The Hayek Group Monthly Newsletters

Real Estate Engineering Plan in Lebanon – Jan. 2020

 

Lebanon experienced hard times since the mid-’70s, 17 years of civil war, foreign occupations for 23 years, 29 assassinations, an Israeli invasion of the capital in 1982, a long political stagnation and a high scale corruption in the public sector, yet the real estate market potential strength of recovery is still there.

This is a solid proof that the real estate system has an immunity to survive. The new government must save this system by adapting a real estate engineering plan similar to the Central Bank’s financial engineering plan in 2016 and should take necessary measures similar to an international crisis such as the great depression after the US stock market crash in 1929 and the mortgage crisis in 2008.

  1. Central Bank Financial Engineering Plan

The financial engineering plan was carried out between Lebanon's Central Bank (BDL) and commercial banks in September 2016 with the aim of strengthening banks' balance sheet and to bring in new $-funds to BDL through banks. The Financial Engineering Operations improved BDL's balance sheet as well as Lebanon's credit profile. Some of the main objectives achieved by the financial engineering operations are:

•             Strengthening BDL's foreign currency assets which have reached around $41 billion.

•             Banks would be able to constitute additional general reserves and to reach the BDL targeted capital adequacy ratio of 15% (end 2018), which is above the international capitalization requirements (Basel III).

•             Liquidity in local currency (LBP) has increased which enabled banks to expand their credit portfolio, especially to SMEs.

•             Interest rates have decreased leading to the improvement of the government debt profile by reducing the cost of borrowing and as a result of this improvement, international financial institutions have encouraged their clients (pension funds and asset managers) to invest in Lebanese Eurobonds.

•             The financial engineering mechanism improved the balance of payments by turning a cumulative shortage of $1.7 billion in May 2016 into a cumulative surplus of $555 million in September 2016.

           •             Lebanon's rating and outlook have changed from negative to stable.

  1. US Housing Catastrophe Plans

Image result for 2- US Housing Catastrophe PlansState interference in saving the system is vital during any crisis, probably the best-known economic catastrophe in recent history which is the Great Depression, that followed in the wake of the stock market crash of 1929. The national unemployment rate was nearing 25%. Eventually, countless Americans who had lost their jobs lost their homes as well. To solve this growing problem, The Home Owners' Loan Corporation (HOLC) was created by the government, one of the principal government bailouts of the Depression-era. This federal agency’s main task was to refinance home mortgages that were in default or at risk of foreclosure. The HOLC’s final year in 1936 had provided just over a million new mortgages and lent out approximately $350 billion ($750 billion today). President Roosevelt's basic philosophy became known as the three "R's" of Relief, Recovery and Reform.

After house prices crashed in 2008, the Federal Reserve owned $1.8 trillion of mortgage-backed securities (MBS), Buying all those MBS from Fannie Mae, Freddie Mac and Ginnie Mae, The Fed could have bought all 7 million completed foreclosures from 2006 to 2013 for that $1.8 trillion. This operation may have helped Wall Street System but it didn’t help homeowners. The bailouts of 2008 were also politically unpopular, with many critics insisting that government should not intercede in the dynamics of a free market.

  1. Lebanon’s Real Estate Engineering Plan

The real estate system in Lebanon needs an emergency survival plan, this challenge is added to the set of tasks that the new government has to tackle. Such a plan should improve the appetite of the private sector to invest in the real estate market and help new homeowners to finance their homes for 15-30-year period.

The proposed Real Estate Engineering Plan is a necessity to save the long-time healthy real estate sector in Lebanon that survived for the past 60 years. Without such a plan, the real estate sector will consume the remaining market strength until the private sector, once again takes the initiative accordingly.

In order to discuss any plan, facts and data-driven analysis must be performed and priority selection must be implemented based on the figures provided by the market.

  1. Housing Industry Facts
  1. The Central Bank has to lay down clear rules for home loans and should provide an attractive bouquet for expats to inject fresh money.
  2. The Public Corporation for Housing (PCH) is a good example to carry on such loan programs knowing that the default rate was less than 1% in 2018.
  3. In 2016 - 2017 and 2018, construction and real estate activities recorded an average of $8.1B and $2.1B respectively representing 19% of the average GDP for the same period. While Dubai Real estate contributed to 13.6 percent of emirate's GDP, in the Kingdom of Saudi Arabia the National Transformation Plan aims to raise real estate's contribution to GDP from 5% in 2016 to 10% in 2020.
  4. Fraction real estate ownership is a promising mechanism to provide investors and homeowners a safe platform which will help increase investment spending into the real estate sector by offering up to 20% of home ownership at discounted rate.
  1. Dispute Resolution Reforms

Real estate disputes in the Lebanese courts take long time before ruling, this matter has an adverse impact on the building industry. The plan must involve a number of possible legal remedies to help Investors overcome this time-consuming matter.

Normally, housing industry disputes end up with negotiation for solutions. If negotiation fails, litigation is often initiated. Mediation is another option which involves the professional intervention of a third-party to help resolve disputes that arise between two or more parties.

Most real estate contracts (such as the C.A.R. or FIDIC form) have an arbitration provision providing for optional binding arbitration. If the parties all initial it, it becomes a requirement of the contract. In arbitration the parties agree to have a supposedly unbiased third person whose decision they agree to be bound. It is a settlement technique in which a third party reviews the case and imposes a decision that is legally binding for both sides.

  1. Market Demand

Lebanon is a small country (10,452 km2), the real estate and housing activities are mainly in Beirut and surrounding Mount Lebanon District. The market demand is attracted by the business district and the proximity to the job location. Local industries are unlikely to contribute in a large scale to the market trend. In contrast, let’s look at Las Vegas, it has one main industry which is entertainment. If Vegas’s entertainment industry crashes (2008) and the general demand for the city goes down, wouldn’t it be more likely that the real estate market decreases may start occurring?

Another example are Michigan cities that crashed alongside Detroit when the automobile industry tanked. Real estate went down in those cities. Not only did people stop moving there because of it, but people had to move out of those cities! That is where the criticality of the market comes into play.

  1. Finite Analysis of the Plan
  1. Establish a Ministry of Building and Housing
  2. Provisional reduction of all taxes related to property registration including inheritance
  3. A reduction of 50% for Building permit fees and rental values
  4. Update the administrative process of building permits thru an E government system
  5. New regulations to protect buyers of under construction projects
  6. Set a framework to promote affordable housing units in metropolitan areas.
  7. Review all income taxes rates for building industry
  8. Ease of clearance from the social security
  9. A new mechanism to refinancing loans at lower interest rates
  10. Unification of the property evaluation process
  11. Private sector prequalification for building inspection and appraisal
  12. Regulate state agents and real estate brokers activities
  13. Promote Rent with an option to buy mechanism
  14. Allow non-citizen’s property ownership for a limited period
  15. Release official building and housing data for public
  16. Finalize national cadastral plans
  17. Establish a new juridical system for building and housing disputes
  18. Develop an anti-corruption control
  19. Initialize a national city planning and zoning program
  20. Provide incentives for Green technology and energy efficiency measures

Conclusion

The current protests in Lebanon for the past two months injected a new dynamism to the Lebanese and Lebanese living abroad, the call for public reforms and anti-corruption process is demanded strongly beyond expectations for the first time in four decades. Lebanon is a small economy; the country’s GDP is less than the revenues of Pepsi Co ($64.6B in 2018) therefore the international community can easily overcome the small scale current crisis compared to other countries.

The process of oil exploration will start on February 2020, when the expected fields are confirmed by Total, the country’s rating will regain a positive position, Local banks will recover from the cash shortage using their extensive experience in this sector and the country’s economy will certainly recover by adapting a new successful economic model.

Lebanon is expecting a formation of a new government headed by Dr. Hassan Diab an AUB scholar, along with the president General Michel Aoun. For the first time in the modern history of the republic, the selection of the ministers is done as per their high qualifications without the influence of the current corrupted political parties, the newly cabinet will have a chance to uplift the country’s economy and earn the trust of the international donors and creditors and adapt an engineering plan to support the housing and the real estate sector among other sectors, similar to the financial engineering plan of the Central Bank in 2016. If this plan is not implemented it may play a key role in contributing to the downturn and acts as a drag on recovery of the economy.  

The free-falling economy, price hikes, and a severe dollar liquidity crunch, 50% devaluation of the national currency and the deteriorating economy, the drain of foreign currency and the banking worries all add up to affect the real estate market which is still holding at the narrowest edge of a downturn correction but for how long?

Abdallah S. Hayek
CEO, Hayek Group
Beirut, January 2020

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