Housing Prices Have Tripled in Less than Two Years
Buying houses from real estate developers incurs 15Pct Value Added Tax (VAT) and 6Pct title deed transfer fee on the actual price tag. Additionally, real estate developers take more time to deliver housing units which further escalates the cost of construction—ultimately pushing the price tag further up. The price of houses developed by real estate firms has further skyrocketed because of the price of finishing materials, which are almost entirely imported, have dramatically shot up by over 200Pct over the past couple of years. This is attributable to the worsening foreign currency shortage and subsequent rising exchange rates of major foreign currencies against the local currency.
This makes houses built by real estate companies over expensive for the vast majority of Addis Ababans. As a result, house buyers have been looking for affordable options.
Villas developed by unlicensed individuals have become one of the options. These players have lesser tax obligations and deliver houses for less in a shorter time span by using adhesives and other chemicals to shorten the curing time of concrete. For this and the curativeness of the business, they are mushrooming and becoming more active in the housing market.
As their number increases, there is fear that the market will become even more informal and out of the watchful eyes of the government. EBR explores.
When Simeneh Asfaw, 57, returned to Ethiopia in July 2019 after living for almost 12 years in the United States, he had to rent a house because he did not own one. Although he had wired USD70,000 13 years ago to a local real estate developer to buy his own apartment, he couldn’t recover his investment as the company failed to deliver the apartment despite collecting money from hundreds of other house seekers.
To add to the disappointment, Simeneh discovered that the price of villas developed by real estate companies ranged from USD1,000 to 2,500 per square meter. Prior to July, 2019, this price was between USD900 to USD2,000. “Now I have to buy another finished house, because real estate units are so expensive,” says Simeneh, who is seeking cheaper villa houses built by individuals engaged in the housing sector without having the proper license.
The housing demand and supply gap has been widening dramatically in the capital particularly for the last decade, during which over a million people have remained in the condominium housing schemes’ waiting list though only around 300,000 units have been delivered. The housing sector can be categorized in to four. Under the first category, lies condos developed by the government, which are further categorized into 10/90, 20/80 and 40/60 schemes. At the current market trend, the price of a three-room 20/80 condo ranges from ETB4.8 million around Summit to as much as ETB10 million in Arat Kilo and Lideta condominiums.
The second category comprises of apartments built by real estate firms. Prices for such, which match the 40/60 condos, range between ETB8 million and 17 million—as compared to 2019 prices which were ETB2 to 5 million. The third category includes villa houses built by real estate developers. Vilas have more varieties these days, from the basic three bedrooms built on 200 square meters of land to ground-plus-two units resting on 300 to 500 meter squares. If one chooses to go further in the outskirts of the city, mansions lavished on 1,000 square meters are also available. The price tag of these houses currently ranges between ETB20 million to 60 million, based on location, amenities, quality, and financing options.
The fourth and the emerging segment of the housing sector, on the other hand, is run by individual builders and smart-mouthed brokers. Both are engaged in the housing sector without having a proper license from the government. Currently, one can find villas built on 150 square meters for minimum price of ETB12 million using such a mechanism. Four years ago, such houses were sold for as low as ETB2.5 million.
Houses developed by individuals are becoming a new trend accustomed by some business people and engineers in order to bridge the demand of house buyers who cannot buy the expensive villas and apartments developed by real estate companies. The emergence of such a housing segment is due to the gap in land supply and also the lack of financial resources for the private housing sector. While real estate companies get land through a lease arrangement from city governments, these unlicensed individual developers usually get land from people who have plots of land but are also short of finance. The land owners lay the foundation of the house before they selling the plot to individual developers. They cannot directly sell a vacant plot because land is the property of the state as per the constitution of the country and cannot be sold or purchased. The buyers then finish the construction and sell it at a profit.
In fact, as business is becoming more and more challenging due to the numerous bureaucratic bottlenecks, multiple tax obligations, and other challenges stemming from engaging in a formal way, many have found this business hassle-free and lucrative. Demand is high; return is extremely high; tax and other regulatory requirements are also manageable. As a result, many business people in the city have joined this sector parallel to the main business lines they routinely engage in. In fact, there are cases where businesses are downsized as owners withdraw a portion of their capital from their formal businesses to engage in these informal and lucrative real estate business and house and land transactions. The situation is creating a growing interest among land owners as the price of an almost-bare piece of land has significantly skyrocketed because of this developing business trend in the city.
“Currently, the number of people who want to sell their land is rising. These people have either leased the land from government to develop by themselves or have gotten it through inheritance or other means. But, they fail to access the finance to build a house on it,” says an engineer who regularly buys land plots using such arrangements to build villas for sale. “We finalize the construction of the houses within three to five months using adhesives and other chemicals that helps shorten the curing time of concrete. As soon as the house is finalized, the price of the houses appreciates. One can then sell it for double the cost of construction and land.” This means if one has ETB20 million to start with, it’s possible do the business at least three times in a year, allowing the owner to make about ETB80 to 100 million in net profit without having the need to pay tax or hire permanent employees. No wonder so many business persons are attracted to this informal sector which is currently devoid of proper governmental regulation. At the moment, no business is profitable to the scale which real estate business, especially the informal type done without business licenses, is.
As of recently, the business is also transforming in the way builders are trying to share the benefits of the bubble. Builders of apartments or shopping malls offer some floors to land owners in addition to money. Land owners here are truly getting better value for their land as they also become shareholders of the new property, allowing them to get a house to live in the same locality and attain other units to lease for a secured regular income. A lot of construction undergoing in different parts of Addis Ababa underwent such arrangements—especially in the city centers. But the villa business is currently hot in Legatafo, Nifas Silk, Kaliti, Ferensai Legasion, Gulele, Sebeta and Gelan as well as other surrounding parts of the capital. Construction costs for private developers for villas is currently between ETB30,000 and 45,000 per square meter, while their selling price is between ETB70,000 and 120,000 per square meter of built-up floor area, according to the engineer. “They are profiting over 100Pct.”
Besides engineers, others are also using the opportunity existing in the housing market to buy land from individuals and sell it after constructing a house by hiring professional engineers. This includes those who have learnt that they can earn more than the interest rate paid by the commercial banks. “People have started to understand the benefit of reinvesting their money on land and housing development rather than putting what they earned in commercial banks or other less profitable businesses,” says Tamrat Girma, a well-recognized and self-promoted Broker on social media.
Individuals involved in illegal activities and cannot save their money at banks for fear of a government crackdown and confiscation are also amongst those developing houses by hiring engineers who may not be licensed.
Meanwhile, real estate developers, who have had an opportunity to lease land from the government, are gradually losing their reputation because they fail to deliver on time. In fact, insiders say the real estate sector has shifted more to land trading than to the housing market.
It is to be recalled that three years ago the Addis Ababa City Administration reclaimed 41 hectares of land illegally possessed by real estate developers. The measurement was part of an ongoing land audit launched by the Land Management and Development Bureau in the same year. The audit included 139 real estate developers who had leased land since 2005 but failed to deliver on their promises. The audit also found 1,743 housing units built by four real estate developers and transferred to buyers without title deeds. “Houses are not being transferred to buyers on time mainly because of the absence of proper regulation and greediness of developers,” said Takele Uma, former Deputy Mayor, during his speech addressing members of the city council.
Despite the presence of such problems, the real estate sector has been performing better than others, growing by an average 14Pct annually over the past decade. There are now more than 630 real estate companies with a registered investment in excess of ETB3.5 billion capital. But there is fear that the growth momentum will be reversed as people are choosing unlicensed developers over real estate firms.
“Getting bank credit is one of the competitive edges for real estate developers. After all the difficulties in acquiring it, the developers fail to sell the houses because the price is highly inflated as they have higher quality,” says a senior manager at the Real Estate wing of JH Simex, the sister company of Inter Luxury Hotel, formerly Intercontinental Hotel. “Over 95Pct of the real estate companies in the capital are engaged in building apartments. Beside real estate companies, individual developers also build villas.”
In fact, the flourish and trendiness of apartments, especially the high-rise ones, have allowed real estate builders to choose the option of acquiring a fairly medium-sized land in the range of few thousand square meters of land in city centers without having the need to approach the city administration to lease land usually in the city’s outskirts. As the business’s return on investment largely depends on the location of the properties, buying land in the inner city has become a better option as apartments built in inner city areas attract buyers willing to pay premium prices. The growing traffic congestion in the city, which is also growing to the outskirts, is also a push factor for buyers to search for more houses downtown.
This trending development in the inner city is for real estate companies who sell their houses for high value. However, the informal housing sector is still mushrooming in the outskirts and old neighborhoods of the city. One of the benefits house buyers get from unlicensed developers is significant cuts in tax and title deed transfer costs. Brokers facilitate the agreement between the developers and the buyers so that the duo agrees to understate the amount of the transaction. In doing so, the seller will be saved from the 15Pct tax, whereas the buyer escapes the 6Pct title deed fee. The broker, on the other hand, earns a lump sum of usually 2Pct of the value of the transaction value for the job. “This is no surprise considering the impassable high cost incurred by real estate companies. Every input and operational cost at real estate companies is under the close watch of the government, while saving costs incurred for tax and title deed is a big incentive for house buyers preferring individual developers,” argues the manager at JH Simex.
Engineers, on other hand, say most of the villas built by individual developers are of poor quality. “The houses are beautiful and attractive from the outset and outside. However, the strength and quality of the houses are very poor, including their structure as the developers use adhesives and chemicals to shorten curing time of concrete. Their focus is on finishing the project in a couple of months and moving on to another similar project,” an engineer with decades of experience explains. “They are usually built by people who have the money rather than formal engineers and supervisors.”
Tamrat, the Broker, says house buyers are currently being badly exploited. “The government is losing revenue but the house buyer is the one losing the most,” says Tamrat, who recommends that the government establish a system that can efficiently maintain housing standards and give approval for such developments. “Home buyers need protection against sub-standard houses.”
“We are aware of all the problems but the government has been patient because it is adopting a free market system. Most of the land the city administration is providing for housing purposes now belongs to individual traders and developers for profit,” says Zerihun Bikila, former Deputy General Manager at Land Bank and Transferring Office of the Addis Ababa City Administration.
Gelana, a senior Expert at the Ministry of Urban Development and Infrastracture, says private developers would be beneficial in averting the housing crisis in urban cities like Addis Ababa. “Private developers provide affordable and quick villas for buyers. Private developers also have huge potential and can significantly contribute in solving the housing problem, but this happens only if the regional and zonal administrations capitalize on them and places a stringent regulation, monitoring, and quality control system.”
Skyrocketing housing prices are a global trend. According to the International Monetary Fund, of the over than 60 countries that enter into the fund’s Global House Price Index, three-quarters saw increases in house prices during 2020, and this trend has largely continued in countries with more recent data.
IMF research indicates that low interest rates contributed to the boom in house prices, as did policy support provided by governments and workers’ greater need to be able to work from home. This is, however, the case only among developed nations especially in Europe and North America. In many countries, including the United States, Canada, Australia and several European countries, online searches for homes reached record levels. Along with these demand factors, house prices also increased as supply chain disruptions because of the Covid pandemic and the energy crisis in Asia and Europe raised the costs of several inputs that goes into the construction process. Logistics disruptions because of frequent shutdowns in China have especially contributed to the huge price surge in construction supplies. The recent fuel price surge because of the war in Ukraine, as well as the tremendous increases in the price of steel and other raw materials have put their mark on the rising cost of construction supplies.
While the fundamentals of demand and supply account for much of the skyrocketing price, housing markets have witnessed a huge leap in many countries during the pandemic. Ill-advised policies and slow corrective interventions have also played a key role in the crisis. Keeping a close watch on developments in this sector is critical to ensure affordable housing for the vast majority. The current exuberant price increase is happening while many have not achieved a matching growth in their incomes. This makes housing unaffordable to many segments of the population. EBR
11th Year • Oct 2022 • No. 111