The saying; ‘a burnt child dreads the fire’ applies to many people who have given their money to real estate developers in Ethiopia because they have been burned repetitively.
More than a few legally registered real estate developers have sold out the land, they have leased from the government to build homes, illicitly, pillaging millions of birr in profits in a villainous process. Then, several other developers who have made promises and deals to deliver finished houses were not able to finish the job on time. They made their clients wait in vain and incur extra costs. Still today, there are some real estate companies that collected pre-payments over seven years ago and haven’t delivered the houses yet. The most appalling incident of all was that two years ago when, one of the real estate companies which conquered the market with an enthralling, surreal promotion and marketing campaign, deserted thousands of its clients after collecting close to 1.2 billion birr by promising dream houses. The company mismanaged and botched the assets many spent their whole lives saving. Victims have taken the case to the Office of the Prime Minister for solutions. The government is working on ways to rehabilitate citizens from the stress they have been through and to retrieve their hard earned money. People have lost so much money that now the public has become skeptical and apprehensive about giving their money to a real estate developer to build their dream home.
Nevertheless, new players are bringing life to the housing industry. The government has prepared a new proclamation to properly support, monitor and control real estate developers. Now several real estate companies are bringing fresh energy to the sector and trying to restore lost trust from potential buyers. These new companies have begun delivering finished houses and commercial units to their clients.
The initial boom
Private real estate began to thrive in Ethiopia during the late 1990s and early 2000s when Ayat, Sunshine and Berta Real Estate Companies built homes around the outskirts of Addis Ababa, (though Jackros Real Estate built a few houses earlier and disappeared). Particularly Ayat, and later Sunshine, delivered a large number of modern villas and condominium apartments. The neighborhood that Ayat established has since then been referred to as ‘Ayat village’, while the neighborhood established by the apartments that Sunshine built around Gerji, an area in close proximity with the Addis Ababa Bole International Airport, has now been called Sunshine Condominium.
Recent inflation has hit the housing industry hard. A villa that Ayat built, for example, used to sell for an average of 50,000 Birr when it began a decade ago now sells for seven million. Not only customers who have bought houses but also real estate developers who joined the industry at a later stage appreciate the achievements of Ayat and other pioneer developers. With all their faults the pioneering real estate companies have done a ‘superb job’, argues Mulugeta Tesfakiros, general manager of Muller Real Estate one of the emerging real estate companies in the country. “It is true there were scams when the business started which is quite common everywhere and they were even not as grievous compared to experiences in other countries,” he adds. “However, the most important thing is to correct these mistakes and use the sector for the development endeavors and building of the nation”.
Real estate developers flourished further after the government incentivized construction of condominium houses with a market oriented lease law that began in 2002.
In Addis Ababa alone about 5.5 million sqm (550 hectares) of land was provided in lease negotiations to 124 developers from December 2003 to October 2009. Except for a single company, Mulunesh Fitret Real Estate, which used privately owned land for real estate development, all other developers took land from the city Administration. Much of the real estate developers, 66 in number (50Pct of them) took land in Bole sub city whereas 26 and 22 developers took land in Yeka and Nifas Silk Lafto Sub cities respectively. The other nine developers took land in Kirkos (4), Akakai Kaliti (2), Kolfe (2) and Lideta (1) sub cities.
The government claims that land was given in lease negotiations with relatively cheap prices and even free of any lease payment. This is because it was assumed that private developers would alleviate the housing shortage and most importantly create jobs.
But that isn’t what really happened. Out of 124 real estate developers who took land from Addis Ababa City Administration, about 14 real estate companies actually transferred land (over 330,000sqm) to third parties, illegally, according to a study by the City Land Administration and Construction Permit Authority. Five additional companies have borrowed more than 100 million birr from banks by using the land leased as collateral. This happened while title deed clearly stipulates that the land: ‘cannot be used as collateral without the permission of the issuer’. A study conducted in 2011 reveals that only 19 real estate companies completed between 30pct to 100Pct of the construction they have promised.
Many expected 30,000 new houses to be built, but not more than 10,000 actually have been constructed. The government on the other hand constructed and handed over close to one hundred thousand low cost condominium houses in less than a decade.
“In spite of the loudness of our commercials, we the private developers are currently far from being considered a force of supply in the housing market of Ethiopia,” says Tsedeke Yihunie founder of Flintstone Engineering & Homes.
Real estate developers all over the world have two things in common: they sell the possibility of a dream home and try their best to keep a delicate balance between sales and delivery. “The complex issues involved in the business creates an overwhelming difficulty in keeping the equilibrium between sales and delivery,” says Tsedeke. These complex issues include processes from land rights to public domain imminence, from design to construction to commissioning and finally from sales to collection of dues, he said in an e-mail response.
There is another piece to the housing conundrum besides the developers. The housing industry needs more support from the government. There is an ugly bureaucratic bottleneck that developers have to face from acquiring land to transferring title deeds. It has become common to see land given to developers without a comprehensive plan, to later be snatched because the land was originally intended for another purpose. Then there is the lack of basic infrastructure (it is common to see new housing developments in places with no roads or sewers) and there is an absence of proper support, monitoring and control from the respective government offices. At a time when there is mishandling and mismanagement of projects, lack of enough financial resources and input supplies and skyrocketing inflation government support is needed even more.
New developments: build and sell
The main reason that real estate companies pre-sell properties is because of lack of finance. As of recently, banks have stopped providing finance to real estate developers. This forces companies to pre-sell the houses by showing the 3D design of houses to be built. There are many risks associated with pre-selling which could eventually lead to delays in delivery and even create a total disaster when the agreements fail to materialize. Particularly, after the abandoning of clients by a real estate developer in 2012, selling houses before their construction start has become a nightmare for developers. The trust which is the most important part of the business has been seriously damaged. So, for developers both old and new, innovations and new strategies are needed to survive and later thrive.
Because of the problems in the market that arise from failures in timely delivery, cost escalation and quality problems, some real estate companies have brought a new paradigm shift to the sector. Noah Real Estate, for example, is marketing villas and commercial buildings after it completed more than 70Pct of the construction. “It has been very difficult to pre-sell properties before completing the construction because of the problems related with trust, so we are now marketing after completing the construction,” Theodros Zerihun, co-founder of the company told EBR. With a motto “don’t sell a house that is not built” Noah Real Estate has now made ready for sale 15 villas and a 12 storey commercial building. “Within a few weeks, more than 35Pct of the houses and units in the commercial facilities have been sold out,” says Theodros. At the moment, the company sells with a 15pct margin compared with the market price and avails commercial edifices for 17,500 birr per Sqm. Ready to move G+ 1 villas which are 450 Sqm are also ready for 7.5 to eight million birr.
Build and sell is not a new concept in the real estate business; but it is very rare and too small to affect the overall market trend, argues Tsedeke. Developers with high liquidity, “tons of cash” as is enviously called in the business, occur once in a long while from an exceptional circumstance that has led to a glut or immobility of capital, according to him. These investors might put some flavor in the market once in a while, but it is unlikely that they will affect the main stream, traditional real estate business – founded mainly on buyer’s money and developer’s trustworthiness.
“The few small local companies that are selling completed units will not be able to alter the course and be a threat to the big developers” the manager of Muller Real Estate shares. They only have few units available for sale, while the overall demand in the market today is huge, he adds. Companies need to engage in large scale construction projects which require high-levels of financing to at least meet the high demand for affordable housing partially, he concludes.
First and foremost developers’ need to establish a strong management team that ensures the timely delivery of houses, says Mulugeta Tesfakiros. This mantra helps companies to overcome major challenges in the business. “Developers should also have a strong workforce on all levels of construction,” he adds. Customers should also make their quarterly payments on time. In fact one of the main reasons why developers are unable to complete projects on time is because customers do not pay on time too, claims Mulugeta.
In the past, developers usually take 5-7 years to deliver houses. This exposed them to risks of increase costs and conflict with clients. However that time has now been reduced to 3-4 years. This is still too long in the eyes of industry observers and the customers. He hopes that a proclamation in the making at the moment will dramatically change the business landscape as developers will be required to start construction and complete projects on time.
The new proclamation
Though the government should have had rules and regulations when the development started, it is now moving swiftly to fix the blunders done in the past. It has come up with guidelines to that end.
The new proclamation was prepared considering the importance of engaging the private sector in the real estate development for meeting the housing needs of citizens with high and middle incomes. The Proclamation is intended to provide a modality for protecting real estate clients as well as for resolving disputes. It is also intended to create uniformity in real estate development and transaction and to encourage investment in real estate, thereby setting a transparent and accountable framework in the sector. The Ministry took almost three years to prepare the bill and it is expected to be approved by the council of ministers soon.
Tadesse Gebregiorgis, deputy head for the Housing and Government Building Construction Bureau at the Ministry of Urban Development, Housing and Construction (MUDHC) agrees that over the past seven years thousands of people have been looted while others have prospered unfairly in the real estate business. He says the new proclamation will support real estate companies that are fair and punish those that do not follow the law. When the proclamation is approved by the parliament, real estate developers will not be allowed to make advertisements before they receive title deeds and building permits. They will also be required to submit their art work (advertisements) to the Ministry for permission to release them. The number of clients to be registered cannot be higher than the number of houses they construct.
The developer is also obliged to deliver the house within the timeframe agreed in the contract; the extension of the time limit for the delivery cannot under any circumstance extended for more than 50 pct of the time limit stipulated in the contract. In addition to this if a client files a grievance stating that the house has main structural defect and it is verified by the Ministry, the developer will be obliged to fix the defects or pay appropriate compensation to the client.
The government on the other hand is obliged to hand over land to real estate developers within 30 days after they have permission. It also promises to provide basic infrastructure or reimburse developers from the lease payments if the later builds these infrastructure facilities by itself.
The Ministry is waiting to include additional packages related with housing and construction before letting it go for the parliament to approve it. This will come after regional states add their comments on the packages.
Last year the government registered around 1.3 million people who hoped to have their own homes in Addis Ababa. Most of these people have started saving, to acquire the houses the government is going to build in the 10/90, 20/80 and 40/60 housing programs targeting the lower income and lower middle income citizens.
This however doesn’t mean government can provide what everybody wants. “We [the private developers] concentrate on providing homes to the mid-tier customers of higher middle income and upper class,” Mulugeta told EBR. Ethiopia will grow indefinitely and the middle income segments of the society will grow in parallel, the real estate developer who has several other businesses in the country hopes. Addis Ababa is the capital of Africa and people from different African countries are interested in having a second home in Ethiopia for its stability, peace and good weather. “These will create lasting opportunities for the market of real estate developers,” he concludes.
Ethiopia with a population of 90 million people, with a new rising economy and a dire shortage of housing has a huge potential for the real estate business. Enacting the new proclamation and providing additional support like financing, will make the sector one major development of a giant awakening economy in Africa. If people in the real estate industry use the lessons from the past to contribute to alleviating the housing problems of the nation they can change the face of the country’s cities and prosper along the way. EBR
2nd Year • February 2014 • No 12