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Realty shock makes Lebanese homebuyers see that small is beautiful

By Shikrallah Nakhoul
"Lucky is he who owns as little as a sleeping space for a goat in Mount Lebanon." This old saying has never been as true as it is today.

In the nineteenth century, the adage expressed the desire of people from neighboring countries to live in the then peaceful and prosperous Lebanon but now it depicts the yearnings of most of the Lebanese themselves.

Analysts, property developers, and other actors in the local residential real estate sector see the emergence of a new trend in this market: the future will be for small-sized residential units outside Beirut especially in the Mount Lebanon area surrounding the capital city.

The new trend is mainly driven by the unprecedented surge in property prices in recent years and the fact that available land plots are becoming more and more in short supply in the small east Mediterranean country. The regional and local economic slowdown and political turmoil added momentum to the trend.

Supply-demand imbalance

Most of homebuyers can't afford to acquire even a small apartment in Beirut while there's an oversupply of large-sized luxury apartments that are beyond their reach, said economist Louis Hobeika, professor at Notre Dame University.

Nassib Ghobril, head of economic research and analysis at the Byblos Bank Group said that even Lebanese expatriates find such apartments expensive and that's why demand for this category of residential units began to decline more than a year ago mainly as a result of the unprecedented surge in prices that the sector has witnessed from 2006 to 2009. Expatriates account for about 65% of the local demand for residential units.

Homebuyers are also undergoing a decline in confidence due to the regional unrest and political instability at home, Ghobril said. During periods of political uncertainty people don't like to put their savings in illiquid assets and then borrow on top of it, they rather prefer to keep the cash close at hand, he added.

There was an oversupply of large-sized luxurious residential units in the last two years and this will continue for the coming two years in light of the projects underway, according to Ghobril.

Cement deliveries to construction projects dropped 3.4% to 1.556 million tons in the first four months of 2011 compared with the same period last year which reflects a slowdown in construction activity resulting from a wait-and-see mood among contractors due to political tensions. The average annual increase of cement deliveries was 11.5% over the last five years, according to Bank Audi research.

Cultural change

The hard market facts have somehow created a realty shock to homebuyers who have begun to lower their expectations of the dream house while developers are trying to adapt to the new changes and meet the shift in demand.

There are early signs of a cultural change as the Lebanese are more and more willing to live in small apartments. Apartments of sizes ranging between 150 square meters and 200 square meters would be up to Lebanese standards although in France for example a studio apartment of 70 square meters is acceptable, said Hobeika.

Ghobril said that real estate developers are becoming more and more aware of the situation and they are building more small apartments outside Beirut to meet the growing demand for this segment of the market.

"Residential demand is increasingly shifting towards smaller size lodging. With real estate prices sticky on the downside and with a growing gap between the purchasing power of residents and prices of the housing stock in the capital city, the market has been experiencing a shift to outside Beirut and to smaller flats in the past couple of years, the most in demand being those with a total size below 250 square meters per apartment," said a recent report of Bank Audi titled "Lebanon Real Estate Sector-Slowdown in Market Momentum along with Resilient Prices".

Actors in the local real estate sector are experiencing the changes and preparing for the future.

Roger Abi Nakhoul, co-owner and general manager of Developers S,A.L. said that the future is for small apartments not only for economic reasons but also because the size of households is shrinking and is expected to shrink further.

Georges Chaiben, a sales' agent at real estate brokerage firm ICAR Wakim said that demand for smaller less expensive apartments is growing and that it's much easier and faster to sell an apartment of 100 square meters than a bigger one especially if the apartment is outside Beirut because it will be much cheaper.

A manager at Elias Saad Luxury Apartments, or Esla, said that they have witnessed a moderate decline in demand and that his company has begun to build smaller apartments but will continue to target the high-income market.

Economist Hobeika said that the small apartments sector isn't as profitable as the large apartment sector and that real estate developers aren't very eager to embark on projects in the small size segment. He added that developers should be satisfied with lower profit margins and build small apartments in Mount Lebanon especially that a number of infrastructural projects are underway in this region.

Abi Nakhoul said that it's feasible to build high-end residential units with an area of about 150 square meters in Mount Lebanon because prices in Beirut are two to three times higher. He added that his company, which targets middle class and well-to-do expatriates as well as affluent Lebanese working at home, will keep serving this market segment but plans to reduce the apartment sizes in future projects.

The shift in favor of areas outside Beirut began a number of years ago. Bank Audi said: "Beirut lost a 7% market share in Lebanon's real estate sales value between 2006 and 2010, while immediate suburbs and mountains gained almost 5% over the same period."

Wake up call

The analysts and developers didn't agree on the future trend of property prices in the country. But there was a consensus that the market won't witness a price upsurge similar to the one experienced in recent years.

Bank Audi said: "Until the housing stock coming to the market and consisting of projects launched about three years ago gets gradually sold, and until lately launched projects consisting of smaller size flats find their way into the market, real estate prices are likely to remain at or near current levels.

"It is true that a price collapse risk is practically unlikely for Lebanon given the sticky-on-the-downside feature, but within the prevailing context, realty prices might find it hard to nudge up tangibly," the lender added.

Property sales fell 17.1% to USD3.166 billion in the first five months of 2011 compared with a year earlier but the average value per property sale rose 2.5% over the same period, according to Bank Audi research.

Charbel Korkmaz, president of the Syndicate of Real Estate Appraisal Experts in Lebanon said that property developers stick to the current price of an apartment and are unwilling to lower it as they want to ensure that the proceeds will be enough to build the next apartment because they expect that the cost will remain high or even rise further.

Property developer Abi Nakhoul expected real estate prices in Lebanon to remain at their current levels for the time being. He added that prices may even rise further if the political situation stabilizes in the region and at home.

Ghobril said that the measures that the central bank took in 2009 to ease credit to homebuyers and to other local sectors will expire at the end of this year and that if these measures aren't renewed or if new ones aren't made this will make mortgage financing more expensive.

Hobeika expected residential real estate prices to witness a significant decline within the few coming months and that an equilibrium point would be reached afterwards. Prices have already begun to fall in real terms when inflation rates are taken into consideration, he added.

He said that it's a buyers' market, and it's better for developers to lower their prices and sell now at smaller discounts instead of being compelled by market forces in the future to sell at more substantial discounts.

Bury the past

The past won't come back and both developers and homebuyers will have to adapt to the new and lasting conditions, Hobeika said. Property developers should stop dreaming that prices would rise again while buyers should become more realistic and look for small apartments, he added.

A change in outlook and lifestyle seems inevitable and is already happening.

A little house in Mount Lebanon is more or less within the reach of new couples and is much bigger than "a goat's sleeping space". In fact, aren't European couples happy with their studio apartments? Those living on the eastern shores of the Mediterranean are learning to be happy too.

But will local politicians let them have sweet dreams?

© Zawya 2011