Residential real estate bubble set for stagnation

At one point several years ago, it seemed as if the whole Levant was in love with real estate. Everyone from taxi drivers, delivery boys, gas station attendants and newly married couples, as well as the developers and brokers who were already players in the sector, were looking to make an extra buck. That picture, however, has changed to some extent. “Expectations were that prices would only go up,” says Nassib Ghobril, chief economist for Byblos Bank, about the pie-in-the-sky hopes of average investors in buying flats or becoming part-time brokers. At the same time, this sentiment was the clarion call of the development and real estate community. There was money to be made and everybody was going to make it, while a quick spike in prices and an emphasis on expensive, luxury flats reinforced this view. But that sentiment has failed to reflect the reality on the ground. In the case of the moderately priced flats in particular, there is a large and increasing disparity between the cost of housing and wage levels. Several experts say that although there is a relatively sufficient supply of regular apartments, they have become unaffordable compared to the mean wage level of the average young Lebanese professional. Flats of around 150 square meters can run up to $400,000-500,000, a hefty sum even for young professionals with salaries of a couple of thousand a month, let alone a minimum wage of $450. At the same time, there is an oversupply of expensive flats compared to the expected demand from wealthy Lebanese expats, Gulf nationals and other well-off foreigners. Ghabril notes that statistics show prices are overinflated in Beirut – including such comparisons as the price-to-rent ratio, which shows that on average it will take a Lebanese investor 22 years to recover the cost of a flat if they buy and rent out compared to 11 years in Oman or 15 years in the once-notorious Dubai market. The increasing political instability in Lebanon, including the knock-on effect of the Syrian civil war raging next door, have also contributed to putting a stranglehold on prices. Across the property spectrum – luxury, medium quality or average – prices are not moving upward for flat rental or purchases, experts say. A recent Bank Audi report on the Lebanese real estate sector, noted the following: “The occasional discounts that the Lebanese residential real estate market has seen mostly revolve around the high-end segment which has witnessed some price drops in the 15 percent range, according to Ramco Real Estate Advisers ... With the demand for luxury apartments feeling the pinch of the regional and local developments over the past year-and-a-half, high-end realty developers have been more inclined than others to grant some discounts on flats.” The June 15 report added: “The low to middle end of the market has only seen some occasional price discounts in the 5-10 percent range.” It concluded by saying: “The market is stuck for a while on the flat side of its stairs-like evolution that characterized price patterns over the past two decades.” This comes after a double-digit markup during the four-year period prior to the 2010 beginning of the slowdown, the report noted. Joe Kanaan, a principal at Sodeco Gestion, a property-management and consultant firm, echoes Ghobril’s comments, telling The Daily Star: “The market is definitely slowing down.” He adds that some of the slack on the rental side has been picked up by tenants from Syria who are residing in Beirut to avoid the increasing fighting in their country, but that is not enough to tip the scales It seems that with every negative news report, Kanaan says, fewer renters and buyers are signing on the dotted line for flats. Nabil Sawabini, the CEO of MENA Capital, a residential developer and private equity fund firm, advises that those new to the development and investing fields proceed conservatively in order not to become over leveraged. “It doesn’t matter how smart you are once the bank comes knocking” as a result of taking on high levels of debt. Of the period running up to 2010, he says: “Certain people were newer to the business and got carried away in the euphoria. They were aggressive in the prices they paid [for development projects] and then they found the [expected] market was not there.” Sawabini adds that the current challenge for MENA – a comment echoed by many in the real estate sector – “has been getting more of our products out the door.” He clarifies, however, that the average sales rate has been 60 percent, with one of MENA’s premier developments 100 percent sold out. While MENA has focused more toward the upper end, the firm has started emphasizing projects featuring scaled-down quality flats. Sawabini stressed, however, that the basic amenities remain the same, including gym, swimming pool, play space (for children) running track, ample parking and safety. “The target executive is a person who needs good quality, but not necessarily luxury,” Sawabini said.