Written by Mina Yirga - Horizon Ethiopia Staff Writer
Tuesday, 15 July 2008
One of the most prominent trends in Ethiopia over the last decade has been the explosion of the Real Estate industry and its impact on the economy as a whole. From residential estates to high rise office buildings, the sector has proliferated urban areas with new construction that together with the ever expanding transportation system, promises to completely transform the urban landscape forever in the next five years. In fact, it would not be far from the truth to refer to the real estate market in Addis as one of the hottest in the world and indeed it is now more expensive to buy residential real estate here than in many other metropolitan areas of the world. While some observers may find this fact to be rather shocking, many factors have come into play in order to achieve the level of extraordinary activity the sector is seeing now and has throughout the last decade.
Lafto in Southwest Addis. 15 years ago, even Mekanisa (above Lafto) was a sparsley populated area and present day Lafto was just wide open fields.
From Repressed Past to Soaring Resurgence
The high levels of activity seen in the Real Estate sector today are a stark contrast to the days of the Derg regime when such activity – especially in the highly organized forms seen today – was practically non-existent. This was directly attributable to the governments iron grip on the private sector in general as well as very thorough discouragement of real estate development in particular as a private sector business. Although the current government policies still do not allow outright ownership of land, most other restrictions regarding the use of land for a variety of real estate activities have been removed. This then was the context in the mid-1990s when a few pioneering companies began to conceive of large scale developments and offered buyers the opportunity to buy into them with promises of low priced but good quality housing. Ayat became the first major, successful residential real estate developer of the era, planting the seeds for the impending desire by many to invest in the lucrative business.
It first started offering plots for development on the western outskirts of Addis Ababa around 1995. Despite the endemic problems associated with the still relatively young industry, it became clear in very short order that Ayat and some of the other earlier entrants like Berta, Ropac and Sunshine, had tapped into an enormous reservoir of pent up demand for housing in Addis resulting in first a trickle and then a flood of new entrants into the sector. Some of the notable names that have entered the market in the last 5 years or so include ENYI, Kara Kore and Akakas. In the last 4 years, more than 400 real estate developers have been licensed in Ethiopia although the number that are actively developing properties is a very small fraction of that number. In Addis alone, over 2.7 million sq. meter of land have been leased to developers suggesting that the current activity levels may only be a precursor of much more to come.
In front of ECA - a hotbed of commercial construction.
The commercial segment of the industry has been no less potent and largely followed a similar path. A few pioneering ventures into the space – the most notable of which was probably Dembel Mall, completed in the latter portion of the 1990s and still standing today as one of the finer and better planned facilities – established that there was a lucrative market for commercial real estate triggering an increasing rush of developers into that space. The activity levels over the past 3 years in particular have been awe inspiring with dozens of high rise buildings under construction in Addis at the present time alone. (For more on the commercial real estate sector, please see the ‘Out of Office Space’ article in our Business & Development section).
How much did you say?!!
One of the most striking aspects of the residential housing market in Addis is the price one has to pay both in relation to those in other metropolitan areas of the world as well its almost incongruous disparity with what the vast majority of residents in the capital can afford. The price for an average 3 bedroom, two level home in the Bole area sited on 500 square meters can range from 2.5 – 4 million ETB or approximately 250-400,000 USD. By contrast, a comparable house in a fairly desirable neighborhood in Dallas, Texas could certainly be gotten for under $200,000 USD. That would ostensibly make housing in Addis more expensive than in the 9th largest city in the United States where the median home price is actually only $127,690 and the average salary is just over $60,000 USD per year.
One of the pricier homes one can buy from a developer at the moment. Prices for homes at the Country Club Development in Legetafo can range from 2 million ETB to 3.7 million ETB or $370,000.
There are a number of factors which play a role in creating this oddity. Firstly, there is the inordinate focus by private sector developers on the upper end of the market. The as yet unsatisfied demand in that segment has the vast majority of such developers scrambling to satisfy this high margin segment of the market and the competition to procure the land on which to build such housing has sent lease rates skyrocketing throughout the city. At the moment in Addis (or its immediate environs such as Legetafo), it is practically impossible to find land at lease rates less than 2000 ETB per square meter. In the Bole area, that number rises to 4000 ETB and there were even recent reports that a 500 sq/m. plot of land in Merkato went for 5,500,000 ETB (11,000 ETB/sq.m.) although this was most likely targeted for commercial use.
Secondly, many of the buyers of homes in this segment of the market are either Ethiopian Diaspora or expats settling down in Ethiopia for some time. At some developments the Diaspora account for over 80% of all transactions and at another, a significant percentage are accounted for by expats. For a good part of this demographic, the pricing levels seen in previous years may have seemed like a bargain compared to what they might pay in their normal domiciles although this is certainly no longer true anymore. For many Diasporans, purchasing housing is one of the few safe and easily manageable investments they can make in Ethiopia more or less remotely (for more on this topic, see our ‘Diaspora Affairs’ article, “The Habesha 401K plan”). Given the dramatic appreciation rates of previous years, it may certainly have seemed like a smart investment a few years ago but the prevailing high costs of housing in the city, high overall inflation in Ethiopia and the global fallout from the US housing market collapse has dampened such expectations considerably. Nowadays, buying seems to be motivated more by the mantra, “If I don’t buy know, it’s only going to get more expensive later!”
Finally, there is the strength of the underlying market for real estate rentals that has supported and in fact encouraged ever higher prices for the purchase of the same. Given an understanding of who’s doing most of the buying of real estate property, it should come as no surprise that many of them do not actually live in these properties. Rather, a significant number of them put these properties out on the rental market which has been and continues to be buoyed by an ever growing international community serving the increasing size and number of development and non-governmental organizations not to mention the escalating rush of private sector investors to the country. Peruse the classifieds section of a local paper and you will routinely see rental rates in the 20-30,000 ETB/mo range.
Price escalations for property are not confined to Addis either but apparently extend out to other urban areas as well. At 700-1000 ETB per square/meter, little Awassa appeared to be one of the priciest locales from the ones we checked. But it’s not like any of the other ones are that far off either. The precise nature of what’s driving up prices in these locales is less clear than for Addis given that Diaspora purchases or the market for rentals is likely nowhere near the levels in the capital.
Other Defining Characteristics of the Market
Most developers in Addis will not construct a home unless they have a committed buyer for it. So you generally cannot walk into an existing development and simply pick a model that you like and move into it a few weeks later. This gives rise to another attribute of the industry in Ethiopia that leaves many buyers frustrated to no end. Delivery timeframe commitments are generally in the 18-24 month range and actual deliveries frequently surpass this by significant margins.
Ayat where it all began. Despite many earlier challenges such as late deliveries and price escalations, this pioneer in the industry has built over 2000 homes and is still going strong today.
In truth at least some of these delays have little to do with any particular developer but are more related to the high rate of activity in the sector overall which puts a lot of pressure on building supplies such as cement, metal and other critical supplies. However, a small number of newer entrants to the industry have begun to adopt pre-building approaches that they believe will not only yield more satisfied customers but healthier profit margins as well. Indeed almost all of them have attempted to help address another glaring issue in Ethiopia’s real estate sector which is the lack of substantive mortgage instruments from the finance sector to help homebuyers spread their purchases out over significant lengths of time. Finally, it must be noted that the process of buying a home in Addis is marked by a lack of good information outside of rumors, anecdotes and whatever your delala (freelance brokers) chooses to tell you. Information about what prices similar homes sold for recently or are even currently listed at is not easily available at all and frequently results in poor decision making by buyers and sellers alike.
Where is the market going?
There are so many variables at hand when considering this question that it is prohibitively difficult to predict an actual direction for the market. But there are some clearly visible trends which can reasonably be expected to be the primary driving forces behind whatever direction the market eventually moves towards.
• The proliferation of real estate developers in Addis focused on the high end market will lead to ever increasing competition for the upper segments of the market. • The pool of available buyers in this segment will steadily diminish due to the high prevailing prices and also due to the current global financial crisis. In particular the upheaval in the US mortgage industry has caused significant financial distress to some segment of the Ethiopian Diaspora who would otherwise have been willing buyers. An apparent softening of the residential rental market in Addis may further exacerbate deteriorating demand for high end housing. • Developers will face increasing pressure to pay attention to alternate market segments as demand softens in the upper end. Indeed Access Real Estate is planning to do just that by intending to primarily offer homes in the 400-600,000 ETB range. It will not be long before more developers follow suit. • Government plans to construct 200 +25 story skyscrapers in Addis over the next decade or so will buttress the low cost housing segment but will also put additional pressure on the supply of building materials for the overall market • The entire industry will be increasingly compelled to move towards using lower cost materials such as drywall, gypsum board and other prefab methods. This will not only reduce the overall cost of building but could also result in improved delivery timeframes and consequently the rate at which developers can satisfy outstanding demand. • Some of the newer banks to come into existence have stated an intent to offer more substantive mortgage instruments (in particular those which rely less on collateral than perceived credit worthiness) to the population at large. This could unlock demand in a very sizable group of potential buyers which otherwise would not be able to afford their own homes.
Possibly the most awe inspiring activity in real estate development is here - the Meri Luki area of town. In the immediate surrounds of the CMC complex, much of the incredible activity here has occurred in just the past two years.
Despite the difficulty of predicting where exactly the market will move, it may appear that some of the driving forces will apply downward pressure on the market. Does that mean you can expect housing prices to decline in the future? Don’t bet on it. Due to the aforementioned lack of sufficient mortgage mechanisms in Ethiopia, the vast majority of completed residential real estate is substantively paid up. Therefore the normative analysis that may have otherwise led to the conclusion of a mini bubble in the Addis housing market may not be valid at all. And the good news for developers is that there is an existing reservoir of need which should assure an almost bottomless pit of demand for their products in the foreseeable future albeit in different segments than the ones they mostly operate in now. In a city of 4.7 million (and growing at 10% per year), estimates of housing needs range from 400,000 to 600,000 units across all segments. If we were to attach an average value of just 100,000 ETB per unit, that would translate into aggregate unmet demand in excess of 50 Billion ETB. Small wonder then that over 400 real estate companies are registered in the country all vying to claim their piece of that lucrative market. And for the time being at least, their prospects for doing so appear to be quite good.
Comments
(3)
Financial Officer written by Techalew Negash , October 29, 2008
Your article on the Addis Housing Industry is enlightening for me. I have always been wondering what driving the mushrooming of housing projects. I have got most of the answers from your article. One aspect remaining though is about the high rising buildings all over the city by the major road sides, which I suspect is through collateral bank loans. Would the develops have market for that! Don't you think low demand for commercial and office buildings will ultimately force owners to convert to appartments and hence may impact in lowering of the price of housing rental, which might also impact on real estate developers in the near future.
Demand for Commercial Real Estate. written by Addis Connexion Staff , October 29, 2008
Thank you for the comment. We have not in fact, found demand to be low at all for commercial real estate. Quite the opposite. Having gone around searching for office space almost literally all over the city, it was quite a surprise to us that many of the new buildings (even those that weren't finished yet) barely had any space to speak of. Take a look at the 'Out of Office Space?' article we wrote in the same issue on this subject.
On another note however, we have recently been getting information that the current global financial climate may be having an impact on residential real estate prices in Addis due to some Diaspora buyers (who constitute the majority of purchasers from the big developments) who are either backing out of or outright selling properties as fast as they can. It is not clear how widespread this is of whether it will have substantive longer term impacts.
potential threat of housing market crunch written by Dorcha , January 14, 2009
Guys, we all are impressed by the drastic change of housing development and related market rise in Ethiopia. However, I am very much of the opinion that, since most of the money has been lent out by the big Ethiopian banks to private and company developers, there is a real threat of market failure some where on our way. The senario of home closure and credite crunch is really needs to be taken into consideration. Don't forget that the same senario has caused the current crisis in the developed world. If the banks keep lending bunch amount money with lesser regulation and control, there is a real uncertainty as to how/when the borrowed money be repaid. similar but sporadical incidents have been happening with farming investment in Ethiopia.
Having said tht, I am one of those guys who are currently engaged in intensive housing development business. I believe there is an immense opportunity to develop or reconstruct new projects to make profits, especially within private and real estates. As real estate developers, we all need to understand the volatile housing market, work closely and transparently with our banks inorder to keep our banks strong and supportive in the future. We must learn a lesson from what is happening in developed world and take early measures- as professional developers we must consult with the banks, advice policy makers, provide good practice experiences from abroad, etc.
