To the shores of Tripoli

Long an international pariah, Libya is increasingly being talked about as a potential destination for real estate investors. Though it may take time before private equity real estate firms can invest there, the market is slowly opening up. By Aaron Lovell

Shortly after Dale Anne Reiss' cruise set sale from Athens, they got the bad news. The tour would not be stopping in Libya as planned.

“They said, ‘Gee, we're sorry. We can't get your visa,’” Reiss recalls, adding that there were plenty of warning signs that entry into the notoriously closed-off country could be troublesome. She had met people on the cruise who had unsuccessfully tried to enter Libya three or four times.

Reiss, the director of global real estate for Ernst & Young, was not planning to visit Libya for work; rather she wanted to visit the country as part of a Mediterranean cruise that she was taking with fellow alumni of the University of Chicago.

Algeria was added as a late-minute substitution and the ship made it to scheduled ports of call in Crete, Tunisia and Sicily. But it was small consolation to Reiss, who was particularly looking forward to touring the ancient Greek and Roman cities of Libya—former outposts like Leptis Magna, located 120 kilometers from Tripoli and a thriving Roman trading town in the time of Tiberius, and Cyrene, a Greek colony dating to 600 BC and written about in the work of Herodotus.

“This [sort of incident] is going to create uncertainty for people and investment in Libya,” she says, recalling how excited she was after first traveling to Dubai—and how much she talked the emirate up to friends and colleagues. “Clearly, you cannot do that for Libya if you can't get there. In fact, the opposite will happen.”

Reema Ali, an attorney with Ali and Partners, a Washington DC firm specializing in Middle East law, says that these sorts of problems are widespread in Libya. Obtaining a visa is not just difficult for a boat-load of globetrotters hoping to see the ancient Roman ruins of Sabratah; it is also an issue for US companies looking to invest in the country.

Ali suggests that the visa problems arise because the Libyan government requires certain passport information to be translated into Arabic. Issues surrounding reciprocity with the US might also be a factor. Even more important could be the country's long history of isolation from the West, something that has only recently begun to change.

Libya has recently started to emerge from a prolonged period of sanctions and political isolation. Since a bloodless 1969 coup led by Colonel Muammar Abu Minyar al-Qadhafi, the country has officially been known as the Great Socialist People's Libyan Arab Jamahiriya. It nominally operates according to the tenets of the Third Universal Way, Qhadafi's own brand of socialism, Islam and traditional tribal practices, which allows him to rule the country with an iron fist.

The United Nations sanctioned Libya in 1992 amidst allegations that Qadhafi was protecting two Libyan intelligence agents indicted for the 1988 bombing of Pan Am Flight 103 over Lockerbie, Scotland, a terrorist attack that killed 270 people. That violent incident capped a decade of hostilities and attacks between Qadhafi and the US. The Lockerbie attack was a response to the US bombing of Libya in 1986, which in turn was in retaliation for the country's role in the bombing of a Berlin discothèque frequented by US servicemen. As US-Libyan relations continued to deteriorate throughout the 1980s, President Ronald Reagan famously referred to Qadhafi as “the mad dog of the Middle East.”

Libya spent the better part of the 1990s as a pariah state until the UN lifted its sanctions in 2002. Then, in late 2003, Libya announced that it would discontinue its chemical and nuclear weapons programs and the following year the country settled outstanding compensation issues related to other terrorist attacks in the 1980s, including the Lockerbie bombing.

The US eventually took Libya off the list of countries that sponsor terrorism and in 2004 Qadhafi visited Brussels, his first trip to Western Europe in 15 years. The country has continued to normalize relations with Europe and the US and has taken steps to liberalize its economy, easing restrictions on property laws and making it easier for foreign oil firms to operate in the country. Libya has a gross domestic product of approximately $68 billion (€88 billion), around a third of which is tied up in the country's oil trade. Petroleum currently accounts for 95 percent of Libya's export revenue, according to statistics maintained by the US government

With the slow thaw of business relations in Libya, a number of private equity real estate firms have hinted at the possibilities in the country, especially as funds look towards emerging markets in search of higher returns. The fourth largest country in Africa by area, Libya has 5.9 million people, more than 1,770 kilometers of Mediterranean coastline and a growing petroleum trade, offering potential opportunities in the office, hotel and tourism sectors. But if tourists have difficulties just getting visas, can foreign property investors get access?

In Libya, Law Number 5 provides a legal framework for foreign direct investment, as well as tax incentives and dutyfree provisions. First enacted in the late 1990s and updated in 2002, the law requires prospective foreign investors to submit an application, complete with a detailed feasibility study and a five-year business plan, to the Foreign Investment Board. International firms looking to invest in real estate can work in joint venture with the government, a move that has been popular with groups from the Gulf Cooperation Council states, or partner with a local operator.

Perhaps most importantly, Law Number Five allows firms to hire non-Libyan employees, repatriate profits and open an account in a convertible currency; other laws restricting foreign direct investment in real estate were also recently relaxed.

“The attraction of Northern Africa is you are within three hours flying time of Northern Europe. You've got guaranteed winter sunshine. You've got history. You've got culture. You've got ruins.”

“If you have a local representative and you have your documents in order, then you're likely to be able to get through,” notes Ali, whose law firm established a Tripoli-based practice in 2004.

However, there are still concerns. Because the government illegally confiscated a significant amount of land, establishing the proper ownership is a difficult issue. “A great deal of property owned by the government doesn't have the clear title to it,” she says. “Someone somewhere may step up and produce a deed to that land.”

This situation has created two property markets in Libya, a black market where landowners do not possess a deed and a more legitimate market where the proper ownership can be verified. Ali says that the government has set up a committee to compensate disgruntled landowners, but this can still be a snag for property investors.

Nevertheless, Ali adds that the government has taken steps to make the process easier in order to encourage foreign investment. Libya is taking a step-by-step approach to liberalization, she says, which, combined with the national fondness for committees, makes the process more arduous than it perhaps needs to be.

“The attraction of Northern Africa is you are within three hours flying time of Northern Europe,” says Richard Cotton, senior partner at London-based property firm Cluttons. “You've got guaranteed winter sunshine. You've got history. You've got culture. You've got ruins.”

Indeed, market participants discussing the Libyan property market highlight its potential as a tourist destination. In addition to the preserved Roman, Greek and Islamic ruins, Libya boasts popular activities like trekking in the Sahara, as well as attractions like unadulterated beaches and the bustling city of Tripoli.

“It's just completely empty,” says Ryad Sunusi, president and chief executive officer of Tripoli-based private investment firm Phoenicia Group, referring to the country's undeveloped shoreline. “Some of the beaches here are like the French Riviera.”

The appeal of such pristine coastline is obvious, both for property developers and consumers. According to Cotton, there is a proven demand by Western Europeans for second homes and resort properties throughout North Africa. “We know the market is there,” he says.

Libya only needs to look to other countries like Morocco and Egypt, which are benefiting from booming tourist markets to see the potential—according to the World Tourism Organization, Egypt hosted more than 8 million tourists in 2005, while Morocco saw close to 6 million. By contrast, Sunusi estimates that only 600,000 visitors come to Libya each year. And it's not just because they can't get a visa.

One of the primary reasons is infrastructure. Egypt and Morocco have enough well-developed roads, hotels and casinos to accommodate those numbers. In Libya, it's another story. But Simon Naudi, a director at hotel investment and management firm Corinthia Group, sees this underdevelopment as a positive.

“Libya has an opportunity to be targeted and focused in the development of their tourism infrastructure—and [it can] avoid the mistakes found elsewhere in the Mediterranean,” he says, noting the overdevelopment found in some resorts in North Africa and Europe.

Naudi should know. Corinthia has developed the sole international, 5-star hotel in the country, the Corinthia Bab Africa Hotel in Tripoli, a 299-room luxury property that includes five restaurants, a conference center and a presidential suite. The complex also has Class-A office space, which has been fully leased to firms like Madison Oil and Conoco Philips.

“The hotel has been thriving since the day we opened the doors,” says Naudi. He says investing in Libya is only natural for Corinthia, a Maltese company, since Malta and Libya have a long history of trade and international business ties. In fact, the investment arm of the Libyan government, the Libyan Foreign Investment Company, acquired shares of Corinthia in 1974.

Naudi says his firm is expanding its operations in Libya and is currently developing Palm City, a 400-unit, gated residential compound in Tripoli that is hoping to attract the expatriate market. Corinthia also hopes to develop resort-style properties on the coast.

Last fall, Dubai-based Emaar Properties announced a joint venture with the Libyan government to build Zowara-Abou Kemash, a 200-kilometer development zone encompassing residential, commercial, industrial, educational, medical, leisure and entertainment components near the Tunisian border.

That deal grabbed headlines as an example of the country's relaxed foreign property laws and was reportedly inked by one of Qadhafi's sons, Saadi, a businessman and the commander of the Libyan military's special forces unit. The younger Qadhafi plans to be a director in the venture. In a press release, Emaar said the development is being “planned to attract foreign investment and generate employment opportunities for Libyans.”

Libya, as an emerging market, holds great potential for growth,” Mohamed Ali Alabbar, the chairman of Emaar, said at a signing ceremony. “The country has announced a series of steps including plans for privatization that are key pillars in its transition to a more free-market economy.”

It is also taking steps towards making the country more attractive to tourists and visitors. Sunusi says development zones like these will allow developers to bend some of the country's more restrictive rules. For example, while the consumption of alcohol is illegal in Libya, the development zone near the coast could get a special provision to serve liquor.

In addition to the Emaar deal, there are other signs that investors are slowly looking at Libya as a potential emerging market.

Late last year, when Dubai-based private investment firm Istithmar acquired a stake in International Hotels Investments, the investment subsidiary of Corinthia, it noted the possibility of expanding its hotel platform further into Libya. And Ali notes that her firm has seen general business in the country pick up since Libya was taken off the US government's list of states that sponsor terrorism. Much of this growth is in the oil sector, though Susuni's Phoenicia Group is looking to launch the first-ever private equity fund in the country.

Naudi says in his experience the government is serious about opening the country up to more foreign investment. “The direction is there,” he says. “We see it every day.”

That said, there is plenty more to be done. For instance, Susuni says that the government needs to work on its public relations. He notes that the free trade zones are hard for foreign investors to learn about: There is only one point of contact for the program and the information isn't available online.

Libya is sometimes compared to Cuba, in that real change may only occur when the current leader is gone. Still, some market watchers like Cotton disagree. “It's simply about making the country accessible after a long period of it being inaccessible,” he says.

But this might be easier said than done. As Reiss notes, during her cruise, she saw the potential for tourism in two of Libya's neighbors, Tunisia and, to a lesser extent, Algeria, both of whom were working to improve their infrastructure. With ruins like Leptis Magna, she says, there is little reason Libya shouldn't be on that list as well.

“Pardon the phrase, but Rome—or Leptis Magna—was not built in a day,” Reiss says.