The Myth of Resilient Land Prices

The Myth of Resilient Land Prices

After a long period of denial that prices have dropped for ANY apartments, most people have now recognized that there has been a significant drop in prices. However, many of those same people who had been claiming that "prices in Lebanon do not drop" or "prices haven't dropped, there's just no buying and selling" and other such nonsense, have now changed their tune slightly. They're now claiming that large apartments have dropped in price, but small apartments have not. We've addressed this nonsensical claim in a previous post. There is another persistent myth about land prices. It goes something like this. Lebanon is a small country and there isn't much land, so while apartment and house prices can fall, land prices can never drop. The purpose of this post is to analyze that silly claim.

People who have studied real estate and who understand the science behind it, use a concept called "Best and Highest Use." So whenever you appraise a raw (i.e. With nothing built in it) piece of land, you appraise it by looking at the "best and highest use" for this piece of land. For example, let's say that you own a 3,000 sqm piece of raw land in the most expensive neighborhood in Solidere, Achrafieh, or Ras Beirut. Let's say you decide to build a huge statue for your grandfather Latif on this piece of land, with a nice garden around it, for your family to bring flowers and place at the grave of your grandfather Latif. If you make it a condition of purchase that this statue of Latif can never be knocked down (to make way for a high rise or mall or other commercial structure), then what is the value of this piece of land? This is rhetorical question. The value is pretty much around zero, albeit, your cousin Jamil might pay top dollar, because he was a fan of Gramps Latif. However, for most people, the value is zero.

So what is the best and highest value for this piece of land? The answer is a function of the regulations and zoning in this particular neighborhood, but the simple answer is related to how many floors and area of the building you can construct on this piece of land. Sometimes, this is referred to as "the price of air".

So let's say that you purchase a piece of land today. Knowing that the apartments in buildings that have been completed today cannot be sold and that there are hundreds more coming online every few months, it is pretty clear, that your building, which would be completed in 2-3 years, has zero prospect of being sold. Therefore, you would sit on this piece of land for the next 5-10 years, or worse, if you build, you'd have an empty building, haunted by ghosts, and degenerating every year, which will make you pay maintenance and other costs, without you seeing a penny for the next 5-10 or more years. Let's say you bought this piece of land for $10,000,000 cash. If you put the money in treasury bonds, at say 8.5% interest, your money in 10 years would be worth $23 million. On the other hand, if you had bought the land and sat on it for 10 years, you would just sit there incurring costs, with no return, especially if you build on it.

Therefore, mathematically, if there's no demand for finished apartments, then there's no demand for land and their prices would drop, along with everything else.

Finally, one thing amateurs don't take into account when they assess the size of Lebanon in making the silly conclusion that prices of land will always go up, are the loose zoning rules in this country, in which you can build 5-story buildings anywhere from Beirut to Anjar. What this means is that Lebanon is more like Singapore or Hong Kong (minus the infrastructure, 24 hour electricity, and rule of law). In other words, you can put 50 million people in it if you build all these junk buildings all over the country. By the way, if you have any doubt that land prices are dropping (and that there's no demand for them), just look at the bank ads offering to lend you money to purchase them. Why would banks, for the first time ever, offer loans on land, which is the riskiest real estate investment (for people who really understand real estate and not amateurs talking out of their BLEEP)?

ٍSource: Real Estate in Lebanon