Real estate investment in Lebanon (page 3 of 3)

"The northern Souks - including a department store, cinemas and a multi-use building - would be a second step, and would depend on how large a department store Solidere can secure and at what price.

"With the securitization of the southern Souks, the present value depends on how many years of future cash flows are included in the securitization vehicle and the discount rate, which needs to be over 10 percent. But, in my view, Solidere should easily be able to generate today the $60 million it needs to completely develop the southern Souks by securitizing receivables for the next five years, including the receivables from sales of the gold souks."

Dividends. More modest sums are involved in Lebanon's first REIC, Eagle One, although its originators believe later REICs will go beyond its $15 million market capitalization. Like securitization, the REIC allows the investor to participate in the property market without direct ownership and to enjoy a good return with minimal risk. The investor buys shares in a holding company that buys property with a high yield. The shares offer both a dividend and the prospect of capital gain when the company is liquidated, and foreigners would not be restricted in ownership.

The REIC would function like the US real estate investment trusts, which have built up a market capitalization of $130 billion and have generally appreciated along with, or ahead of, GDP growth. But Lebanon has limited legislation on trusts, so Eagle One's legal status is a joint stock holding company.

The identified properties are those let at the height of the market around the mid-1990s when the tenant - often a blue-chip company or foreign embassy - agreed to a rental of 10 percent of sale value. If Eagle One can buy today from capital-hungry owners at, for example, 75 percent of the 1996 price, the yield is instantly converted to 13.4 percent. Eagle One has been actively seeking investors in the Gulf.

The pioneers of these new financial instruments believe that further legal change is needed if secondary markets are to begin fulfilling their true potential in stimulating investment and liquidity.

Karim Salameh advocates a "whole range" of changes. "These include better transparency in corporate accounts, tougher regulation of auditors, wider same-day permissible fluctuations in share prices, and the listing of more companies on the bourse," he said. "But we also need a wider range of financial instruments - options, futures, short sales - to drive the market."

For Iyad Boustany, it is important that an SPV be allowed to own real estate. "Under current law, this is not possible," he said. "But it would be allowed under the securitization law being discussed but not as yet passed by parliament. This could help in cases of default - the more control the SPV has over the securities, the better for investors."

Politically, this is likely to raise the objection that parliament is encouraging foreign ownership of Lebanese real estate, which has been a touchy subject in the past. Boustany believes that the benefits to the country of stimulating secondary markets and attracting overseas capital would outweigh notions of ownership that are becoming outdated.

"In any case the SPV is Lebanese, so the owner is still Lebanese," he said. "The titles can be owned by any person, Lebanese or not, but the owner registered in the real estate register will be a Lebanese SPV."