A wobbly real estate sector nearing what might be described as a “bubble,” driven by political instability and unjustified valuations.
There exists a mismatch between purchasing power and real estate valuations exerting corrective pressures.
As the title clearly states, this article is about the real estate sector in Lebanon. It will be the first of many articles, as it is difficult to capture all the intricacies of this sector in only one article. In this first article, I try to understand the current situation of the sector, I also analyze current market prices and compare them with other countries. The idea for the article stems from the fact that real estate has been the sector of choice for most investments in Lebanon for the past 5-6 years as prices rose dramatically during that period.
Current Situation: At the present time, the situation of the real estate sector in Lebanon is not great. It is characterized by very low activity (very few transactions) and decreasing prices (this is a new trend that is almost never clearly stated). I believe there are two main reasons for this condition: first, the unstable local and regional political situation is seriously deterring people from investing big sums of money into fixed assets while unsure of the future of the country they are investing in. Second, the price levels have reached levels so high that are totally unjustified and out of reach for the vast majority of the people who would normally constitute the real demand. In fact, I believe we are well into bubble territory, and a correction (the extent of which is difficult to determine at this point in time) is inevitable.
Market Prices: Here, let us give a numerical example to illustrate how much the current prices are out of sync with the purchasing power of the people who should be the target audience for this sector. Assuming a price/sqm of USD3,500 (which is the average for most neighborhoods in Beirut), a 200 sqm apartment would cost USD700,000. From a buyer's perspective, a USD700,000 apartment implies a monthly installment of USD5,162 over a period of 20 years (including interest – at the prevailing levels of interest - and registration fees). Now, given the fact that the monthly mortgage payment cannot exceed 1/3 of a person’s monthly income as per Central Bank regulations (that are strictly applied by Lebanese banks); this means that the person buying this apartment should be earning at least USD15,488 per month! Anyone who knows the job market in Lebanon knows that extremely few people make that much money. The consequence of what we explained above is that people who buy out of income are almost ALL priced out of the market; which by itself reduces demand dramatically. What is left is people who buy out of wealth. However, most of these people already have houses (in most cases, multiple houses) and don’t need to buy anymore; moreover it is mostly these people who bought during the past 5-6 years, implying that the size of demand constituted by people who buy out of wealth has shrunk substantially.
Comparison with Other Countries: To make things clearer, we compared real estate prices in Lebanon with ones in few countries around the world selected randomly (we tried to avoid countries that have special situations like Monaco, or are in wars like Egypt or Syria). The table below illustrates the findings:
This table shows that in real terms (comparing apples with apples), real estate prices in Lebanon are the highest among the 8 countries present in the list as the ratio of average real estate prices / GDP per capital is the highest. If we take this same logic further, we can compute how much should the price of m2 in Beirut be if the ratio of price/sqm to GDP per capita would be similar to the other countries in the list. The table below illustrated the findings:
So, this table shows that if real estate prices in Beirut are to be the same as in Dubai (relative to purchasing power parity), the price/sqm in Beirut should be of USD1,381 while in reality it is of USD3,591; meaning that the current prices are 160% higher than what they would have been if we use Dubai standards! Same logic applies for all other examples, so prices in Beirut should have been of USD2,357 instead of the current USD3,591 if we were to follow Montevideo’s levels (Uruguay is a country that we chose on purpose as it has many similarities with Lebanon, size of population for instance).
The conclusion of what was stated above is that current real estate prices in Lebanon are very high and unjustifiable, both in comparison with other countries in the world (countries that have much better economies, security, and stability) and also relative to what the people in Lebanon can afford.
Anonymous - Well basically the logic behind any market is very dependent on its economic freedom .Economic Auto regulation is a concept that theoretically Is only applicable in free markets . However maybe Lebanon is just closer to a medieval politico-economic-social even cultural structure very similar to feudalism where monopoly of the land was held by an elite ruling class . Demand and supply laws do not impact pricing in the case of monopolies. its all in the hand of the elite easing the tap when stability is beneficial for them and squeezing it when instability can be used for proper purposes.
Miranda - Excellent article, Wael. I am so frustrated by greedy landlords and the extortionate prices they demand. I make a good salary for this country, and yet have almost no disposable income left after my parasitic landlord extracts her pound of flesh. This is a good article from Al Akhbar; I thought you might like to read it http://english.al-akhbar.com/content/beirut-rich-only-average-1m-residential-apartment
Wael Abdul Rahm... - Thank you very much for your note Miranda. In addition, I want to thank you for the link you shared, very good article indeed; I enjoyed reading it.
Anonymous - This article is great and i can relate to it perfectly. Even though my income is decent, I still feel prices in the market are higher than what they should be and I'm very discouraged to buy. In some limited ways, what has held a bit the prices from falling further is the influx of Syrians who are also purchasing..but I see this as very temporary. The amount of "for sale" signs is the best indicator.
Wael Abdul Rahm... - Thank you for your note. It is your words and people in situations like yours that drove me to do the research and to write the article in the first place. I am glad that you can relate to it. Like you, I believe the current situation is temporary and prices will eventually have to drop.
Jhony A. - Few new comments: The price of land is just a lagging amplified indicator of the prices of house as land itself cannot generate money returns usually except by holding and buying at a profit, or by construction on the property and selling of houses or other. Owners of land still price in a yearly appreciation of 25% in the price of constructed property, which is neither logical nor possible. Since land doesn't have maintenance cost, and value of a land doesn't depreciate contrary to built property and since money deposited in the banks still barely yields any interest, their prices will be sticky for a while but will follow at some point if house prices depreciate. The land scarcity problem is actually only an illusion created by the lack of decent infrastructure, and the special treatment that Beirut is getting comparing to any other part of Lebanon (in Electricity specially). This lack of infrastructure is also another reason why prices here in Lebanon are ridiculously high. Furthermore, the price of the square meter in all of Lebanon cannot be compared with the real estate of Lisbon for example. It will need to be compared with the price of real estate in Portugal as a whole. We can only but compare oranges to oranges. that's why we also need to take into consideration, that what developers market as a 120m2 place in lebanon is in fact smaller than a 100m2 in any other part of the world. As for Expats, we have two kinds. The first kind: Some actually went abroad to get a decent salary to afford a place in Lebanon. Many of them will never afford returning to Lebanon and continue to pay the mortgages they contracted, and as such will want to sell their property at some point. A few will be able to return after having set aside enough money to get rid of their mortgage, but might never regain their purchasing power they got used working outside of Lebanon. So all in all, only a few of those, will ever get back to Lebanon and stay. That's the way it was, that's the way it will always be. The second kind: They just invested in the real estate sector while it was booming. Some made a decent profit, some will sleep it over to the next round. GCC citizens real estate purchases have also different facets: There are the ones who purchase a summer house here. Except for the very rich of them, I think lots now consider lebanon a very expensive destination. Most of the Rich already have their multi-million place anyway. There is also the "investment" part of their involvement that is so similar to what happened in Dubai. They came in at low prices and got out at high prices. However, contrary to what happened in Dubai, Lebanese are stubborn and prefer to hold their houses waiting for the inflated prices they ask rather then sell at the price point where demand exists and is real. Furthermore, the influx of Syrians to Lebanon helped many developers by providing many purchase and rent opportunities that would have never existed anyway. And last, the Lebanese Central Bank is extending a seemingly easy monetary policy which allows people to overextend themselves to purchase property, policy that might bite both consumers and the local banks once interest rates start increasing. ( Loan Payments will increase for the all who are paying off their mortgage, but that increase will also impact local banks and the central bank who will still bear 60% of that interest rate increase.) Last but not least, while some developers are focusing on small real estate and realizing good sales, this is not a very sustainable as the purchasing power of the lower middle class and of the poor is rapidly deteriorating, with salaries constant and inflation very high. The only question they ask themselves before buying the house is: can i get the loan ? and yes they can because of the super easy lending policy. They don't ask the right question that is: Can I afford the load ? and no they can't because they are barely affording to pay it, because interest rates and their mortgate payment can only go up, and because there is no chance they will earn substantially more in the near future. Conclusion: Will the real estate market prices in Lebanon drop ? Only time will tell. What I can tell is that a 20 to 30% global drop in prices will give second wind to all the Lebanese economy. If that doesn't happen soon, the Lebanese economy will continue to suffer and might even experience excruciating pain until normal inflation catches up with the real estate prices or until everything crashes down spiralling out of control.
Wael Abdul Rahm... - Thank you Jhony for your comment. You make a lot of valid points, and i agree with the majority of what you say. Most of all, it is your concluding remark that I like a lot: prices will have to drop, otherwise the whole economy might be looking at a really big problem in the near future (as if it needed more problems).
jad mouka - With that being said, add to it the lack of liquidity in the market and the fact that developers are paying contractors with apartments instead of cash money, i think we are heading into more and more inflation that eventually will pop. Lots of companies now working on the market, are working for apartments instead of cash. suppliers are most of the time giving credits facility more and more with delayed payments reaching up to 12 months. we have taken the saying "Walking on the edge" to a whole new level. Imagine what would happen if the currently being developed projects does not get sold, imagine if the demand halts to a total stop. the circle would fall apart. contracting will go bankrupt, suppliers will not get their money back, banks will not get their money back. The slightest devaluation of the real estate market will take us back to the dark ages with the lack of government investments and ability to hold the economy stable. We are looking into the real estate bubble that happened in the usa years ago with only one difference that the debts are not being traded in the share market which gave it the fast fall off, it is gonna be slow and painful. We are sitting on a time bomb.
Wael Abdul Rahm... - Thank you Jad for your pertinent comment. You raise a lot of points that I will be talking about in my next article as i will tackle the effect of what is happening in real estate on the overall economy. I believe the real estate sector is putting the country at risk. Just look at the subsidies the central bank is giving through the loans and you can see that the situation is serious. Like you, I believe we are sitting on a time bomb (very well put).
tony - The price per m2 used is high. Many neighberhoods are much cheaper. The benchmarks themselves vary a lot between themselves. Dubai is just out of a bubble and cannot be used. Historically Lebanon has much more resilience than all benchmarks, plus we are not much higher ten our peers. Plus capacity is just and debt is limited in the sector. This article is at amateur level with all due respect.
Rich S - I have been seeing coming five years ago when our GDP improved in 2007. And prices increased quickly between 2008 and 2011. But to people who are counting on fuel and oil, just to let you know that if you look at Brazil which is a bigger country than us after the oil and the improve of their economy , the gap between the rich and poor have increased which due to corruption. Especially in a democratic country like Lebanon with a big time corruption this is what will happen. If we get our oil we will get more jobs but the wages will still be low and not enough to buy houses. Also if you consider our immigration it is in the peak right now and in the long run people who are looking for houses right now will back up and place it for sale, once they have kids in a different country because their kids won't come back which will also increase the supply. Either way we look at it it is a loosing situation in the long run.
Anonymous - This article failed to mention the land scarcity in Lebanon. THERE IS NO LANDLEFT IN LEBANON!! Beside , most of the apartments in Lebanon are owned by Lebanese expats. Moreover, land prices are higher than most of these countries that the writer mentioned, and that plays a big role in the price of real estate.
Wael Abdul Rahm... - Thank you for your comment. Please refer to my earlier comment regarding the argument of land scarcity. I know this is a vastly used argument, but it doesn't matter how much land is left if you are pricing at a level which no one can afford (which is the case right now). First of all, prices will have to adjust to a level where transactions can occur (in order to have a market for the forces of demand and supply to interact) regardless of land scarcity; then we can talk about how much land is left and price it. jm, you make very good and valid points. Thank you.
jm - There is no land left in Central Beirut...If you go out of beirut the price per SQM stays high from 2000 up to 3500$...the writer is talking about the average price. in beirut the prices are at least 4500$ per SQM without mentioning that 70% of beirut consists of old buildings that are being demolished and reconstructed. So the land scarcity is not a valid argument
GBA - All this price for real estate and you don't even have proper electricity nor internet services?
Wael Abdul Rahm... - I know... how ironic... and some people claim that prices will go up even more, go figure!! Common sense and logic have died in this country.
SG S - It'd be good to understand the following while making an evaluation: loan ratios or average down payment, are the purchases reliant on prices increasing in the short term (Are people flipping houses?), the rental property market (are there even buildings that are rent only?), is the rental value enough to cover the payments on the loan? What is the liquidity position of the actual buyers? These are all important because if there is credit crunch, the price level will only be impacted if the buyers are in a liquidity bind. If however they can sit on it and have staying power, then they simply won't sell. Finally, what is the average sqm that can be afforded? Is new construction in Beirut for large apartments or small? What may happen is simply smaller units that are more affordable. That is what happened in Europe and the populated cities in the US.
Wael Abdul Rahm... - Thank you for your comment. I will try to answer come of your questions: - around 6-7 years ago and earlier, people did not use to flip houses at all. However, recently, flipping houses has increased tremendously due to the illogical rise in prices of real estate. I personally know of people who own 12 apartments in Beirut (very much into flipping houses). I believe this is one more reason why prices will have to drop, as this is not real demand by people who want to live in these houses, but just specualtion - rental yields are very low, especially for big and expensive apartments. I would say, rental yields reach a maximum of 4 to 5%, but something around 2% is more accurate. And 2% is a very low rate (you are better off putting your money in the bank for 5% interest and capital guaranteed) - liquidity position is a case by case. Some buyers have the cash while others take loans. - In my opinion, the average price per sqm that makes sense and can be afforded should be around $2,000, if not less - New construction in Beirut is more skewed towards smaller apartments, which only makes sense, and which also proves that the prices are high and developers are looking for alternative ways to sell I hope this makes sense.
RA - Hello Wael , do you have any statistics about the finances of the speculators ? The people you know that own 12 appartments , did they take loans to purchase these assets or are they just very rich people looking to long hold those assets ? and do you know if it s the banks that are involved in holding assets in order to try and sustain real estate pricing. It might be interesting to explore that in another article no ? thank you
Wael Abdul Rahm... - Hi RA, thank you for your comment. You are absolutely right, you raise very important points through your questions, and they are definitely worth exploring in future articles. I hope I can gather enough data and information in order to write a useful article in that regard. Now let me answer your questions: It is extremely difficult to have statistics concerning the speculators as they are not defined as such in any database. However, from my personal experience, they are in general very wealthy; some of them buy with no debt, but the majority actually get loans (especially with the subsidies that the central bank is giving). However, it is important to note that regardless of the method of financing, very few buy these assets looking to hold them for a long time; in general they are looking to flip them quickly (within less than one year). Now for your last question regarding the banks' involvement in sustaining real estate pricing, I don't think that the banks are explicitly and intentionally trying to hold real estate assets; rather they are forced to do so in most cases (foreclosure for example). They don't want to hold real estate because most of them know that these are assets with depreciating value, and in the current situation, quite illiquid. I hope that was insightful, and thanks again for your constructive comment.
Wael Abdul Rahm... - Finally, I wanted to thank you all for taking the time to leave your comments, which are all constructive and valuable.
Wael Abdul Rahm... - - Jad K. and Zee: you have similar comments that I hope to have addressed in my comment about the scarcity of land in Beirut and the effect of expats - SLC: the article mentions the prices in Beirut not Lebanon, and the source is duly mentioned (I have no input in these numbers). Agree with you on the role of the municipalities. As for your optimism for the future, I have to vehemently disagree. I find the current situation extremely bad, and getting even worse. I also believe that the vast majority of the people in Lebanon are very pessimistic about the country's situation which would put downward pressure on real estate prices. - RA: thank you for your comment. I think you are absolutely correct; and I might add that you can walk around Ras Beirut at night and easily notice that most of the new buildings are not lit (implying that most apartments are vacant); which confirms that there is no shortage of supply despite all the rhetoric about shortage of land - Elie: I love your comment! I agree totally with you, and this is what drove me to do the research about this topic and write this article. You wrote the most important sentence: "Prices are way unjustifiable" - Anonymous (3): can you please share with us how did you come up with the 15% figure? - Lebanese: Thank you for your comment. I totally hear you; and I wish that my humble article can make a change, even if a small one, in increasing awareness about this topic, and consequently in helping people in your situation.
Wael Abdul Rahm... - Now, let me answer your individual comments: - Anonymous (1): Thank you for the comment - Julien: the price/m2 is taken from a source mentioned in the article. And I agree with you, the Lebanese way of calculating areas is often flawed (at least exaggerated) - Paul A.: I answered the scarcity of land in my previous comment. As for the other points you are making, i have to disagree as I see the situation as bad and worsening (definitely not improving). I believe the reply of Jhony A. is a very good one to your points. - Jhony A.: can't agree with you more. Your points are very valid, and I think the instability in Lebanon adds to the real estate bubble - Joe Sakr: I hope I have answered your points in my previous comment - Lost Lebanese; I agree with you 100%. You summarized most of my article in your comment - Anonymous (2): If invited, I will happily talk about this subject on TV - Tariq Aldowaisan: thank you for the comment. I don't know much about the situation in Kuwait but I hope it is not as bad as in Lebanon
Wael Abdul Rahm... - There are two points that were brought up in more than one comment that I would like to answer: 1. The effect of Lebanese expats. In fact, I agree that Lebanese expats account for some of the demand, and have largely contributed to the increase in real estate prices. However, I wanted to focus on the people living in Lebanon as they constitute the majority of demand, and ALL of REAL demand (they are the ones who will actually live in the apartments). 2. The scarcity of land in Beirut is a nice argument but it doesn't answer the real question and surely does not justify the sharp increase in prices. Let me explain: if you have 1 m2 or 1,000,000 m2 of land left, it has no effect if the asked price is above what everyone who wants to buy can pay. You must price your asset in a way that is affordable for the people who want to buy or no one will buy REGARDLESS of how much land is left.
Wael Abdul Rahm... - Thank you all for your comments. I will try to answer them all. I will also try to answer some of the issues that were mentioned in more than one comment.
frustrated leba... - For those of you talking about very little land left, let me state that if you compare the population increase vs the price increase you'll notice that the price increased much more than the increase in population. I mean for the last 5-6 years the population in lebanon did not increase from 4-5 million to 15 million did it?
Lebanese - This article speaks my heart. I am a young Lebanese citizen, engaged & current imaginary real state prices do not encourage me take any further steps in this country..
Anonymous - Can't agree with d author coz he didn't mention about d land price in Beirut wich is so high+ the time of construction from beginning to d end.so this period is so long n maximum d owner can get profit about 15% per year
Elie - I am not an economist nor do I pretend to have a thorough understanding of real estate but what I am certain of is that current pricing of real estate in Lebanon is fueled by the super greedy Lebanese mentality. Prices are way unjustifiable. I understand that there is a place for luxury apartments but the majority of new projects should not target this sector. In fact, the majority of the Lebanese cannot buy anything whether in Beirut or in the nearby suburbs. People are forced to take huge loans from banks or ask for their families help in order to get half decent apartments. Instead of pointing out the obvious lack of lands in Beirut to justify the ridiculous pricing one should ask for more scrutiny from state agencies regarding real estate and the charlatans running this sector.
Miranda - Well said, Elie. That's what has driven this bubble - unbridled greed. What we get charged to live in crummy apartments that need maintenance are not justifiable at all. All I am seeing in Hamra and on the Corniche are rows and rows of empty buildings. To me, this indicates an impending crash. Just as there was panic-buying at the start of this bubble, so there will also be panic-selling that brings prices back down to reasonable levels. Had there been regulation and property tax to keep the real estate profiteers in check, this would have happened much sooner. Hang in there; the crash is coming.
SLC - Good point to discuss . 1. Try to compare LEB to other countries with a very limited free land availability 2. Xpat/immigrant are almost triple the number of the current citizens living in lebanon 3. The average price per sqm in lebanon is 2300$ not 3591$ as mentioned .your numbers are based in beirut minor area 4. Prices is logically accepted comparing to the regions avg price. What I would like to highlite is that some of the projects in lebanon are not worth the asked price due to the bad execution and bad finishing .here I point finger on such project to be reevaluated by the Municipalties to take action or to aware the end user from paying the market price in these projects. Finally we are influenced and optimistic towards the natural resources process and requirements from foreign investments could grab a wild open opportunities in all means . GB
RA - Well even if we apply the average of 2300 Usd and base it on the purchasing power of a couple along with the existing rates (that are historically low and that have no way but up, making existing loans even more difficult to repay ), Each person in the couple should be making at least 3750 which is also much higher than the average salary in Lebanon. As for comparing to other countries , who s to say that prices aren't inflated there ? Excess liquidity and low interest rates worldwide caused by the quantitative easing policies made it easier for unsolvable couples to borrow and driving real estate prices unsustainably . Finally I don t know if most people commenting on this page about scarcity of supply actually noticed that on the metn highway coming towards Beirut there s not a single building ( yes not a single one) that doesn't have a vacancy advertised on it . and that's just one road in Lebanon. I think the real problem like almost everything else in Lebanon is the lack of a proper set of laws that would solve the issue, or even maybe that the will to solve it is simply not there.
Marwan El Kashef - The measures are totally different between Dubai and Beirut; the comparison should include the social trend, purchasing power, ratio of demands and supply.
Zee - The author did not mention what amount from the 700,000 USD that was mortgaged. Add to that, the author did not take into consideration the two most important factors when it comes to real estate in Lebanon. First, the shortage of land availability in Beirut. Two, the amount of Lebanese people living abroad and earning their income outside Lebanon who invest in properties in Lebanon and usually more than once.
Jad K. - Interesting article, however, as per the below comments, some factors are missing here. Need to take the following into account: scarcity of build-able land in the capital (Beirut); expatriates who are the majority of mid it high end apartments; demand vs supply of new projects. Those factors will push the prices upwards, versus the factors being stated which push downwards. In addition, not all people will be able to buy in the capital and this is normal, where there are other options like Bchamoun, khalde, martakla,,,,,, I believe the government should residents in such areas via managing the road networks, public transportation and building permits organization. This should be a National level discussion where representatives from government, buyers and sellers should discuss an overall strategy for the issue at hand.
Tariq Aldowaisan - Nice perspective on the skyrocketing prices in Beirut. I'm sure the situation in Kuwait is far worse, with over 110 thousands lining up to own their dream homes.
lost lebanese - Prices must drop. We will not buy one sqm in lebanon unless prices readjust by at least 30%... dont believe real estate agencies neither the fake real estate tv shows on some lebanese channels. How can some one with a 2000 dollars salary can buy a half a million dollars apartment..or shall we live on the street?
Joe Sakr - He has a point but he completely missed making reference to the wealthy Lebanese expats and other GCC citizens which combined constitute a big bulk of the buyers in Lebanon!
Fadi - It used to constitute, it is not anymore. They are currently selling not buying! All GCC owners are now selling their properties!
Paul A. - well what is being said is right theoretically but the fact that the situation in lebanon cannot be compared to other countried, it may be true that the prices r high and the situation in lebanon is unstable, but if you look at the area and the population in lebanon, you would change ur mind, since there not much land left to build on and the population is growing, the demand of apartments will rise which means the price will rise. and about the countries unstability .. i think its temporary and the economy will improve once natural resources are used properly (gas, oil and water). in my opinion, the prices will keep on rising.
Jhony A. - Oil and Gas? Look at Cyprus, and they are way ahead of us in the process of drilling for gas. Lack of Apartments? I only see empty apartments and For Sale Signs. Situation in Lebanon will get stable ? The more this unsustainable pricing continues, the more it will fuel unstability. There is no better reason for War than poverty. Even the US attacked Iraq just after one of their bad recessions.
Julien - I'm curious to know if the author made the calculation on the price per sqm the regular net way or the lebanese way (including common spaces, cave, parking spots, roof... and whatever can be put in) ? This dramatically changes the price per sqm
Answer to Julien - The Lebanese way includes the common spaces of the same floor but not cave, parking spots,... So I dont expect any considerable changes...
Answer to Answer - That's the official way which includes only the common spaces. But the marketing way, that's where things get ugly. most houses I have seen owners or developers want to sell as 200m2 at 2000$/m2 but when asked about the deed, it becomes a 170m2 and this still does include the common spaces so where did everything else come from ?
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