Real estate investment in Lebanon (page 1 of 3)

By Gareth Smyth BEIRUT

Business news in Lebanon this summer was made by record post-war numbers of Gulf tourists and the opening of new hotels, including a Movenpick resort and a 200-room Crowne Plaza. But more significant for the long term may be two quiet attempts to foster secondary markets.

The success of tourism cannot mask continuing problems in the Lebanese economy. Public debt has risen to $28 billion, over 175 percent of GDP and one of the world's highest levels, and the government's borrowing demands have driven up interest rates to double digits, reinforcing the banks' conservative lending policies and crippling businesses.

Despite the moribund state of the Beirut bourse, where trading barely touches $50,000 on most days, some Lebanese are looking to foster vibrant secondary markets, which are seen in developed economies as crucial to the success of primary markets. Alone, secondary markets cannot turn around the Lebanese economy, but they could help kickstart new investment.

Two important recent initiatives involve real estate, traditionally Lebanon's most successful sector after banking and tourism, but one where practices remain very old-fashioned. July saw the Saradar Investment House launch Eagle One, the country's first real estate investment company (REIC). Eagle One aims to purchase properties of around $15 million and list on the Beirut Bourse in around 18 months.

BEMO Securitisation, which was created eight years ago by BEMO bank, structured investment to corporate clients. In April, BEMO Securitisation launched the first securitization transaction in the Middle East and North Africa region: Indigo I issued $6 million asset-backed notes for Solidere, the listed real estate company responsible for rebuilding Beirut central district from wartime devastation. The tradable notes mature in three years, and they offer a fixed yearly return of 5.75 percent - plus the possibility of a higher return if Solidere stocks rise.

Both initiatives are intended to offer the investor good returns plus liquidity. With Eagle One, investors will buy shares in the company, which will own real estate, and receive dividends and, if the market rises, enjoy capital accumulation when Eagle One winds up in 10 years.

"By then all properties would have been sold and disposition sums distributed to investors," said Karim Salameh, the managing director of the Property House, a sister company of Saradar Investment House. "The orderly disposition of properties calls for a gradual sale when real estate prices become attractive again." Eagle One expects the combination of dividend and capital gain to amount to around 15 percent per annum.

In the case of securitization, the investor buys a security, issued by a "special purpose vehicle" (SPV), that entitles the investor either to a fixed return or to a (lower) fixed return bundled with a variable (usually profits).

The SPV is a distinct legal entity from the "parent" company, or "originator." "Securitization is the process by which non-tradable assets are converted into tradable securities," said Iyad Boustany, vice-president of BEMO Securitisation. "Illiquid assets like mortgage loans, auto loan receivables, or cash credit receivables are packaged, underwritten and sold in the form of securities to investors."

Collateral. Although the underlying collateral for Indigo I's notes is Soldiere shares, Indigo I does not own real estate. The whole scheme depends on the quality of Solidere's assets, although it is incidental that these happen to be primarily real estate, essentially its land bank.

"Lebanese law allows the establishment of SPVs in that it allows one entity to have several estates," said Iyad Boustany, vice president of BEMO Securitisation.