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Beirut Can Bloom Again

Source: Forbes.Com

Lysandra Ohrstrom 07.26.06, 6:00 AM ET


BEIRUT, Lebanon -

To all the horror that the bombing in Lebanon is causing in ordinary lives, you can add the end to what had been a heartening boom in the troubled country's real estate market.

Right? Well, not necessarily.

Beirut has a history of surprising comebacks despite the wars and radicalism that have plagued it for decades. Even today, some optimistic developers here insist they see light at the bottom of the bomb shelter.

Before the outbreak of the latest round of hostilities, Lebanon had begun sharing in the realty riches that have flooded markets worldwide in recent years. Buoyed by a flood of petrodollars, the economy seemed to have finally shed the stained legacy of a 15-year civil war and restored its credibility as a viable recipient of foreign direct investment.

Soaring demand caused commercial real estate prices in downtown Beirut to grow 70% over the past 11 years--from $88 a square foot in 1995 to $150 a square foot in the months before war broke out. The assassination of former Prime Minister Rafik Hariri last year slowed things down but didn't undo the momentum.

After the "Gucci Revolution" (dubbed that by Hezbollah and Syrian sympathizers), protests were finished, Gulf nationals began coming back to Lebanon in droves. Surplus oil revenues poured into high-end residential and tourist developments in Beirut Central District.

The booming prices and relative political calm also brought vacation-condo buyers--mostly tourists from other Gulf states, hoping to escape the social restrictions imposed in their home countries. Beirut was quietly reclaiming its status as the playground of the Middle East--"the Bedouin's brothel," its detractors called it.

It was the low cost of construction in Beirut that first attracted developers. Most of the big investors were Saudi Arabian, Kuwaiti and Emirate moguls. But some noted Westerners got in, too. Ivana Trump formed a partnership with Dubai-based property giant Damac Holdings. And a venture involving French designer Phillipe Stark was announced last year.

The Israeli air strikes and retaliation by Hezbollah have put a freeze on these projects. The sounds of fighting have replaced the din of construction. Yet remarkably, some of the developers insist all this is no big deal.

It's impossible to tell if theyíre just trying to be positive or deluding themselves. But Damac Chairman Hussain Sajwani insists that plans are still on track for "La Residence by Ivana Trump," the 27-story, $150 million luxury apartment complex.

Trump's spokesman told last week that the project was "on hold." Sajwani says that's only temporary. "We are going ahead with it because we think in the long term Lebanon is a stable investment climate," says Sajwani, who had planned to complete construction by 2009. "We hope things will still be on time, but we will have to wait and see if things get worse [and] there might be a delay."

Some 40% of the units in the La Residence have already been sold, and an additional 30% have been reserved, says Sajwani, who claims that no investors have tried to pull out yet.

"We havenít had a single case of anybody backing off from the La Residence," he says, adding, "I don't think anyone, including Ivana, is worried about the long-term security of their investment, though I can't speak on her behalf."

Aren't Sajwani's customers at least a little bit concerned? Bombs have dropped less than a mile away from Damac's development site.

He pledges that any indirect consequences of the violence, such as rising interest rates, will not deter Damac, which intends to move forward with its Lebanon expansion plan and pump about $500 million into the country over the next four years. "Interest rates are going up worldwide, and of course this naturally affects the property market," Sajwani says. "But we feel that real estate is one of the securest, least volatile investments."

The list of developers with projects now on hold is long. The Abu Dhabi Investment House was midway through the construction of the $600 million Beirut Gate Complex.

Stark and his partners were in the midst of developing a ten-building tourist and residential complex in cooperation with the Saudi Arabian Royal Hotels and Resorts company. And Hyatt, Hilton and Four Seasons hotels were all under construction in Beirut.

Damac's Sajwani isn't the only optimist. Salah Al-Mayyal, the Kuwaiti mogul behind the largest foreign direct investment in Lebanon's history--the Phoenicia Village, a three-building, $1.1 billion, residential and commercial complex--says a diplomatic solution is on the horizon. Four to six months is all it will take, he says.

Al-Mayyal's development site is prime--near Beirut's upscale Tabaris area. Unfortunately, it's also a 15-minute walk from craters made by Israeli bombs.

Sure, a mile in Beirut is a long way--the city is divided block by block along class and religious lines. And even before the bombing began, no Christian Beiruti would dare set foot in the Southern Suburbs, the de facto Hezbollah area.

Moreover, there has been a massive exodus of the Syrian workforce. They were the cheap labor in Beirut. And there have been no deliveries of sand, cement or gravel by land or sea since early July. But Al-Mayyal believes that once the naval blockade is lifted, the blow-back to the real estate sector will be minimal. Even the cost of imported building materials should stabilize, he claims, since the costs are predetermined through futures contracts.

"Lebanon has always been a favorite destination for inter-Arab investment, second only to Egypt, and there has always been political uncertainty," says Al-Mayyal. "As long as things don't get worse, this isn't going to change."

The internationally recognized Fitch's Sovereign Ratings Group is less Pollyanna-ish about Lebanon's prospects. Fitch downgraded Lebanon's outlook rating from "Positive" to "Stable" after only two days of violence, saying that the extent of the economic damage will depend on the time frame and severity of Israel's attacks.

Direct losses from the bombardment of national infrastructure have already reached $1.5 billion, according to Finance Minister Jihad Azour. Given Lebanonís reliance on foreign investment, which accounted for 10% of gross domestic product in 2005, the mounting indirect economic losses are impossible to predict.

If the optimists are right and Beirut comes back, itíll be thanks to the city's status as one of the few places in the Middle East where Arabs feel safe letting their hair down. The rich Khaleejis to whom developers sell condos and rent hotel rooms have put up with the outrages of Lebanese politics for years. There are simply few other destinations in the region that allow muhajiba (veiled) women to strut around in the latest fashions while their husbands cavort at "super nightclubs" with Russian escorts.



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