A Real Estate Investment to Rethink
September 11, 2020 | Joyce Ibrahim
When done correctly, real estate can generally be considered as one of the most profitable and popular investments with significant potential for success. With well chosen-assets, investors can generate passive income and stable cash flow that can grant them financial freedom. Investors can also benefit from significant returns, tax breaks and deductions, and portfolio diversification advantages from owning a physical asset. Real estate also serves as a hedge against inflation and as a means to build equity. Furthermore, it is possible to invest in real estate without owning property or having to navigate this market’s complications through mutual funds, construction firms, and REITs among others, some of which offer an opportunity to earn dividend-based income, widely diversify investors’ real estate portfolio, and offer no less than 90% returns on shareholders’ taxable income.
However, these were not the investment considerations that pushed countless Lebanese citizens to buy up property and real estate stock amid what may be the worst the financial crisis witnessed by the country to date.
Crisis in Lebanon
Shortly after nationwide protests erupted in October 2019, the ensuing financial crisis triggered a run on US Dollar deposits as fear of banks’ insolvency emerged. The Lebanese economy had already been suffering prior to the protests as interest rates rose, confidence fell, and economic activity considerably tightened across sectors leading to a drop in investments, and thus, a US Dollar shortage.
Local banks quickly began enforcing unofficial capital control on foreign currency transfers that had depositors unable to withdraw more than US 200$ every two weeks or exchange Lebanese Pounds to US Dollars, or even transfer cash abroad. The financial and economic crises further exacerbated following the government’s default on a US$ 1.2bn Eurobond that matured in March: with the Lebanese Pound losing more than 80% of its value since October, banks implemented stricter measures on foreign currency, introducing a US$ 1,000 monthly withdrawal limit in Lebanese Pounds (lollars) at a capped exchange rate of 3,850 against the US Dollar, while black markets emerged in parallel offering up to 8,000 LBP against the US Dollar. These factors, paired with rumors of heavy haircuts on big depositor accounts and a general distrust of banks, led citizens and investors alike into a property-buying frenzy.
Lebanese real estate booms, fueled by panic-buyers
Desperate for physical money and seeking a safe haven for their US Dollars, depositors resorted to investing in real estate as a vehicle to transform their money in the bank into tangible assets, ushering a real estate boom after a 5-year slump in the sector. In fact, starting December 2019, the real estate sector went on an upward trend, with 6,189 transactions executed in December, while property sales jumped by 27% year-on-year in January, with a total of 4,668 transactions in the month of January.
Solidere, the private-public partnership in charge of managing downtown Beirut is stated to have sold US$ 340M worth of property and plots since early 2020, with each plot ranging between US$ 15M and US$ 60M, as depositors flocked to buy in Lebanon’s most highly coveted and valued real estate area. Wealthier depositors with some money to spare also invested in Solidere shares listed in BSE, as these shares held 53% of the average BSE volume in Q1 2020, and 83% of BSE value for the same period, amounting to US$ 732,636. The recent real estate boom, however synthetic, allowed developers and construction companies to close their debts to local banks by accepting banker’s checks from buyers and paying them to banks in settlement of their loans.
Though property prices rose by 30% since the start of the crisis, this upward trend was not mirrored by the construction sector, revealing the artificial nature of this recent real estate boom. In fact, according to a report by Bank Audi’s Lebanon Weekly Monitor, due to US Dollar shortage and price increases cement deliveries to the country have reduced by 55.7% in Q1 2020, reaching 300,334 tons as opposed to 677,629 tons during the same period in 2019, indicating a decline and near-halt of construction activity. Therefore, the wisdom behind investing in real estate in such circumstances must be called into question. With the economy in an ongoing freefall with no landing ground in view, and the purchasing power constantly dwindling along with it, it is unsure whether these empty properties will be resold at a later stage, at a satisfying price, and without generating losses. This is especially true for property located in the Solidere area, as downtown Beirut has been and will likely continue to be a major destination for protests and consequently, vandalism. And as developers have covered most of their LCs by selling most of their units, little property and realties are left to buy in the country, with construction companies unable to resume projects or begin new ones.
The real estate bubble is expected to burst shortly, and prices are estimated to fall by next year. In addition, the volatility of unfavorable local and regional political climates will likely reflect on the Lebanese real estate sector, further depreciating the assets citizens bought to transfer their money outside of an already frail banking sector. Therefore, investing in real estate may cause many to lose a significant portion of their money’s value, while not generating returns or making profit, as property that remains vacant also implies the burden of taxes and ownership expenses coming out of investors’ own wallets.
Don’t let panic make investment
With panic and fear over their US Dollar deposits as their rationale, big and medium depositors rushed to invest in what is more likely to be a liability than an asset. Given the inability to transfer or invest US Dollars abroad, and with Lebanon’s deep and harmful dependence on imports, investing in local ventures, namely in production, will prove to be a more beneficial asset both for individual investors and the economy. This could include investing in ventures related to agriculture and F&B, as most products from these fields are necessities that Lebanon has been using US Dollars to import. Another opportunity would be to invest in clothing manufacturing and retail, as most retail stores in the country are foreign, and product prices are soaring due to the LBP against US$ exchange rate and hyperinflation. With many of these stores bringing their operations in Lebanon to a halt, there will soon be a need to replace them with local alternatives.
In a widely strained economy where poverty and unemployment rates respectively reached 45% and 30% in May 2020, looking into productive ventures may be a better choice of investment that would not only generate more value to investors, but that would contribute to creating job opportunities and stimulate the economy.
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