How to buy prime Lebanese property at an 80% discount

As seen in the January edition of Master Investor Magazine.

A collapsing oil price, the conflict in Syria, and the advance of ISIS don’t exactly make for an inspiring story to invest in the Middle East. Yet times of crisis offer the biggest opportunities. What if the war in Syria came to an end in 2016? And what if you were currently able to invest into prime real estate in the region at just 20% of the current market value? This month’s property story is for investors that like to take anti-cyclical positions.

Anyone who is old enough to have watched TV news during the 1980s is likely to vividly remember the destruction and devastation caused by the civil war in Lebanon. Beirut, the country’s capital, had become a by-word for chaos. Large parts of its central business district had been bombed into oblivion, and what was left standing had bullet marks all over its walls.

Following the end of the 15-year civil war in 1990, plans were drawn up for rebuilding Beirut. During the 1960s, the city had rivalled places such as Monaco and Cannes, and the plans for reconstruction sought to bring Beirut back to its former glory. To make it all happen, a unique and (to this day) controversial decision was made.

Led by a billionaire politician, Rafik Hariri, the entire inner district of Beirut was dispossessed. All property owners instead received shares in Solidere, a company set up by Hariri and listed on the Beirut Stock Exchange. Solidere is an abbreviation for “Société libanaise pour le développement et la reconstruction de Beyrouth”, French for “The Lebanese Company for the Development and Reconstruction of Beirut”. The company ended up owning the entire 200 hectares that make up the central business district of Beirut.

With the financial backing from Hariri, who had made his money in construction in Saudi Arabia, Solidere set out to rebuild Beirut. Conveniently, Hariri’s family also owned a major stake in Solidere. This obvious blatant conflict of interest wasn’t the only controversy that the company had to deal with.

Property owners who saw their land title taken away in exchange for Solidere shares felt their properties were undervalued and Hariri had robbed them of their family heirlooms. Hariri, on the other hand, pointed out the practical nonexistence of a functional government after the war, and the near-impossibility to align all stakeholders – including property owners – with one unified and feasible vision. To his credit, subsequent studies agreed that Hariri’s proposal to use private resources to plan and execute the rebuilding of Beirut was indeed the only viable option.

The controversy didn’t stop there, however. The plans for reconstruction envisioned bull-dozing countless historic buildings and replacing them with the kind of modern architecture that can be found throughout the Middle East nowadays. Locals felt priced out of the market, arguing that the new buildings were for the “Khaleejiyi”, using the colloquial term for Gulf Arabs.

Much of this criticism was no doubt justified, but plans went ahead regardless. Ironically, Hariri was not to see for himself how his masterplan eventually came together. He was killed in a 2005 car bombing, although his family maintained their role as large shareholders. Solidere’s assets totalling $10 billion effectively represent 20% of the entire Lebanese economy, giving the family a powerful role in the future of the country.

Despite all the controversy, Solidere is today widely credited with successfully seeing through Beirut’s rebirth as a bustling destination. The city has not yet earned back its pre-war title of the “Paris of the Middle East”, but it has succeeded in creating a city centre that by now has been featured in countless travel magazines as a must-see place in the Middle East.

The masterplan process had been led by British architect and urbanist Angus Gavin, formerly of the London Docklands Development Corporation. As the Guardian once described it, Beirut is now “an odd mixture of careful urban design and preservation, dotted with showy outbursts by big name global architects. A good number of streets have been impeccably restored to their beaux-arts glory, with colonnaded pavements and beautifully carved stonework along cornices and window reveals, reviving the fusion of French colonial and Levantine vernacular.” For better of worse, Beirut now has the usual rows of stores from Gucci, Virgin, and Rolex. Rents are sky-high, and locals have indeed been priced out of the market to a certain extent.

Solidere has even branched out to handle construction projects in other parts of the Middle East. However, 90% of its assets are still in Lebanon. It’s as close to a pure play on the Lebanese economy and property market as you can get. Its shares have been traded on the London Stock Exchange as Global Depositary Receipts ever since the company was created in the mid-1990s. Anyone with a brokerage account can easily buy and sell shares in Solidere in London, offering a much easier option than physically buying property in Lebanon.

What’s more, Solidere shares are currently trading at a huge discount to their underlying property value.

Following the initial success in rebuilding Beirut, the share price soared from $5 in 2004 to $39 in 2008. Since then it hasn’t been trading anywhere near that price again. The global financial crisis and the ongoing political instability of the Middle East took its toll, and at last count the share was trading at around $10. The Net Assset Value per share was last calculated at $51 per share. Such a large discount to Net Asset Value is unusual, and offers investors the opportunity to buy into an asset on the cheap. Solidere debt gearing isn’t particularly high, leaving the company largely immune from the financing issues thrown up by the financial crisis.

It is of course possible that the volatility of the Middle East could lead to the share temporarily trading even lower. However, in the long term, and assuming the Middle East doesn’t descend into all-out chaos, the gap between the Net Asset Value and the share price is likely to decrease again. Investors might now have a similar opportunity to the one in 2004, when the share was undervalued and subsequently multiplied in value. Needless to say, such an opportunity comes with its own set of risks, which is why such an investment should never make up more than a small percentage of an investment portfolio.