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The real estate crash might save the Lebanese economy
BEIRUT: As the real estate market continues its downward spiral amid turbulent times, Lebanon's economy might, in the long run, benefit from this drop, leading economist Jihad El Hokayem tells Annahar.
Productive sectors, which are the real sectors of any given economy, "will tremendously benefit from a decrease in real estate prices given that their operational costs will, by correlation, also decrease," he says.
Sectoral components of Lebanon's GDP, which include agriculture, industry, and services, are the productive sectors, and their viability dictates the overall health of the economy.
Different industries set different standards for what percentage of a business' income should go toward rent, anywhere from 2 to 20 percent depending on the size of the business.
Production plants, factories, retail shops, and restaurants all pay rent, which takes up a sizeable portion of their fixed costs, El Hokayem notes, arguing that the decrease in real estate prices would drive this cost down.
This drop in operational expenses will be followed by a decrease in inflation, El Hokayem explains, which has trended in the wrong direction as of late, increasing by almost seven percent year on year in 2018.
Lebanon's Consumer Purchasing Index shot up to its highest level in five years in August, representing an inflation increase of 16 percent in the prices of clothing and footwear, and also in the cost of water, gas, electricity, and other fuels, according to the BTA-Fransabank Retail Index.
"A reduction in costs will increase a business' margin of profits," he says.
Meanwhile, the food and non-alcoholic beverages division displayed an increase of 5.87 percent.
The drop in the retail sector can be attributed to Lebanese' shrinking purchasing power and selective consumption pattern as a result of the heightened inflation, as well as the recent tax hike enacted by Parliament in spite of the "current unfavorable economic situation."
The tax hike, passed by lawmakers in the summer of 2017, was disputed by El Hokayem, who went against mainstream analysts, and warned of the dangers of raising taxes "in the midst of a recession."
"As illustrated by Laffer's Curve, hiking taxes during a recession might not lead to an increase in government revenue, instead it can cause an economic depression," he says.
Cost of housing in Lebanon, including Beirut, constitutes numerous problems, particularly for students and new graduates who find themselves living in group apartments to enable housing affordability.
A recent EuroCost International cost-of-living survey for expatriates ranked Beirut in seventh place globally, ahead of places like London, Zurich and New York.
To alleviate Lebanese household's diminished purchasing power, El Hokayem reiterates his call for a decrease in residential rents and household prices which then leads to a higher standard of living as well.
"If people spend less on rent, their discretionary income naturally increases," he says, which then translates to increased spending on other amenities, boosting the service and retail sectors among others.
Lebanon's real estate's sector has taken a substantive hit in recent years as the market is oversupplied and demand is shrinking, with all signs pointing to a continuation of this trend.
According to the data from the General Directorate of Land Registry and Cadastre (LRC), the number of Real Estate transactions, which may include one or more realties, decreased by a yearly 18.20 percent to reach 27,472 transactions by June 2018.
The value of total real estate transactions also dropped by an annual 14.01 percent to stand at $3.87 billion, while foreigners executed 559 transactions of the total in H1 2018, compared to 599 in H1 2017.
"The real estate sector shouldn’t have been propped up at the expense of the economy and the productive sector," El Hokayem notes, alluding to Banque Du Liban's unsustainable efforts to maintain the market by supporting "developers, through circular No. 427, and the wealthy, through circulars No. 473 and No 313."
Circular No. 427, issued in June 2017, was aimed at supporting developers selling their existing new real estate stock by allowing commercial banks in Lebanon to offer credit facilities to companies, funds or special vehicles for the purpose of acquiring real estate.
Meanwhile, based on circular No. 473, the ceiling on the cap of subsidized housing loans was upped from a previous LBP 800 million (around $530,679) to LBP 1.2 billion ($796,020), depleting BDL'a ability to fund lower income brackets.
El Hokayem traces back the problem to 2013, when BDL issued circular 313, granting subsidized housing loans worth LBP 800 million per apartment "for individuals that don't need subsidizing."
Despite injecting $500 million this past March toward subsidized housing loans to support limited-income-families, who mostly acquired small apartments outside Beirut, the funds ran out in a mere 30 days.
To prop up the economy, foreign direct investments should also be boosted by making Lebanon's macroeconomic landscape more attractive. "Today, investment from wealthy businessmen based in the Gulf is almost non-existent," he says.
Add to that the surge in high-interest rates, which "increased the cost of capital and the financing of corporations," firms have witnessed an elevated high cost bringing about a drop in competitiveness while depressing their potential expansions and employment opportunities, he says.
When real estate prices drop, expats residing in the Gulf, Africas, and beyond will be encouraged to explore investment opportunities in Lebanon, the economist argues.
Lebanon's overall capital accounts will witness a substantive improvement with increased capital inflows, which also applies to its current accounts given that exports will expand as well after operational costs are driven down, making prices more competitive.
"Lebanon is in dire need of dollars at the moment," he says, as the small Mediterranean country stares down the barrel of a gun.
A soaring debt of $84 billion and unemployment believed to be around 36 percent are continuously compounding concerns that the country is on the brink of collapse.
Coupled with the servicing cost on this debt, expected to absorb 44 percent of the government's revenues this year, and Lebanon's account deficit will reach nearly 25.8 percent of GDP while it gazes at one of the most consequential periods of its history.
"The drop in real estate could have tremendously benefited Lebanon's youth and newlyweds, a wide-ranging number of businesses, and the overall health of the economy, but the different policies implemented led us to botch this potential silver lining," El Hokayem concludes.