In our May/June issue of this magazine (under The Addis ConneXion title), we highlighted the Real Estate sector in Ethiopia. The Feature article – ‘The Dynamics Of The Real Estate Market In Ethiopia’ – noted the exceptionally high prices of residential real estate in Addis and pointed out that there appeared to be signs of downward pressure on the horizon. Although the US economy was already beginning to show signs of stress at that time, we certainly could not have predicted the financial calamity that was to follow and the global fallout from decades of high risk and speculative investments.
Globally, the worst may appear to be behind us but that may be small comfort to the segment of the real estate sector in Ethiopia which has experienced a sharp drop off in demand for higher end housing. In many ways, it is trying to come to grips with the end of its own bonanza that was once fueled by Diaspora buyers whose comparative purchasing power could afford the sky high prices which most residents of the city could only dream of coming up with. For most developers in this segment, Diaspora buyers accounted for 60-80% of the sales. What’s more, it appears that a not insignificant number of these buyers committed to purchases leveraging home equity loans from housing they owned in their current domiciles. Of course the subprime mortgage crisis in the US meant that some of them ended up with vastly reduced if not negative equity potentially leading to foreclosure. This is likely behind the reports of some instances in which buyers have abandoned contracts with money on the table, in essence losing all the money they had already put into a contract because they were not going to be able to pay anything more on it.
This came against a backdrop in which over 400 developers had secured 2.7 million square meters of land in Addis of which some had already made significant capital investments on preparing to cash in on the hot market. Nowadays though, sales have dried up with few signs of the frenetic interest that had been seen just a year or so earlier.
So why aren’t real estate prices in Addis reflecting this reality in the form of lower prices? Developers may be thinking that a return to ‘normalcy’ may be around the corner but there are few signs that will happen anytime soon. Given a rather anemic global recovery which must yet address some of the fundamental weaknesses that gave rise to the crisis, a return to the high spending days which defied normative analysis, is unlikely to come quickly. The pressure to lower prices on housing in the upper end of the market will continue to mount as the low demand doldrums continue to drag on. And for those who haven’t yet constructed anything on the land they leased from the government, will soon find it knocking in their doors if they still haven’t done so within two years of leasing. However, demand for housing in other segments of the market still remains strong and should remain big business (albeit at lower margins) for a long time to come.
Editor's Note: Since this article was published, there are indeed reports that prices on condominiums as well as plots of land in various locales, have receded somewhat. We will be reporting on just how far down they have come so far and whether they are meeting with buyers at lower price points.
