BEIRUT: With some old apartments in prime Beirut locations being leased for as low as $120 a year, politicians and economists agree that the country’s outmoded rental system is due for a makeover.

But as Parliament debates proposed changes, experts warn of trouble ahead for landlords and tenants alike.For landlords, the problem is simple: Rents paid by the tenants according to the old law are far lower than the prevailing prices in the market, and what was good in 1992 no longer applies.

According to the vice president of the Committee for the Rights of Tenants Laws, the old law has allowed some 170,000 of the Lebanese capital’s 210,000 tenants to pay rent substantially below market value.

That value has increased immensely due to triple-digit inflation over the past two decades.

But with wages still lagging far behind rising prices, many Beirut residents could find themselves forced to move, not only from homes they have lived in for decades but also from a city that has suddenly become unaffordable.

And although apartments can be leased for prices set by the market, once Parliament scraps rent controls – probably in the next couple of years – landlords also have reason to worry.

Economist Ghazi Wazni forecasts a glut of rental property that few will be able to afford. “Supply will grow, and demand won’t compensate,” Wazni says. “We will see the Lebanese real-estate market in a quasi-freeze.”

Leases on apartments signed before 1992 are governed by a rental law drafted in 1975 that worked only as long as inflation was kept in check.

But by 1990 the Lebanese lira – worth nearly 50 cents in 1975 – was valued less than 0.05 cents. The Central Bank finally pegged the lira in 1995 to LL1,500 per dollar, where it remains today.

At the same time, driven by foreign investors, Lebanon’s real estate market boomed, with a two-bedroom flat in a desirable Beirut location now worth around a $700,000, up from around $300,000 few years ago.

But that bubble could be about to burst. And if it does, it will compound potential problems for owners already sitting on real estate they are unable to lease out because the end of rent controls have made their apartments unaffordable for the majority.

The real estate downturn that had already begun in 2010, parallel with external regional crises, shows no signs of recovery.

An IMF report earlier this month said “domestic demand is depressed, slowed down by falling investments.”

The IMF blamed “regional uncertainty,” and Wazni echoes those concerns, noting that Lebanon’s “economic situation is tied very much to the political situation.”

The volatile situation in neighboring Syria, which used to have a strong influence on the country, has also dealt another blow to the country’s real estate market with sales in 2011 falling by more than 18 percent.

With so many problems, economists say that the new real estate law will likely come with built-in cushions.

Details being weighed in Parliament include protecting tenants by requiring landlords to give them up to eight years notice. Landlords in turn would have the option of speeding up that process by buying out tenants, paying them up to 20 percent of the value of the apartment if they leave immediately. Also being contemplated are bank credit facilities allowing tenants to find alternate housing during the transition phase.

But the changes come with a price tag that will have to be picked up by the government, notes economist Ramzi Mabsout.

In other words the government may subsidize part of the interest rates on the loans the tenants will obtain from commercial banks to buy new apartments outside the capital.

This, according to Mabsout, will further strain the government’s budget.

And the new law could poke an even bigger hole in the shrinking real estate bubble, with an increase of rental space after old tenants leave – and few new tenants available to pay rents that now are higher than they had previously paid.

Wazni projects that once the law is put into place, “there will be no more interest from investors in the real estate market, neither domestically nor from abroad.”

Meanwhile, economist Simon Neaime says that “the expected excess supply will for sure lower the existing real estate prices, putting further downward pressure on a real estate market already affected by the regional geopolitical turmoil.”

However, not all real estate brokers and developers share this view.

The IMF report noted a shift in the market, saying that while “the boom was driven by the luxury apartment segments, demand has shifted to small apartments.” This is bad news for luxury real estate owners but could benefit landlords of more modest units, as former tenants move out from homes made unaffordable by the end of rent control and look for cheaper lodging.

Realtor Raja Makarem says the new law could encourage investors to “increase investments into buildings targeting low income families,” leading to a boom in pre-rental renovations.

He also expects many tenants to reach agreements with landlords on new leases that slowly adjust rents to the market instead of sudden jumps.

“An oversupply of apartments is out of the question,” he says.

Fellow realtor Tony Abou Rizk agrees, saying demand will continue to exceed supply in Beirut due to excessively high land prices that restrict new home construction.

“Even if the supply is increased, prices will be unlikely to drop,” he said.