Real estate prices in Lebanon freeze or rise, but never fall. That has long been the commonly held view of the sector in this small country on the Mediterranean, long a prime destination for Arabs and the Lebanese diaspora for its mountains and beaches.
It was only rational for investments in this services-based economy of limited exports and high imports to be directed mostly towards properties, which have guaranteed profits almost every time.
That trend may be ending.
In February, the IMF warned that Lebanon’s economic situation was “fragile.” “The traditional drivers of growth in Lebanon—tourism, real estate, and construction—remain slow and a strong rebound is unlikely soon,” the fund said, citing central bank figures that real estate prices declined by more than 10% in 2017.
Rise of real estate
Since the early 1990s and the great post-civil war reconstruction project, Lebanon has seen the elevation of two primary sectors: The first was the financial sector, which is four times larger than the country’s gross domestic product (GDP) and owns the majority of the government’s debt.
The vast majority of its investments are in real estate. The second major sector was real estate itself, funded primarily by Gulf investors and Lebanese expatriates abroad.
Between the years 2007 and 2011, the Lebanese real estate market was undeniably thriving. However, over the past few years the mythical sector known to subsume and multiply any amount of money thrown its way has been facing increasingly complicated difficulties.
Between 2007 and 2010, around 60% of foreign investments to Lebanon were going to real estate and most of that money was coming from the Gulf.
The slowdown of the sector began in 2011, with growth in prices decelerating through 2013, followed by a massive fall in demand in 2015.
The factors behind this were wide-ranging. Lebanon has experienced a broad economic slowdown in recent years against the backdrop of global economic stagnation and financial volatility. The country has also been impacted by regional conflicts, domestic political deadlock and the 2014 drop in oil prices.
One of the most harmful developments was a series of travel warnings and bans issued by Gulf states in recent years against their citizens traveling to Lebanon.
Once investments from the wealthy Gulf states began to diminish, real estate developers found themselves standing on thin air, surrounded by mostly high-end luxury and commercial buildings that very few Lebanese citizens could dream to afford.
The real estate downturn culminated in a completely stunted sector this year with the evaporation of government-subsidized housing loans.
Housing loans pulled
The national Banque du Liban (BdL) in January of this year introduced housing loans with subsidized interest rates as part of a series of stimulus packages.
The stimulus packages included a 278% increase in housing loans and a 112% increase in construction loans. The aim was to give the real estate sector the push it needed to keep the market from crashing.
The January stimulus allotted 750 billion Lebanese lira (US$500 million) to cover the population’s housing loan needs for 2018.
To the surprise and dismay of the public, by March the package was declared to have been depleted.
Shortly after, the banks halted all applications for subsidized housing loans, including those advanced in the process and even loans which had been approved, demanding that BdL issue another stimulus package.
A senior source in the Lebanese financial sector said he believed banks had lent out significant portions of the stimulus money to developers and investors to speculate on real estate, rather than reserving it for individuals seeking housing loans.
Upon receiving an excessive amount of loan applications from the banks in that very short period, BdL became suspicious of the unusual activity in the market. The bank initiated an investigation into the matter following the depletion of the stimulus package, the Lebanese daily Al-Akhbar reported at the time.
News in Lebanon dies quick, and scandals in the government and banking sector are normalized to the public in such a way that they rarely provoke consequences.
Whatever conclusions BdL reached through its investigation of the immediate package depletion, those were never made public.
Meanwhile, real estate prices have not been allowed to drop in accordance with the drop in demand with developers instead opting for individual discounts at their discretion.
The state of the real estate market has sparked failed attempts by the government to secure housing loans for 2019, as well as debates among observers as to whether the sector is collapsing,
On September 12, the governor of Banque du Liban, Riad Salameh, met with the parliament’s National Economy, Trade, Industry and Planning Committee and said introducing a 5,000 L.L. (US$3.32) tax on petrol prices would be the only way to secure the funds for the 2019 housing loans.
A proposal by one lawmaker to collect taxes owed by the banks as the best way to fund the 2019 stimulus was reportedly rejected. This was later cemented by Finance Minister Ali Hassan Khalil when he signed an agreement that would postpone tax collection until 2020. The Lebanese government is owed an estimated US$5 billion worth of evaded taxes, about 10% of the country’s GDP.
Khalil also said that he would “reformulate the provisions on comprehensive tax settlements” (tax exemptions for banks and companies), a move previously challenged by Lebanon’s Constitutional Council on the grounds that it “violated the principle of equality of taxpayers, rewarded tax evasion, encouraged it, and squandered public rights,” Al-Akhbar reported.
The gas tax risks detrimental effects on an economy already suffering unprecedented and dangerously high rates of inflation (7.6%) and an equally drastic 7.7% increase in the consumer price index, according to the Consultation and Research Institute.
Finally, the finance ministry said it released around 100 billion L.L. ($66 million) to reactivate housing loans, a temporary fix, but only a small percentage of what would be offered in a large-scale stimulus.
BdL has declared that its housing loans will return in 2019. The problem remains, however: how will they be funded?
Too big to fail?
While the government officially denied additional taxes, it is still possible that the financial sector lobby will bully the 5,000 L.L petrol tax proposal into implementation.
Lebanon now faces a deadlock. Whichever move the government and BdL make – or don’t – will potentially induce some sort of crisis.
1) Issuing a stimulus package in Lebanese Liras will increase inflation and BdL will lose grip on its famous peg to the dollar (1,500L.L =$1).
2) Issuing it in US dollars means it will dip into its dollar reserves which it requires in order to secure the currency value. Already suspected to be at risky levels, that also will mean it loses grip on the peg.
3) Not issuing a package at all would mean that people will not be able to purchase properties and the market fails.
The fall of the real estate sector will also put the banking sector, and thus the government at risk. According to the IMF, around 90% of the banking sector’s investments are in the real-estate sector.
The Lebanese economic model is a full loop: the banking sector invests in government debt to the extent that its share is approximately 60%. In turn, the real-estate sector depends on loans from banks for both construction and buying and selling houses.
If the real estate sector was to fall into crisis, the banks would follow suit.
The history of the Lebanese economy has marked by the capacity to continuously defer crises, but it is possible it may no longer be capable of delivering this master function.
The government can no longer sustain a constant debt accumulation for the banks to invest in. The real estate sector is no longer a viable investment given foreign demand has diminished and the locals can neither afford to purchase properties nor to accumulate any more private debt, as both remittances and gross national income per capita are decreasing annually.