Financial Engineering and its Contribution to the Real Estate Collapse:
Pretty much everyone now agrees that large apartments have dropped in price and we've addressed the reasons for this in previous posts, which is the drop in oil prices, the withdrawal of Gulf nationals from the market, and the reduction of wealth among our expats in the GCC and Africa, which were the main source of funding in the past.
There's one more reason. Many of you might have heard about the swap or "financial engineering" that occurred last summer (If you haven't heard about it, we include a link at the end describing it). By the way, when they call it "financial engineering" it sounds complicated, cool, and high-tech, especially in Lebanon, where all our parents want us to become engineers or marry engineers. However, all it was really was some Houdini maneuvering, entailing the printing of some spanking, brand new Lira notes, and using those new Lira to pay banks an interest of around 38% on the Lira, in return for them convincing some rich, but dumb, depositors to bring new dollars into the country, which had a large $ shortage last summer. Except, the rich depositors weren't as stupid as the banks thought, so they basically recycled money from one bank in Lebanon, to another bank outside Lebanon, like Dubai, then back to a 3rd bank in Lebanon to "meet this BDL requirement." In other words, the net $ deposits increased by a negligible amount of around $1 billion or so. All the rest, was recycled Lebanese deposits. What did the lucky few receive for their trouble? Interest rates of 20-25% on dollars! Yes, you heard me. 20-25% on dollars, while you might be lucky to get 5-6% at your local bank. What did the banks get for doing this? They get to show one more year of artificial, bull$hit profit and get huge bonuses for the managers, while their bank is actually reeling from bad expansions pretty much everywhere, from Turkey, to Syria, to Egypt, to Iraq.
So for those real estate developers naive enough to think that these rich depositors would come back into the market and buy their overpriced junk, let me ask them this. If you had $1 million cash and could put it in one of the largest banks in the country and get back $1.25 million in one year, would you do that or would you buy an overpriced apartment in Achrafieh or downtown?
I don't think a lot of people can fathom an annual return of 25%, so we'll try to help you. So let's say that instead of attending AUB, you invest the $100,000 it would have cost you for a 4-year degree at 25% for 20 years, does anyone know what you'd have at the ripe age of 38 years old?
The answer is ... drum roll ... $8.7million.
So back to our optimistic developer. Let's ask him again: If you had $1 million cash and could put it in one of the largest banks in the country and get back $1.25 million in one year, (or $87 million in 20 years) would you do that or would you buy an overpriced apartment in Achrafieh or downtown?
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