Solidere (The Lebanese Company for the Development and Reconstruction of Beirut) is the biggest development company in Lebanon. The company was established to revitalize the Central District of Beirut which was ruined during the 15-year civil strife. Solidere is an association of property rights holders and investors whose contribution has made possible the financing and execution of the required infrastructure allowing the project to move forward. A joint-stock corporation established formally on May 5, 1994 following a statutory meeting of its shareholders, Solidere's share capital is made up of common stock of two types totaling $1.82 billion. Mounir Douaidy, General Manager and Chief Financial Officer of Solidere spoke to Ekaruna.
Q. What general phases did Solidere go through since its inception?
A. When Solidere was established, it was initially announced that the BCD project will be executed in two phases. Phase I was set to tackle all reconstruction works in the traditional city center, while the second phase was planned to tackle the development of the waterfront. Nevertheless, with time the two phases overlapped. As we were restoring the traditional city, we also started executing some parts of phase II mainly reclaiming the land and cleaning the Normandy area, which over the years had become an environmentally hazardous site, due to the huge amount of waste that was accumulated in the area. Thus, cleaning that area became a priority followed by backfilling and creating the land known today as the new waterfront.
The reclaimed land had also to be protected by sea defenses that consisted of two defense lines. The construction of these two defense lines became part of the major infrastructure works of the reclaimed area in addition to the western marina. So, basically we did all these works in phase II in parallel to the reconstruction and development works in the traditional BCD.
Today, after 16 years, we have completed 90 to 95% of the infrastructure works in the traditional downtown (phase I) in addition to major parts of the waterfront (phase II) and we are moving forward with the overall construction process including the development of Solidere's own properties, monitoring the developments of third party investors, introducing services in the city center, creating public areas and open spaces concentrating on completing phase II. Now, you will see the reclaimed area physically coming to life after constructing the roads which materializes the continuity between the traditional BCD and the waterfront.
Q. What is the total land area of Solidere, and how much of this land is invested?
A. The total surface area of Solidere is 1.9 million sqm of which 700,000 sqm is reclaimed. On the other hand, the master plan sets the maximum amount of built up area in Solidere at an estimated 4.69 million sqm. Commercially, we usually deal with the built up area rather than the surface area. Approximately 600,000 sqm of the 4.69 million sqm comprises all the properties that previously existed and were recuperated or renovated by their original owners, especially the religious monuments and the governmental buildings. Approximately Two million of the remaining 4 million sqm of built up area were sold to third party investors while we developed our own projects. Currently there's about 200,000 sqm which were developed by Solidere itself including the southern part of the Souks of Beirut that was completed recently. So, basically, the major part of the built up area was subject to investment by third party developers.
Q. According to the master plan, what types of projects can be constructed in Solidere?
A. Beirut Central District is a mixed-use development comprising residential, office, commercial and retail spaces in addition to spaces offered for recreational and cultural proposes. There are guidelines in the masterplan that indicate the percentage for each. The residential component is about 40%, while 50% is set for office and retail spaces, and the remaining 10% covers everything else including the hotels, hospitality venues, plus recreational and cultural centers.
Q. When did Solidere start making a profit?
A. Solidere was profitable during its first year of operation, and this has been the case since the company's inception. Land sales grew over the years which led to a substantial increase in profits that have peaked in 2010 at $196 million after taxes, or $230 million before taxes. As a result of its strategy and operational performance, the company has distributed dividends to its shareholders from these profits nine times during the last 16 years. Total dividends distributed amount to approximately USD 1 Billion.
Q. How do you explain that this profitable performance has not been reflected in the stock exchange in terms of share prices that are fluctuating dramatically in the past 16 years?
A. When it comes to financial markets, the strong fundamentals of any company may get affected by external and circumstantial factors that are beyond its control. We have during the last 16 years faced several turbulent periods locally and regionally which has negatively affected the share prices. However the valuation of the company based on its assets remains strong and unaffected because the fundamentals are there and despite Lebanon's various challenges, property prices are continuously appreciating. It is important to note that properties built in Solidere have held to their values, and appreciated during the previous periods. Hence, there should be no concerns relating to the value of Solidere's assets.
Nevertheless, this good asset value of Solidere is not reflected in the stock market and share prices are fluctuating due to external risk factors. Investors always look at risks that could be related to country risks or to the level of the liquidity in the stock market itself. We should admit that the Beirut Stock Exchange hasn't really reached a satisfactory level of liquidity and activity so far. There is enough potential though not yet entirely exploited. In the future, the more liquidity is abundant in the financial markets, the more share prices will get positively affected. The less political instability there is in Lebanon and the region, the more is the possibility of share prices going up. We shouldn't also disregard the impact of the international financial crisis on the overall stock markets and the behavior of international stock exchanges.
Q. If this is true, then why in late 90s, when we didn't face such circumstances, Solidere share prices depreciated exponentially?
A. In the beginning, when all former owners and property right holders acquired shares, many of the smaller shareholders decided to convert their shares into cash by selling them in the market. This rush augmented the supply side of the shares. And naturally, when you have bigger supply, prices go down. This was the primary reason for the depreciation that we witnessed in the 90s coupled with some internal political factors. After all, each period has its own characteristics and as a rule, we should keep in mind that risk factors play a major role in determining share prices.
Q. In terms of Solidere and private developers, what major projects are already executed, what are the ongoing ones and what new projects are in the pipeline?
A. As we mentioned earlier, more than 2 million sqm of built-up area has been sold to third party developers and most of the planned projects have been already executed; few are still ongoing, several of which are in the design phase. Actually, 262 projects comprising 1,277,553 million sqm have been completed.
There are over third party projects of a residential and hospitality nature that are currently under development. When completed we expect these to add value to the overall urban environment and the Beirut Central District experience
Regarding occupancy, during the last few years we've seen significant improvement in the occupancy rates of the residential and commercial spaces. The retail sector is the most promising. Most of the shops are leased, at least the ones that are owned by Solidere. It's rare to find a retail space in Solidere which is not occupied. All third party developments are mainly occupied by end users.
Q. What is the estimated value of the executed projects and what about Solidere's portfolio?
A. By calculating the price of the land sold, the price of the 2 million built up area that is completed, I would say that at current prices, the estimated market value of third party projects is around $10 billion.
On the other hand, Solidere is developing its own projects and creating its own portfolio of real estate properties that are revenue generating. Retailers already occupy significant spaces in the southern parts of the Souks project which was completed almost a year and a half ago.
Before the Souks, our portfolio primarily consisted of residential spaces and renovated old buildings that were also destined for residential use. Besides, we had office buildings like the ESCWA, the embassy complex, and retail areas in different locations. Our portfolio of properties will grow further in 2012 and onward primarily because the remaining components of the Souks will be completed, mainly the cinema complex in less the one year and the department store three years from now.
Q. Rental income and yields constitute an important part of Solidere's revenues. Is the company satisfied with the outcome? What are the short-term and long-term rental projections?
A. Our rental income is increasing every year because more revenue generating properties are added to our portfolio. Our strategy is based on leasing everything that we own rather than selling them. As the Souks project is completed parallel to other projects that are entitled to generate revenue from leasing, our rental income will increase every year.
In 2010, rental outcome went up to $41 million from $27 million in 2009. The rental income will definitely grow as we add on more properties to our portfolio hoping to increase our annual rental income to $100 million within the next five years.
As for the rental yields, which is measured in percentage terms, it is obtained by calculating the relationship between the rent and the value of the property. The rental yield is a good way for measuring profitability; the return that any property generates compared to its value. Now as property values in Solidere continue to climb, rental rates are not expected to go up much and will remain reasonable. So, if we want to measure the rental yields, they will not reflect the genuine profitability or the performance of the properties in Solidere. In any case, our rental yields differ from residential to offices and retail. The highest yields come from the retail followed by offices and then residential.
Q. When and why did you decide to establish Solidere International? What are the projects initiated by SI?
A. Solidere International was created in 2007. At that time, the management of Solidere realized that we have developed enough expertise in urban design and development and the name Solidere had become a brand for reconstruction and rehabilitation of entire cities. The management believed that this experience could be exported outside the boundaries of Beirut. Solidere was solicited by many countries and developers from all over the world and mainly the region. However, by law, Solidere could operate only in BCD as a Lebanese company, so there had to be another vehicle to do the work outside Lebanon. Hence, Solidere International (SI) was created following a majority decision by the shareholders of Solidere where many regional investors and international financial institutions participated as shareholders. Today, Solidere Lebanon owns 38% of Solidere international. There are agreements between Solidere and SI whereby SI has the right to use the Solidere name and operate with the support of the technical teams of Solidere in Beirut.
Soon the company received many offers for mega urban projects mainly in the UAE and Egypt, while efforts at exploring the Saudi Arabian market are ongoing. The UAE development is located in the emirate of Ajman and is known as the Al Zorah project. Originally, it was supposed to be a huge mixed-use project but when the real estate sector of the UAE was impacted by the international financial crisis, we felt that the project is too huge to be executed in these circumstances, so we downsized the project by decapitalizing the company. We returned part of the land and part of the cash to the shareholders. Obviously SI was not affected financially by these steps because the project wasn't as yet launched. Now, Al Zorah has become a touristic project, smaller in size and fit with upcoming market trends.
In Egypt, we have two major developments in Cairo: East Town and West Town, both extensions to the capital. Here, SI is providing services rather than acting as an investor. Nevertheless, we are consolidating our activity there to see how things would evolve in Egypt.
Currently, we are closely looking into the Saudi market in addition to other opportunities in the Mediterranean basin where we believe lies plenty of opportunities for Solidere International.
Q. What can you say about the current situation of the real estate sector in Lebanon in general and Solidere in particular?
A. The real estate sector in Lebanon has been growing for the last five years until a couple of years ago when it started to slow down a little due to the political and economic conditions in the country. In Solidere, developers continue to see healthy demand. Actually real estate in Lebanon is sustainable compared to regional real estate markets that mostly rely on foreign investors. This dependence on foreigners proved unsustainable when the global financial crisis hit the real estate markets.
In contrast, the Lebanese market mainly depends on the Lebanese diaspora, Lebanese expats living and generating money in the GCC and even other parts of the world. These expats continue coming back to Lebanon and investing heavily in real estate. It's a fact that the positive balance of payments of the country is due to the remittances of the Lebanese expats, and the largest part of this money is invested in the real estate sector.
There are no concerns within the Beirut Central District area in terms of demand and sales of land and properties. Let us not forget that we have already sold 2 million sqm of built-up area to third party investors in the last 15 years. We continue to have demand for developing new projects in the coming few years. Demand in Lebanon could slow down due to circumstances, as it happened marginally in the last 12 months but we already feel that this has started to change as expats and investor are regaining interest in the Lebanese real estate market.
© Ekaruna 2011
