Lebanon: Real estate moving along

Lebanon’s real estate sector, like the economy in general, is enjoying a surge, with record levels of sales and high returns for investors. However, there are concerns that the property growth could become too much of a good thing, with the rapid increases becoming unsustainable and a correction on the way.

According to figures released by the state’s Directorate of Real Estate in mid-June, there was a 41% increase in property sales in the first quarter of the year compared to the opening three months of 2009. In total, the 22,000 property transactions conducted throughout the quarter had a value of $2.1bn, a new record. Combined with lower interest rates and an easing of loan restrictions by local lenders and state housing assistance schemes, this record may not stand for long, with some analysts predicting an even stronger performance in the market for the rest of the year.

While most of the sector is still attracting investors, there have been some cautious notes being struck over the property boom. In its latest report on the state of the Lebanese economy, issued in early June, the IMF said the country was reaping the benefits of improved stability, with the economy performing strongly despite the general downward trend in the region. Though predicting that GDP could grow by more than 8% this year, the IMF did warn that the economy was still vulnerable to long-standing weaknesses such as high state debt levels and the slow pace of fiscal reform. Both criticisms could have been made – and often were – at any time over the past decade.

However, the fund also warned that new vulnerabilities could emerge over time, citing the real estate market as being of potential concern, as risks could emerge in the real estate sector if property prices and credit availability continued to rise rapidly.

“While prudential standards for housing and real estate lending are conservative and bank exposure to these sectors is limited, care should be taken that the recent price surge and accelerating credit growth do not feed off each other to produce a real estate bubble,” the report said.

Andreas Bauer, the IMF’s mission chief for Lebanon, says it is vital to address these vulnerabilities, suggesting that the government look at measures to take some of the heat out of the property sector.

“If credit growth accelerates further, the authorities should consider capping and gradually phasing out incentive schemes that provide exemptions to reserve requirements,” he said in June.

Lebanese officials have been quick to reject suggestions that the property market is going bubble shaped, with central bank deputy governor Saad Andary saying that only a fraction of the money being poured into the sector is being floated from bank loans.

“Out of each $100 spent on property acquisition, not more than $16 to $18 are financed by banks,” Andary told the Bloomberg news agency on June 18. “The rest is hard cash, mainly from Lebanese from abroad. We have no fear from a housing bubble.”

Central bank governor Riad Salameh agrees, saying that there is no bubble in the market. “The growth of Lebanon’s real estate is natural and normal and will not collapse,” Salameh told a conference in June.

The rise in Lebanon’s real estate prices is not so much as the result of a shortage of residential property stock, at least in the upper end of the market; rather the climbing costs are being driven by demand.

A study by Beirut-based real estate advisors RAMCO estimates that there are some 2m sq metres worth of residential property currently under construction in the greater Beirut area. Much of this construction work is priced at $3,500 per square metre or more, out of the range of many locals. Indeed, the RAMCO report, issued in mid-June, said that up to 45% of all buyers were Lebanese expatriates, with resident nationals buying into the lower- to middle-end properties, priced at around $250,000 per unit.

A majority of the 350 separate buildings comprising the 2m sq metres of floor space will be completed by the end of this year, the RAMCO study said, with most of the stock expected to be snapped up.

As long as Lebanon is able to maintain its recent run of political stability and the good economic performance it has been staging over the past two years – having shown itself to be resilient to a number of negative local and global factors – there is little reason that the country’s real estate sector should not continue its surge in growth.