Land Lease Price in Addis: A Market Neither Logic nor Theory Explains

In 1975, the Ethiopian government undertook a robust land reform plan to create equitable access to land particularly in urban areas. However, forty years after these reforms, it seems that land access and distribution is all but fair, as prices for it continue to skyrocket. EBR’s Meseret Mamo explains what, if anything, is being done to change that reality.

In 1974 when the Derg regime announced its land reform programme, the long over due land ownership problem in Ethiopia seemed resolved. However, after four decades, the policy that strives for equitable land distribution seems to fail to end the land price surge in most urban areas like Addis Ababa.

The rising land lease price in the city illustrates the failure of the legal framework as well as the land management system in the country. The maximum price of a square metre of land has skyrocketed from 2,000 birr in 2008/09 to 26,202 birr in 2012/13 and 31,850 birr in 2013/14. The recently announced lease price of 65,522 birr for a square meter by the Administration on May 2014 further shows the shocking growth rate of lease price in the capital in few months span. This lease price under the primary market for acquiring land from the government through auction exhibited 529Pct annual increment on average between 2008 and 2014. 

It is not only the fast growth rate of lease price that is surprising. The current land lease price in Addis Ababa is near the average lease prices in more advanced countries that follow the same land tenure system as Ethiopia but have a more accurate and integrated land management system as well as adequate infrastructure. 

The average price of residential land in 105 Chinese cities surveyed in 2013 was USD730 per square meter while in India a square meter of land can be leased with an average price of USD700, according to MarketWatch, a financial information website. Based on the result of recent land auction, the average land lease price in Addis Ababa is currently USD650 per square meter. This clearly shows that the land value has no rationale and demonstrates the land lease bubble that is taking place in Addis Ababa, according to Selamawit Terefe, an Economics lecturer at Adama University.

The land lease price offered in auctions put forward by the city administration affect the land prices in the secondary market where private individuals transact. 

“Two years ago, when a 500 square meter of land around Bambis Supermarket, in Kirkos District, put in the auction floor, it fetched a maximum of 26,202 birr per square meter, “said Tilahun Alemayehu, a property broker around Bole area in the Metropolis. “Although the law demands down payment of not less than 10Pct of the total lease price to acquire the land, the price remains to be a point of reference for brokers like me when negotiating with buyers.” 

 While land cannot be officially sold in Ethiopia, offering an exaggerated amount for properties on lands has been a common practice. This is why the government put forward a proclamation in 2011, to prohibit such practices by putting all previous private land holdings in urban areas under a lease system. The Urban Land Lease Holding Proclamation also includes provisions that govern the transfer of lease rights and make it very difficult to continue previous practices.

Initially, the impact of the Proclamation brought down the land price under the secondary market since only the property on the land is allowed to be sold. Developers can only have utilisation rights on the basis of a payment arrangement. The land in which the property rests on, as described in the constitution belongs to the state. However, as time goes, the price of land and house continues to rise as brokers and other involved parties found a loophole to manipulate the system. 

Maximum lease price offered through auction (birr/square meter)The Proclamation obliges the city administration to lease out land plots every year. Based on this, the administration recently auctioned a total of 70,566 square meter of land classified under 250 plots for the eighth time since the ratification of the Proclamation. The result of the latest auction shows that a plot of land in Bole District fetched 65,553 birr per square meter. This price is 719Pct higher than what the administration had set as a base price. 

“The administration is very much troubled by the excess and unfair price offered by auctioneers,” said Teklay Tesfay, an officer at the city’s Land Bank and Transfer Agency. However, he said, the administration only sets a minimum benchmark price for plots that will be transferred through the auction system.

The increasing price offers through the land auction system also limits the opportunity for many middle and lower income individuals like Meaza Wolde, 37, who has participated in three auctions in the past. “In the first auction, I offered 3,500 birr, but the winning price was 8,000 birr,” Meaza, who is a civil servant, recalls. The same goes for the consecutive two auctions she participated, which shadowed her hope for leasing a land to build a dream house.

Dimiru Alemayehu, 35, and a father of one, can also attest to this phenomenon. Trying to build his own house, he participated in the 7th round auction conducted six months ago. 

“I offered 5,040 birr per square meter for a 500 square meter plot located around Betel Hospital in Kolfe Keranio District,” Dimiru, who runs his own small construction company, remembers the tense competition among dwellers in the city for acquiring land. Unfortunately, he was unable to lease that land because someone offered 11,000 birr, more than double his offer. “It is really confusing when someone is willing to pay 5.5 million birr for 500 square meter deserted plot,” he told EBR in frustration.

In addition to the sky-rocketing lease price offer by auctioneers, the prices charged by the administration follow neither the floor price nor the grades of the plots. A homogeneous plot of land does not fetch a similar price. This can be illustrated by the latest auction result. Two plots with the same grade in Bole District fetched 32,000 birr and 65,522 birr per square meter, which shows that the price pattern in terms of location is beyond any theoretical rationalization.

Although the theory states that prices of plots of urban land decrease as the distance from the centre increases, a plot of land located at the peripheries of Nifas Silk Lafto District managed to fetch almost the same price as the plot located in Bole District. “It is unreasonable for a plot at the peripheries of the city to get a similar offer as plots located in the centre of the city,” says Teklay.

Land price in Addis Ababa follows neither logic nor theory, says Isayas Deribe (PhD), assistant professor of urban planning and management at Unity University. “However, this is the nature of land valuation in most developing countries. Although the value of land should be determined based on expected future cash flow, the land valuation system in Addis Ababa is filled with subjectivity,” he says. 

Theoretically, the availability of physical infrastructures such as roads, water, and sewerage and electricity as well as the cost incurred by the land seller for the supply of a specific plot of land also determines the value of land.

Subjectivity arises from the land leasing system of the city which remains divided, slow, and changing, a study conducted by the Addis Ababa Chamber of Commerce in 2012, revealed. This is because many buyers in Addis Ababa have little understanding of valuation theory, which forces them to rely on the behaviour of other buyers and sellers. This is exactly as the proverb, “a nerd follows the herd”, says Isayas who stresses that land values tend to be based mainly on what others are paying which is the result of herd behaviour, positive feedback and circular reasoning.

Although the skyrocketed land price in Addis Ababa can be partially explained by the existence of subjectivity in the market, systemic supply constraint can drive land prices higher since demand and price are directly related, argues an economist at Adama University: “Although land supply is price-inelastic, unfortunately, the rise in price could not instigate any rise in supply in the city.”

The Addis Ababa City Administration had 7.3 million square metres of developed land registered under its land bank in the 2009/10 fiscal year. This is close to half of the total developed land in the city at the time. In addition to this, over a million square meter of land restored through the urban renewal programme in the last decade, demonstrates the untapped land capacity of the city. The City Administration also has an infill land potential of 11 million square metres and an expansion capacity of 89.5 million square metres, according to a research conducted by the Administration in 2011.

Despite the availability of vast land resources a little more than one million square meter of land has been transferred through auction since the ratification of the new urban lease proclamation in 2011. “The city administration has a plan to continuously lease out land plots in the future in order to appease the escalated demand”, Teklay told EBR. 

Selamawit adds that “in the system where competition over access to properties is stiff, land is considered as a source of power and stability especially in countries like Ethiopia where the struggle for land, the ultimate and real source of power has a long history.”

Indeed, land issues are of crucial importance to economic and social development, growth, poverty reduction and governance in Ethiopia. Access to land is the basis of economic and social life in both rural and urban areas. 

Analysts argue that the multiple dimensions to land issues, such as inefficient land administration system and limited supply, require a careful and well-implemented approach which places current land issues within the political, economic, and social context. Otherwise, they say, only the sky will be the limit for the skyrocketing land lease price in the city now and in the future.

2nd Year . August 2014 . No.17

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