Rising input costs put Lebanese real estate beyond reach of Lebanese customers
Wednesday, 27 June 2007
Roger and Liliane Rizk, like many Lebanese newlyweds, were looking forward to purchasing a new apartment soon after their wedding. But the prices of new homes have risen dramatically since the couple first started shopping for an apartment about six months ago, when they were able to find suitable apartments for around $50,000. "We cannot afford a new apartment right now because the price has gone up to $65,000," said Roger.
"We currently have two choices," Roger added, "either to buy a second-hand apartment or rent a small new apartment."
The Rizks are not alone. Many Lebanese have been forced to put off plans to buy new homes due to the skyrocketing price of real estate. During the past six months alone, the asking prices for many properties have risen by an estimated 30 percent.
This sharp rise, along with the unstable political situation in the country, has contributed to a recent slowdown in the real-estate market.
The increase in property prices is tied to a number of factors, including the rising costs of construction, the surge in demand in the wake of the summer 2006 war with Israel, the appreciation of the euro, and the rise in the prices of building materials such as cement, steel and diesel oil.
"Home prices have steadily risen as building-material cost have become more expensive. Local buyers hoping to buy low in the unstable situation have been let down," said Patrick Gemmal, chairman and managing director of Ascot Brokers.
The increasing costs of materials have taken a heavy toll on the construction sector.
"Conditions in the construction sector have become more difficult due to several reasons, mainly the fluctuation of building-material prices, such as steel, fuel, asphalt, cement and the materials imported from Europe," said Fuad al-Khazen, the head of the Contractors Syndicate.
"In addition, the delay of the public sector in paying ... [its debts to private contractors] makes the contractors suffer from a lack of liquidity as well as the heavy interest rates of loans taken from banks," he added.
The price for a ton of cement averaged $75 in 2006, but can currently exceed $110. Lebanon's three cement producers agreed after last summer's war to set a price cap of $65 per ton, but middlemen charge much higher rates.
The price of steel has also risen, from about $200 per ton five years ago to approximately $800 in the retail market today.
The surge in prices for some materials is fueled by growing demand for building materials worldwide.
The development boom in the Middle East - especially the Gulf Cooperation Council-is another factor that accounts for the rising cost of steel and cement.
Alex Demerjian, a steel importer, said local rates were related to worldwide prices that have increased by 25 percent in the past year alone.
"Many emerging countries like China, India, Russia and some others have been recently experiencing a construction boom," Demerjian said, adding that this trend contributes to increasing global demand.
In addition, he said, "the value of the dollar is not what is used to be." In the past, Lebanon imported steel mainly from Europe, but currently many local importers look to Egypt, which exports at a lower price, to meet local demand. The export price of a ton of Egyptian steel is estimated to be around $680 per ton, about $20 lower than European imports. According to Lebanese Customs, steel and iron imports from Egypt increased from $91,024 in 2005 to $167,076 in 2006.
Energy costs are also having a pronounced impact. The price of 20 liters of diesel oil, for instance, has tripled to LL18,000 in the last few years.
As though all of this were not enough, "gravel and sand prices have been fluctuating according to the government's decisions on whether to open or close the quarries," said Khazen, noting that the vast majority of rock and sand quarried in rural Lebanon is destined for the construction sites in Beirut and other coastal areas.
Demerjian told The Daily Star that virtually all common components of construction have risen in price, increasing overall costs for contractors.
By itself, "an increase of 20 to 30 percent in steel prices would increase the total cost of a building by about 1 percent," he explained. "However, the increased prices of cement and other raw materials, added to the weakness of the dollar versus the euro, would raise the cost of a real-estate development by about a quarter."
All of these factors have caused contractors to complain that they are losing 20 to 25 percent on many construction projects.
Khazen noted that contractors threatened a work stoppage in April if the government failed to address the issue. He could not estimate how many projects would be affected by such a move if contractors made good on their threat, but warned that they would included work in both the private and public sectors.
Contractors recently came to an agreement with the government to compensate them for losses stemming from price fluctuations, but the terms of the final arrangement remain uncertain.
To make up for the price spike, contractors had asked the government to approve "escalator clauses" in public-bid contracts.
"A compensation plan is currently on the prime minister's desk," said Khazen. "But we believe that contractors will be partly, not fully compensated, and it will really take time."
"We are actually negotiating with the Council for Development and Reconstruction [toward] a formula of escalation clauses to cope with the heavy fluctuation of prices of building materials that happened worldwide without the awareness of contractors during the execution of their projects."
The syndicate has also called upon the government to accelerate changes to the clauses and general conditions of laws governing agreements between the state and private contractors. Negotiations have been continuing on this subject for about five years, however, and given the political impasse that has paralyzed Parliament, there is little optimism within the industry that meaningful changes can be implemented any time soon.
The situation has also affected developers, who suffer from unpredictable prices increases during the execution of their projects.
Tanios Bassil, a developer of five residential projects in Yarzeh and Baabda, said he had sustained losses of between 40 on 60 percent on some of them. He added that the effect of the price increases was amplified by the political deadlock.
But does doing business in the construction sector remain a profitable undertaking?
"Developers still generate profits," said Elias Beainou, a trader in building materials. "Developers will recuperate losses through the increase of the unit selling price. At the end of the day, the end-user, not the developer, is the most affected because he would purchase a new apartment at a higher price."
Bassil predicted that because of the unpredictable price fluctuations, "the sector will witness a delay of some upcoming construction projects" - but that as far as ongoing projects were concerned, "developers have been forced to continue their work."
"Despite the deteriorating situation," he said, "I have to execute the projects presently under way." Khazen saw things differently. "This upward cost does not have a negative impact on construction activity," he said. "Despite the rise of steel and cement prices, many development projects are still under way, especially the luxurious projects due to the expected demand from Arabs." Gemmal's interpretation was closer to Bassil's - but for different reasons.
"The amount of construction will diminish mainly because of the current internal strife," he predicted. "Currently, the squabbling political situation has driven investors away and made developers reluctant to undertake big projects ... Construction activity is going to stop expanding.
"Developers pursue their projects with the intention of making sales," he explained. "If sales are not occurring, they won't proceed with their work."
Before last summer's war, Lebanon had been experiencing a dramatic increase in construction activity, driven by a boom in residential and commercial projects. Construction was among the best-performing sectors of an economy that was decidedly on the rebound, with the number permits increasing by 60 percent from the previous year.
But after war, the rosy picture changed. According to a survey by the Central Bank, overall activity in the construction and public works sectors declined rapidly in the fourth quarter of 2006. In fact, 48 percent of surveyed firms reported a decrease in activity during the period, 8 percent reported an increase, and 44 percent reported no change.
"The unstable political situation and the increase in apartment prices are behind the slashed activity," said bassil. "Demand is currently low."
On the other hand, some real estate brokers don't share Bassil's view.
"There is no huge impact on the real-estate market," said Gemmal. "The increased cost of materials building will only directly affect locals."
Gemmal believes that the real estate market will witness a reduction in demand from local buyers because of their decreasing purchasing power. The clientele for new products, he explained, are mainly Arabs and Lebanese expatriates who won't be heavily affected by the increase of prices.
But other brokers wonder if the market can continue to maintain this relative immunity because the profile of buyers has recently changed. Gulf Arabs have recently shown less interest in the Lebanese market, and locals - who remain almost the only source of demand - cannot afford new apartments, especially larger, more expensive ones.
"The increase in construction cost will affect locals in terms of square meters," said Gemmal. "Local buyers won't search anymore for large apartments. They will search for a second-hand or a smaller product. Instead of buying a 100-square-meter apartment at $50,000, they will search for an 80 square-meter size. Arabs will be the main buyers of large apartments," Gemmal said.
On the other hand, he said, much of the discussion is academic. "How can we talk about sales and prices," he asked, "if there are no clients?"
.......……..…………………..
http://www.dailystar.com
"We currently have two choices," Roger added, "either to buy a second-hand apartment or rent a small new apartment."
The Rizks are not alone. Many Lebanese have been forced to put off plans to buy new homes due to the skyrocketing price of real estate. During the past six months alone, the asking prices for many properties have risen by an estimated 30 percent.
This sharp rise, along with the unstable political situation in the country, has contributed to a recent slowdown in the real-estate market.
The increase in property prices is tied to a number of factors, including the rising costs of construction, the surge in demand in the wake of the summer 2006 war with Israel, the appreciation of the euro, and the rise in the prices of building materials such as cement, steel and diesel oil.
"Home prices have steadily risen as building-material cost have become more expensive. Local buyers hoping to buy low in the unstable situation have been let down," said Patrick Gemmal, chairman and managing director of Ascot Brokers.
The increasing costs of materials have taken a heavy toll on the construction sector.
"Conditions in the construction sector have become more difficult due to several reasons, mainly the fluctuation of building-material prices, such as steel, fuel, asphalt, cement and the materials imported from Europe," said Fuad al-Khazen, the head of the Contractors Syndicate.
"In addition, the delay of the public sector in paying ... [its debts to private contractors] makes the contractors suffer from a lack of liquidity as well as the heavy interest rates of loans taken from banks," he added.
The price for a ton of cement averaged $75 in 2006, but can currently exceed $110. Lebanon's three cement producers agreed after last summer's war to set a price cap of $65 per ton, but middlemen charge much higher rates.
The price of steel has also risen, from about $200 per ton five years ago to approximately $800 in the retail market today.
The surge in prices for some materials is fueled by growing demand for building materials worldwide.
The development boom in the Middle East - especially the Gulf Cooperation Council-is another factor that accounts for the rising cost of steel and cement.
Alex Demerjian, a steel importer, said local rates were related to worldwide prices that have increased by 25 percent in the past year alone.
"Many emerging countries like China, India, Russia and some others have been recently experiencing a construction boom," Demerjian said, adding that this trend contributes to increasing global demand.
In addition, he said, "the value of the dollar is not what is used to be." In the past, Lebanon imported steel mainly from Europe, but currently many local importers look to Egypt, which exports at a lower price, to meet local demand. The export price of a ton of Egyptian steel is estimated to be around $680 per ton, about $20 lower than European imports. According to Lebanese Customs, steel and iron imports from Egypt increased from $91,024 in 2005 to $167,076 in 2006.
Energy costs are also having a pronounced impact. The price of 20 liters of diesel oil, for instance, has tripled to LL18,000 in the last few years.
As though all of this were not enough, "gravel and sand prices have been fluctuating according to the government's decisions on whether to open or close the quarries," said Khazen, noting that the vast majority of rock and sand quarried in rural Lebanon is destined for the construction sites in Beirut and other coastal areas.
Demerjian told The Daily Star that virtually all common components of construction have risen in price, increasing overall costs for contractors.
By itself, "an increase of 20 to 30 percent in steel prices would increase the total cost of a building by about 1 percent," he explained. "However, the increased prices of cement and other raw materials, added to the weakness of the dollar versus the euro, would raise the cost of a real-estate development by about a quarter."
All of these factors have caused contractors to complain that they are losing 20 to 25 percent on many construction projects.
Khazen noted that contractors threatened a work stoppage in April if the government failed to address the issue. He could not estimate how many projects would be affected by such a move if contractors made good on their threat, but warned that they would included work in both the private and public sectors.
Contractors recently came to an agreement with the government to compensate them for losses stemming from price fluctuations, but the terms of the final arrangement remain uncertain.
To make up for the price spike, contractors had asked the government to approve "escalator clauses" in public-bid contracts.
"A compensation plan is currently on the prime minister's desk," said Khazen. "But we believe that contractors will be partly, not fully compensated, and it will really take time."
"We are actually negotiating with the Council for Development and Reconstruction [toward] a formula of escalation clauses to cope with the heavy fluctuation of prices of building materials that happened worldwide without the awareness of contractors during the execution of their projects."
The syndicate has also called upon the government to accelerate changes to the clauses and general conditions of laws governing agreements between the state and private contractors. Negotiations have been continuing on this subject for about five years, however, and given the political impasse that has paralyzed Parliament, there is little optimism within the industry that meaningful changes can be implemented any time soon.
The situation has also affected developers, who suffer from unpredictable prices increases during the execution of their projects.
Tanios Bassil, a developer of five residential projects in Yarzeh and Baabda, said he had sustained losses of between 40 on 60 percent on some of them. He added that the effect of the price increases was amplified by the political deadlock.
But does doing business in the construction sector remain a profitable undertaking?
"Developers still generate profits," said Elias Beainou, a trader in building materials. "Developers will recuperate losses through the increase of the unit selling price. At the end of the day, the end-user, not the developer, is the most affected because he would purchase a new apartment at a higher price."
Bassil predicted that because of the unpredictable price fluctuations, "the sector will witness a delay of some upcoming construction projects" - but that as far as ongoing projects were concerned, "developers have been forced to continue their work."
"Despite the deteriorating situation," he said, "I have to execute the projects presently under way." Khazen saw things differently. "This upward cost does not have a negative impact on construction activity," he said. "Despite the rise of steel and cement prices, many development projects are still under way, especially the luxurious projects due to the expected demand from Arabs." Gemmal's interpretation was closer to Bassil's - but for different reasons.
"The amount of construction will diminish mainly because of the current internal strife," he predicted. "Currently, the squabbling political situation has driven investors away and made developers reluctant to undertake big projects ... Construction activity is going to stop expanding.
"Developers pursue their projects with the intention of making sales," he explained. "If sales are not occurring, they won't proceed with their work."
Before last summer's war, Lebanon had been experiencing a dramatic increase in construction activity, driven by a boom in residential and commercial projects. Construction was among the best-performing sectors of an economy that was decidedly on the rebound, with the number permits increasing by 60 percent from the previous year.
But after war, the rosy picture changed. According to a survey by the Central Bank, overall activity in the construction and public works sectors declined rapidly in the fourth quarter of 2006. In fact, 48 percent of surveyed firms reported a decrease in activity during the period, 8 percent reported an increase, and 44 percent reported no change.
"The unstable political situation and the increase in apartment prices are behind the slashed activity," said bassil. "Demand is currently low."
On the other hand, some real estate brokers don't share Bassil's view.
"There is no huge impact on the real-estate market," said Gemmal. "The increased cost of materials building will only directly affect locals."
Gemmal believes that the real estate market will witness a reduction in demand from local buyers because of their decreasing purchasing power. The clientele for new products, he explained, are mainly Arabs and Lebanese expatriates who won't be heavily affected by the increase of prices.
But other brokers wonder if the market can continue to maintain this relative immunity because the profile of buyers has recently changed. Gulf Arabs have recently shown less interest in the Lebanese market, and locals - who remain almost the only source of demand - cannot afford new apartments, especially larger, more expensive ones.
"The increase in construction cost will affect locals in terms of square meters," said Gemmal. "Local buyers won't search anymore for large apartments. They will search for a second-hand or a smaller product. Instead of buying a 100-square-meter apartment at $50,000, they will search for an 80 square-meter size. Arabs will be the main buyers of large apartments," Gemmal said.
On the other hand, he said, much of the discussion is academic. "How can we talk about sales and prices," he asked, "if there are no clients?"
.......……..…………………..
http://www.dailystar.com