In the wake of breaking the country's political deadlock, with both a president and a cabinet now in place, Lebanon's construction sector is looking to better times, after more than two years of war, internal conflict and instability.

According to figures released by the Order of Engineers of Beirut and Tripoli on July 22, approvals for building permits jumped by 19.5% in June compared to the same month last year. Building projects covering 1042 sq metres were given the official go-ahead last month, with 48.8% of the permits being granted for work in the Mount Lebanon region and a further 13.7% in Beirut.

In its weekly report on the Lebanese economy, published on July 22, Bank Audi credited the agreement reached in the Qatari capital Doha to form a national unity government as providing "yet another push for contractors to launch new projects, aside from their will to benefit from the on-going real-estate demand".

Although the construction industry has been battered by the fallout of Israel's incursion in the summer of 2006 and the loss of investor confidence resulting from political infighting, the sector has made steady progress. While a number of major developments were put on ice, projects covering more than 5m square metres have been approved so far this year.

The local construction industry was given a significant boost with the news that Kuwait-based Levant Holding was to relaunch a $2bn real estate project in central Beirut. Originally slated for April 2006, Levant's mixed use residential and commercial Phoenician Village development came off the table following Israel's military strike in July that year.

Though it appears increasingly buoyant, Lebanon's construction sector is not without problems. Skyrocketing materials costs are hampering some projects, especially those contracted by the government.

In response to the effects of rising prices on their members, the Order of Engineers and Architects of Beirut and the Lebanese Contractors Syndicate (LCS) has called for protest action, suggesting work could be halted at construction sites across the country.

One of the biggest issues facing building contractors carrying out work for the government has been that they are locked into long term state contracts that do not take into account fluctuating materials costs.

Lebanese contractors were being forced to take all the risks associated with rising building materials prices, Fouad Jamil El Khazen, the head of the LCS, told local press on July 24.

"These price rises are simply not being seriously considered by the Council for Development and Reconstruction or any of the relevant government ministries," he said. More should be done by the state to rein in rising prices and to apply an inflation-based component on contracts for major building and infrastructure projects, he added.

Along with many countries in the region, Lebanon is experiencing a shortage of cement and other materials. Combined with a near 50% rise in the price of steel in the past six months, the construction industry is struggling to complete projects on time and within budget. Rises in the cost of other essential products such as oil, water and electricity, which increased by 11.1% in June, are also adding to the pressure.

Another concern, raised by the governor of Lebanon's central bank, Riad Salameh, is that soaring demand will create a real estate bubble, as many buyers are funding land and building acquisitions through bank loans with limited equity to back them up.

One way to take some of the heat out of the market would be making it a requirement for borrowers and investors to post the equivalent of 40% of the value of their approved property loans, argued Salameh.

"The Central Bank is respectful of the market forces determining or dictating the prices of properties. But our concern is not to develop a bubble in real estate and that's why we are discussing the idea of 40% equity of the total property loan," Salameh told local press on July 11.

Just days after Salameh's warning, the Directorate of Real Estate at the finance ministry released figures showing the extent of Lebanon's real estate boom. In a report issued on July 15, the directorate said there had been a 19% rise in the number of properties sold in the first five months of the year compared with the January to May period in 2007. However, the value of these transactions was up by 72%, totaling $1.99bn, the report said.

While investors are returning to the real estate market, with the renewed interest having a direct impact on to the construction sector, many foreign firms are adopting a cautious approach.

Nabil Itani, the head of the Investment Development Authority of Lebanon, the state body charged with attracting investment to the country, said that despite overseas interest, no new major projects had been committed to.

"Investments are a long-term strategy. Many of the potential investors want to study carefully the economic sectors in Lebanon before deciding where to spend the money," Itani told the local media on July 18.

This caution may be justified, with the unity government yet to agree on its joint policy programme more than two weeks after it was formed and a renewed outbreak of fighting in the northern city of Tripoli on July 26 leaving several people dead.

Source: Oxford Business Group