements, it is critical that the project must proceed according to the final study with a minimal margin of error. This is why the risk is enormous for small players in the absence of clear market strategies and data analysis. Product and quality selection is becoming an essential part of the project’s success, developers must establish the principles that an entity shall apply to report useful information to users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer, including qualitative and quantitative information. However, greater transparency may be perceived differently by different users – whilst shareholders, lenders, and competitors get greater insights into the contractor’s business, the information may be considered commercially sensitive by management.
Banks
Developers are urged to reconsider injecting funds in the real estate market instead of accepting higher interest rates for their savings; the logical reasoning behind this decision is the availability of distressed properties which could be purchased at attractive prices to compete with the 9-10 percent interest rates, taking into considerations the low-risk factor of both decisions.
Even though the highest delinquency rates in a bank are real estate sector related, most of the prime real estate loans were mismanaged and too aggressive compared to market expectations and therefore affected the overall quality of real estate loans. Banking policymakers must adapt to the current market necessities by putting forth an allowance for higher risks housing loans at convenient interest rates. While construction projects are tougher today and building activity has been slowing down since 2005, banks should be aware that the construction industry in Lebanon will sustain its workflow going forward due to the $500 billion project estimate for the reconstruction of neighboring Syria.
Bank deposits exceeded $182 billion in a distressed economy, corrupted system, and stagnant market, knowing that the default rate for housing loans for the past 10 years was recorded at less than 1.0percent, however; banks are reluctant to finance real estate projects due to the low demand for new homes and commercial units; instead they are satisfied to lend the government through treasury bonds.
Central Bank
The central bank has a more critical role to play whereby it is mandatory to resume the subsidized housing loans with tighter restrictions to help low and middle-income families purchase their homes from the available stock of small units in urban areas.
Lowering interest rates is another issue the central bank has to tackle; even though the US Federal Reserve decided to increase the interest rates, the central bank of Lebanon should design a new vehicle to achieve lower interest rates in the local market.
Dr. Riad Salameh, the central bank governor, is one of the best acting governors in the world; this has been proved through the stability of the local currency during the dramatic events and political instability of the state. Given that the foreign currency reserves at the central bank are valued at $41.2 billion and the Gold reserves at $12.5 billion, the stability of the currency at least for the near term is evident. This will increase the positive appetite of investors to get involved in new and ongoing projects, while a new culture for investors must be accompanied by protective measures through new regulations to ease any conflict between banks and borrowers.
Government
The race to establish market importance under a revised demand and supply perspective is most definitely on the move. This will be driven by financial and demographic necessities, initiatives associated with the new government’s vision as well as tourism-related projects, and a commitment towards infrastructure.
Political conflicts had no influence on the economy until early the 90’s, all disputes were challenged and resolved by political parties and the state's establishment. Currently, the property market and many other sectors are seriously affected by the political disputes. Some of the key strategic initiatives which the government is facing will involve the private sector taking a more active role in the economy, job generation for a rapidly growing labor force, increased localization and attracting foreign investors through updated laws, availability of public records and the easing of restrictions.
Fiscal reforms will need to be launched over the medium-term with measures to increase revenue by nontaxable sources, such as further energy generation reforms and controls on public spending.
The culture of privatization of some key state-owned entities, such as the Power Generation, Infrastructure etc. is a phenomenon that most economies go through as they start to mature and change to a more private sector-led economy.
Fundamental to the success of this transition will be the private sector's involvement. The use of public-private partnerships, attracting foreign direct investment and the privatization of state-owned assets are key elements to achieve the new government’s visions for socio-economic reform and fiscal balance.
Conclusion:
Major players must adapt to new standards and regulations arranged by the Central Bank and the private sector. The limited role of the public administration should maintain minimum involvement until the new government proves to be qualified to tackle the real estate sector.
It will be challenging to reinvigorate the real estate market, but it can be achieved while avoiding a crisis in light of a limited consumer purchase capacity and political stagnation.
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.
The views expressed in this article are those of Mr. Hayek and do not necessarily reflect those of Annahar.
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