Ethiopia’s Real Estate A Year of Transformation

The past year in Ethiopia has been a rollercoaster for the real estate sector, marked by significant challenges and opportunities. The credit cap imposed by the Central Bank and the introduction of a floating exchange rate have significantly disrupted the market, impacting the buying power and investment decisions of stakeholders. On the other hand, the government’s plan to open the sector and allow foreigners to own properties has introduced new possibilities. Despite these challenges, the industry has not only weathered the storm but also shown remarkable resilience and adaptability. Innovative strategies from developers and a growing focus on foreign investment offer hope for a more prosperous future.

The just concluded year in Ethiopia showed massive dynamism in the real estate market.  The Central Bank issued a 14% credit cap policy directive almost 13 months ago. The full-scale implementation of the macroeconomic reform, as announced on July 29, 2024, floated the Ethiopian birr, which in effect significantly devalued the local currency from 58 per USD to almost double the rate. The prime minister also announced the intention to open up the sector to foreign investors. The year witnessed a convergence of challenges and opportunities that tested the resilience of the industry and its key players. As we reflect on the events that transpired, one thing becomes clear: the Ethiopian real estate industry is not just facing challenges, but is undergoing a truly transformative phase that will shape its future trajectory in a positive way.

The year began with a seismic shift in the financial landscape when the National Bank of Ethiopia implemented a 14% credit cap on commercial banks. This measure aimed at combating inflation and stabilizing the economy, sent shockwaves through the real estate sector, which had grown accustomed to ready access to financing.

The impact was immediate and far-reaching. Real estate developers across Addis Ababa grappled with a new reality, where securing loans for ongoing projects and initiating new ones became increasingly challenging. Atlaw Alemu (PhD), an assistant professor of economics at Addis Ababa University, acknowledged the necessity of the credit cap, stating, “It is seen as a necessary policy to tackle the persistent inflationary pressures in the economy.”

However, the unintended consequences were profound. Developers faced substantial difficulties securing funding from banks, leading to project delays and a slump in the construction industry, a sector once known for its robust growth. Ephrem Bogale, Chief Operations Officer at Ahadu Bank, shed light on the impact, explaining, “Previously, developers could enter the market with a stock of houses and speculate on the market, benefiting from debt relief. The credit cap has significantly impacted the real estate sector, disrupting the previous dynamics.”

As a result, real estate companies found themselves in a cash crunch, forced to rely on their resources to fund construction and repay existing loans. The reduced access to credit and the need to meet loan obligations created a significant financial strain, limiting their ability to invest in new projects.

In response to the credit crunch, many developers resorted to revising prices downward to attract potential buyers and generate cash flow. However, even with revised prices, the lack of available credit made it challenging to find buyers who were willing and able to make purchases. Asmamaw Kasaneh, a prospective homebuyer, expressed his frustration, echoing the sentiments of many Ethiopians caught in the real estate market’s fluctuations.

Expressing his frustration, he echoed the sentiments of many Ethiopians who found themselves caught in the crosshairs of the real estate market’s fluctuations. “The advertisements painted a picture of affordability, but the reality on the ground was far from it,” he lamented. “Despite the promises of revised prices, the cost of owning a home remained out of reach for many. The discontent between luring advertisement offers and actual financial constraints was disheartening, leaving us feel misled and disillusioned.”

The combination of limited access to credit and lowered prices led to a significant inventory of unsold properties in many parts of Addis Ababa. Melat Alem, a real estate consultant, highlights another factor in the price decrease: “The recent reduction in the cost of certain construction materials, such as cement and steel, has also played a role in the overall market dynamics.”

Genet Getachew, a UN staff member who started construction on a plot of land around Kotebe, in the eastern part of Addis Ababa, mid-year, expressed her concerns over Ethiopia’s volatile construction material prices. “The cost of construction materials, especially cement, has been a major challenge for me. Prices have fluctuated dramatically after the [macroeconomic reform, which in effect devalued the birr]. Just in a few days, I’ve seen the price of cement increase to ETB 2,300 from 1,800, but I know it could easily spike back up in a matter of days. These constant price changes are driving my budget crazy and making it incredibly difficult to plan and manage the construction of my house. I’m constantly worrying about how I will afford to complete this project, as the expenses are taking a toll on my bank account. It’s a stressful situation, but I remain hopeful that the government will find ways to stabilize the construction material market and provide more accessible financing options for homeowners like myself.”

Cuba Wendmachew, a private construction contractor, expressed concern over the ongoing challenges faced by the real estate sector. “Despite the government’s efforts to stabilize the economy, the devaluation of the currency has led to a significant increase in the prices of construction materials, such as cement and steel. This has put immense financial strain on individuals who are building their own homes. Many are struggling to complete their projects due to the rising costs, which has far exceeded their initial budgets. The credit cap has only exacerbated the situation, making it increasingly difficult for homeowners to secure the necessary financing. As a result, we are seeing a growing number of unfinished houses across Addis Ababa, as people simply cannot afford to see their projects through to completion. It is a concerning situation that requires a comprehensive solution to support homeowners and ensure the continued growth and development of the real estate sector.”

At the moment, private real estate developers are contracting over three hundred thousand housing units, while the government is constructing eight thousand condominium houses, Fitsum Asefa (PhD), Minister of Planning and Development, reported to the council of ministers last May while reporting the nine months performance of the economy. However, most of these houses represent an excess of unsold inventory. While developers remain eager to recover their investments, financing home ownership become central. City residents need more financial capability due to poor financial position and the high value of housing units, making homeownership an unaffordable dream for many. The affordability resulting from price adjustments was overshadowed by the diminished purchasing power of potential homebuyers, who struggled to secure mortgage loans or access the necessary funds for cash purchases.

The slowdown in the real estate sector had broader implications for the Ethiopian economy. The construction industry, a significant source of employment generation, declined as developers scaled back their projects. This downturn also affected other sectors dependent on the real estate industry, such as building materials and services.

The ripple effects of the credit cap were felt across various sectors, underscoring the interconnectedness of the nation’s economic fabric.

Amidst the challenges posed by the credit cap, a glimmer of hope emerged with the government’s decision to. This long-anticipated move had the potential to inject much-needed capital and expertise into the market, offering a lifeline to developers and investors alike.

Amidst these changes, the Ethiopian prime minister announced in March 2024 that the country plans to open property ownership to foreigners. The premiere highlighted the country’s preparations to pass legislation to let foreigners own real estate as part of its broader plan to open up the economy and attract investors.

Currently, foreigners are barred from owning houses in Ethiopia, either residential or commercial buildings, which is a hurdle to ongoing efforts to attract foreign investment.

The prospects of foreign investment received cautious optimism. Analysts predicted that the real estate sector could experience a compound annual growth rate of 10% between 2024 and 2028, reflecting the potential for a resurgence driven by international participation.

However, the road to attracting foreign investment took a lot of work. Developers and investors alike had to navigate regulatory frameworks, establish partnerships, and ensure transparency to foster confidence in the market.

In this evolving landscape, some real estate companies emerged as trailblazers, adopting innovative strategies to overcome the financing hurdles. OVID Real Estate stood out as a pioneering force, tackling two significant challenges simultaneously: limited access to affordable housing and difficulties securing homeownership financing.

By embracing innovative construction technologies a few years ago and, more recently, establishing OVID Bank to offer unique financing options, OVID Real Estate set a remarkable example for the industry. Their approach streamlined processes reduced construction time, and lowered overall costs, making quality housing accessible to thousands of home seekers.

Similarly, the Kefita Project, spearheaded by Rockstone Real Estate, successfully secured foreign equity funding for a real estate development in Ethiopia, showcasing the potential for international collaboration and investment to solve part of the financing shortages in the sector.

These pioneering initiatives addressed immediate challenges and set the stage for a more sustainable and inclusive real estate ecosystem in the country.

As we reflect on the events of 2024, one thing becomes clear: the Ethiopian real estate sector has demonstrated remarkable resilience in the face of adversity. The challenges posed by the credit cap and the opening to foreign investment have underscored the need for adaptation and innovation within the industry.

Embracing a collaborative approach and fostering partnerships between developers, financial institutions, and the government is highly recommended to improve the housing supply and enable most city dwellers to own dream houses. By working together, the stakeholders can address the financing constraints, explore alternative funding mechanisms, and create an environment conducive to sustainable growth.

Real Estate moguls highlight the government’s role in facilitating the sector’s transformations. Revising the credit cap policy and providing more favourable lending terms and conditions also enables at least middle-income earners to own houses. The issue further requires actively encouraging foreign investment to alleviate the current liquidity constraints and restore confidence in the market.

Moreover, the adoption of innovative construction technologies and financing solutions, as exemplified by OVID and DMC Real Estates, serve as a blueprint for the industry. By embracing these advancements, developers can optimize resources, reduce costs, and make homeownership more accessible to a broader population segment. Technology helps reduce the cost of construction and the construction period, improves quality, and helps build houses in mass in a shorter period of time

As the world continues to evolve, the Ethiopian real estate sector is gradually adapting and positioning itself as a resilient and attractive investment destination. Massive opportunities still lie ahead; thus, the industry paves the way for a prosperous and inclusive future in which housing dreams become a reality for future generations. EBR

12th Year • September 2024 • No. 133