Ethiopia’s Real estate Market Navigates Shifting Landscape Impact of Credit Cap in focus

Ethiopia’s booming real estate sector, boasting a remarkable 14Pct average annual growth over the past decade, faces a potential turning point. The recent implementation of a 14Pct credit cap by the National Bank of Ethiopia (NBE) has significantly impacted bank lending capacity, sending ripples through the industry. This article delves into the specific consequences of this policy, exploring its effects on key players and overall market dynamics, particularly in Addis Ababa.

Indeed, Real estate developers and individual sellers across Addis Ababa are grappling with a new reality. Despite price adjustments aimed at aligning with reduced buyer purchasing power, a noticeable struggle to attract buyers has emerged, while some developers are innovatively taking swift strategic moves to solve the looming financial gap in the sector. This shift can be attributed to the credit cap’s influence on loan availability, effectively limiting access to financing for potential buyers. EBR’s Eden Teshome sheds light on the multifaceted impact of the credit cap in the Real Estate sector.

The government’s decision to cap credit expansion at only a 14 Pct increase compared with last year’s performance of the respective banks stemmed from the government’s commitment to combat inflation and stabilise the economy. The measure targets the credit mobilisation of the banking sector that involves 31 commercial banks, including two state-owned ones. The total loans the financial sector mobilised in 2022 alone grew by nearly 70Pct to almost half a trillion birr. Banks’ disbursement increased by more than 130 Pct in the same period.

This considerable growth had its limitations. It contributed to the rise in inflation, which has come to affect society’s wellbeing. As a result, the government had to make a tough decision that led to the arrest of inflation last summer. Because of this decision, banks’ credits can only grow at 14Pct compared with their previous year’s disbursement portfolio.

However, this policy has had unintended consequences for the real estate market. The credit cap has limited the lending capacity of banks, making it more difficult for developers to secure loans to finish their projects. As a result, many real estate companies have had to rely on their resources to fund construction and repay existing loans, creating a cash crunch in the market. With banks constrained by the credit cap, obtaining financing for ongoing projects and initiating new ones has become more challenging for developers. As a result, the developers face 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 contributing to the economic leaps the country registered consecutively.

Additionally, real estate companies that have previously borrowed funds from banks found themselves burdened with repaying those loans. The reduced access to credit and the need to meet loan obligations have created a financial strain for developers, limiting their ability to invest in new projects.

Many real estate developers are revising prices to attract potential buyers and generate cash flow. However, even with revised prices, the need for available credit has made it challenging to find buyers who are willing and able to make purchases, resulting in a massive inventory of unsold properties in Addis Ababa.

According to Ephrem Bogale, Chief Operations Officer at Ahadu Bank, mortgage finance is scarce in Ethiopia and is primarily accessible to bank or foreign institute employees. The banks use such arrangements as a staff retention mechanism. Similarly, the banks use the arrangement to attract foreign currency inflow as the international NGOs, which are mainly foreign, channel their foreign-sourced funds via the particular bank that arranges the loans for its staff.

“This one-sided approach has predominantly favoured developers and individuals purchasing houses as assets. The credit cap has significantly impacted the real estate sector, disrupting the previous dynamics.” Ephrem further explains that previously, developers could enter the market with a stock of houses and speculate on the market, benefiting from debt relief. It allowed developers to adopt a passive approach, keeping their houses without rushing to sell. However, with the implementation of the credit cap, developers are now required to make payments which have matured. They are still determining whether to renew their loans or even manage extensions. “Developers have resorted to reducing prices and selling properties to maintain cash flow,” says Ephrem. The credit cap has thus introduced new challenges and altered the landscape of the real estate market in Ethiopia.

Melat Alem, a real estate consultant, sheds light on the dynamics of the current real estate market in Addis Ababa, emphasising that the price decline in real estate sales goes beyond the credit cap.

Melat explains, “While the credit cap has undoubtedly impacted the market, it is essential to recognise that another major contributing factor to the price decrease is the recent reduction in the cost of certain construction materials. The prices of cement and steel, two major construction inputs, have experienced a notable decline in price in recent months. This has a direct correlation with the selling prices of real estate properties. Developers are adjusting their prices to reflect to this decreased cost, which has created an additional downward pressure on the overall market.”

The combined effect of limited access to credit and lowered prices has led to unsold housing inventories in many parts of Addis Ababa. With developers eager to recover their investments, the excess unsold inventory has emerged as the new market reality in Addis Ababa.

Despite the affordability resulting from price adjustments, the credit crunch has significantly diminished the purchasing power of potential homebuyers. Many individuals and families, even those currently working in the financial sector, need help securing mortgage loans or accessing the necessary funds for cash purchases, leading to a decline in demand for real estate. Several banks still need to disburse approved mortgage loans even to their employees.

Prospective homebuyers are finding it increasingly difficult to secure mortgage loans and afford properties in the current market. The lack of available credit has thus pushed housing prices down in several circumstances, but the affordability gap remains a significant barrier for many potential buyers. This has resulted in declining homeownership rates and shifting towards rental properties.

Asmamaw Kasaneh, a general manager at a multinational company in Addis Ababa, had been diligently saving for years to purchase his first home. However, his dream wasn’t realised when he recently visited his bank to apply for a mortgage loan. “The bank told me loans were no longer as readily available due to new regulations capping credit expansion,” Asmamaw expresses his frustration. The tightened lending standards, which aim to curb credit growth, are increasingly impacting individuals like Asmamaw across Ethiopia’s banking sector. He adds, “It seems the goal of owning my own home will have to wait even longer now.”

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

According to Atlaw Alemu (PhD), an assistant professor of economics at Addis Ababa University, implementing the credit cap by the National Bank of Ethiopia is seen as a necessary measure to tackle the persistent inflationary pressures in the economy. He asserts that the credit cap, which restricts the growth of lending by commercial banks, aims to moderate the pace of money circulation and gradually alleviate inflation over the upcoming quarters. He supports this policy as part of the multifaceted approach encompassing supply-side interventions, structural reforms, and disciplined fiscal policies. While Atlaw acknowledges that the credit cap may result in some economic slowdown, he emphasises its significance in regaining control over inflation and ensuring sustainable economic growth in the long term.

According to Atlaw, government intervention is crucial to stimulate the real estate market. The government should consider revisiting the credit cap policy and work closely with banks to provide more favourable lending conditions for developers. This collaboration would help alleviate the current liquidity constraints and restore confidence in the market.

Real estate developers also explore alternative financing options to overcome the credit crunch. In this regard, OVID Real Estate is a pioneering force in the sector, tackling two significant challenges simultaneously: limited access to affordable housing and difficulties securing homeownership financing. By deploying innovative construction technologies a few years ago and, more recently, establishing OVID Bank to offer unique financing options, the company has set a remarkable example for the industry.

Traditional construction methods in Ethiopia led to lengthy project timelines, high costs, and inconsistent quality. Recognising these hurdles, OVID Real Estate embraced innovative technologies, streamlining processes and significantly reducing construction time. This expedited project completion and made high-quality housing more accessible by lowering overall costs.

Solving the financing challenge in the real estate sector takes various forms. Partnerships with private investors or seeking foreign investment could also provide much-needed funding. Additionally, establishing specialised real estate investment funds, encouraged by the government, could attract capital for the sector. The Kefita Project, spearheaded by Rockstone Real Estate, is a noteworthy example of successfully securing foreign equity funding for a real estate development in Ethiopia. While the company invested one billion birr in its maiden project in Addis Ababa, the Kefita Project succeeded in attracting foreign equity of USD. This initiative demonstrates the potential for international investment in Ethiopia’s real estate sector. It also serves as a valuable case study for other developers seeking similar funding, highlighting the importance of strategic partnerships and targeted marketing to reach international investors.

Improving the regulatory framework in the real estate sector is also essential in improving the housing market. Strengthening regulations and ensuring proper oversight would increase investor confidence and attract domestic and foreign buyers. Clear guidelines and streamlined property registration and land acquisition processes would facilitate transactions and stimulate market activity.

Overpriced housing is not unique to Addis Ababa; many cities in Africa and beyond also have similar challenges. As populations in African and global cities boom, demand for housing outpaces supply, driving up prices. Furthermore, densely populated urban areas often need more developable land, constraining supply and contributing to price hikes. Investment in real estate, while contributing to development, can also exacerbate price inflation, mainly when targeting luxury developments. Volatile economic conditions and political uncertainty, like the one Ethiopia is going through, can also deter investment in long-term housing solutions, hindering affordable housing development. While these challenges affect the sector significantly, weak governance and ineffective regulations exacerbate the situation by allowing unfair practices that hinder efforts to ensure affordable housing for the vast majority.

Addis Ababa’s rising property values aren’t unique in the continent. Many other cities in Africa are going through a similar trend and pattern. Numbeo, a platform that typically details the differences in the standard of living globally, closely monitors the property prices of numerous regions, including in Africa. The platform indexes change periodically, as reflected in the difference between the property price index for September 2023, which lists Douala as the world’s most expensive city for real estate. The platform later released data showing Kampala, Uganda’s capital, as the most expensive city for real estate in November. Addis Ababa ranked third in the continent and fifth globally as the most expensive city for real estate houses.

The values reflect Numbeo’s price-to-income ratio, a fundamental measure for apartment purchase affordability, where a lower ratio indicates better affordability. It is typically calculated as the ratio of median apartment prices to median familial disposable income, expressed as years of income (although variations exist elsewhere).

Numbeo’s formula assumes and uses net disposable family income, as defined as 150Pct of the average net salary (50Pct is the accepted percentage of women in the workforce), median apartment size is 90 square meters, price per square meter (the formula uses) is the average price of square meter in the city centre and outside of the city centre.

Across the African continent, several countries have experienced significant growth and development in their real estate markets. For instance, South Africa has a well-established and sophisticated real estate industry, particularly in urban areas like Johannesburg, Durban and Cape Town. The country has seen a rise in mixed-use developments and commercial properties, driven by foreign investment and a growing middle class.

Countries like Egypt have also witnessed notable advancements in their real estate sectors. Egypt’s real estate market is experiencing significant growth, driven by several factors. Despite global challenges, Egypt’s economy is projected to grow steadily, making it an attractive investment destination. Mega-project initiatives by the government, including a new city development on the outskirts of Cairo, infrastructure development, and reforms, aim to boost the sector and attract a massive influx of foreign investment. Rapid urbanisation further fuels the demand for new housing, particularly in major cities like Cairo, Hurghada and Alexandria. Several Gulf countries, such as the United Arab Emirates, Saudi Arabia and other international players, are entering the market, injecting significant capital into Egypt’s burgeoning real estate market.

While high real estate prices can sometimes be associated with economic growth and development, it’s crucial to look beyond this simplistic association and delve deeper into the multifaceted consequences, especially in the context of African cities.

Growth associated with rising property prices often benefits higher-income earners and investors while pushing low- and middle-income residents further towards the periphery, increasing their commuting times and straining essential services. This situation exacerbates existing inequalities and hinders inclusive development.

High prices exclude a significant portion of the population from accessing decent and affordable housing, leading to overcrowding, informal settlements, and compromised living conditions. It has implications for public health, social stability, and overall wellbeing.

Rising prices often trigger gentrification, displacing existing residents with businesses and higher-income individuals. This scenario disrupts communities, erases cultural heritage, and weakens social networks, a problem that Addis Ababa has experienced even with the introduction of the Affordable Condominium Housing Project in 2004.

High rental costs can also harm small and medium-sized businesses, pushing them out of desirable locations and hindering their growth potential.

The focus on high-end developments fueled by high prices can divert resources from addressing critical needs like affordable housing, infrastructure, and essential services, hindering overall development.

High property prices are sometimes driven by speculation rather than actual demand, creating financial bubbles and unsustainable growth. Such cases can lead to sudden crashes and economic instability.

From the experiences of developed countries, implementing policies like rent control, land use planning, and taxation on vacant properties can help address affordability and prevent speculation. Furthermore, Promoting mixed-income housing developments, investing in public transportation, and improving essential services in lower-income areas are crucial for inclusive growth. Involving residents in planning processes and ensuring transparent governance can empower communities and mitigate displacement is also necessary. Expanding access to mortgage financing and promoting alternative housing models is crucial to increasing affordability and homeownership opportunities. That’s why a holistic policy intervention is more critical now than before.EBR

12th Year • February 2024 • No. 126


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