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How low can Beirut’s housing prices go?

Dec 05

Lebanon’s real estate market is hurting. Even insiders admit it. “We are suffering,” says Mireille Korab Abi Nasr, head of business development at FFA Real Estate and vice president of the real estate developers’ association REDAL.

At the high end of the residential market, prices are said to have dropped some 30 percent off their 2010-11 highs.

“If you want to sell, you have to reduce your property 20-30 percent,” says Karim Makarem, partner and director at RAMCO, a Lebanese real estate brokerage and consultancy.

There is no consensus, however, on where the market is going.

Jihad El Hokayem, a financial markets strategist and an EMBA lecturer in real estate at the Lebanese American University, predicts a 50 percent fall from the peak – meaning we may only be halfway down the hole.

Hokayem bases his prognosis on the price of oil, noting a striking correlation between crude prices and capital inflows to Lebanon as measured by changes in nonresident deposits in Lebanese banks. These deposits, he says, are a proxy for one of the three major components of real estate demand: Lebanese expats. The other components, he says, are Lebanese in Lebanon and Gulf Arabs, the latter of which are no longer buying property in the country.

The correlation with oil, Hokayem says, is on a 20-month delay. A drop in the price of oil takes over a year and a half to manifest itself in nonresident deposits.

Oil’s precipitous drop began at the end of 2014 and only bottomed out in 2016. According to Hokayem’s calculations, that puts the worst of the worst yet to come. “The lowest was in 2016, so you’re going to see the biggest impact after October 2018,” he tells The Daily Star.

Others doubt Hokayem’s view.

“Any kind of assumption that housing prices are going to fall by 40, 50 percent – this is not going to happen,” says Abdallah Nassereddine, an associate professor of economics at Beirut Arab University.

“People don’t trust money in Lebanon. ... When you have a shaky environment like today, people throw money into real estate. And when you have a good environment, people will throw money into real estate,” Nassereddine tells The Daily Star. “Even if you have a catastrophe, the haven during that catastrophe is real estate.”

Nassereddine also points to steady demand for smaller apartments. “The only demand of the market that is driving prices today is residential demand. And because residential demand is mainly driven by buyers who are middle-income people, the large apartments have no demand whatsoever – so they have actually taken the largest punch in terms of prices,” he says, “The small apartments are still maintaining their demand because the demand is still there.”

While the drop at the high end of the market has put downward pressure on the price of smaller apartments, Nassereddine says, the latter is coming down more slowly, due in part to this demand. “It’s a bit sticky; it doesn’t go down quickly.”

RAMCO’s Makarem tells a story of shifting market dynamics: “What’s been happening over the past two years in particular is that developers have had to really reduce their prices in order to sell because they’ve got a property that’s way too big. It doesn’t match the budget in Lebanon, which is predominantly anything from $300,000 to $1 million.”

Developers saw the warning signs as early as 2011. The shift was so abrupt it occurred in the space of about three years, FFA’s Korab Abi Nasr says.

“[No one] thought the needs and the wants of the consumer, the consumer behavior, would change that fast. And that purchasing power would change that fast.”

By the time developers realized what was going on, many large-apartment projects were already underway and would continue to come online for years to come, flooding the market with giant apartments no one wanted, needed or could afford.

Many of these apartments sit empty. According to RAMCO’s research, there were some 3,600 unsold apartments in Beirut proper as of Nov. 20. This translates to 900,000 square meters of residential space with a value of $3.6 billion, Makarem says.

Others put the figure even higher. Nicolas Chammas, the president of the Beirut Traders Association, claimed there were “millions of unsold square meters in Beirut” during a recent conference, according to a report by Mouhamad Wehbe in Al-Akhbar.

If RAMCO’s figures are right, Makarem doesn’t see a big problem. “All you have to do is sell an additional 720 apartments a year for the next five years and you’ve absorbed that,” he says, adding: “It’s not a frightening figure.”

Still, he says, “You need something to change. Otherwise the stock is just going to grow, and eventually you may have a real issue.”

But until something changes, the oversupply will continue to exert downward pressure on prices. How much lower they will go, nobody truly knows.

“I’m not Nostradamus,” Makarem says.

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