Acquisition of Fixed Assets
Buying houses from real estate developers incur 15Pct Value Added Tax and six percent title deed transfer fee of an actual price tag. Additionally, real estate developers take more time to deliver housing units which further escalate cost of construction that ultimately push price tag further.
This makes houses built by real estate companies more 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. The unlicensed individual developers have lesser tax obligations and deliver houses for less at a shorter span of time. As a result, they are becoming more active in the housing market.
As their number increases, there is a fear that the market would become informal and out of the watchful eyes of the government. A simmering rumour about a possible change of the local currency note is further boosting the housing market as many people who fears keeping their money in the banks take property acquisition as a shield from loosing cash at hand. EBR Explores.
When Simeneh Asfaw, 54, 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 ETB1.4 million eight years ago to a local real estate developer to buy his own apartment, he failed to recover his investment because the company failed to deliver on the apartment despite collecting money from hundreds of house seekers.
To add on to the disappointment, Simeneh discovered that the price of villas developed by real estate companies ranged from a minimum of ETB27,000 a square meter to a maximum of ETB65,000 for the same square meter. Prior to July, 2019, the price had been between ETB22,000 to ETB50,000. “Now I have to buy another finished house, but real estate units are so expensive,” says Simeneh, who is seeking cheaper villa houses built by individuals who are engaged in the housing sector without having the proper license.
The housing demand and supply gap has been dramatically widening in the capital particularly for the last decade, during which over a million people remained in the condominium housing schemes’ waiting list, which could not deliver more than 176,000 housing units. 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. The price of a three bed-room 20/80 condos ranges from ETB1.8 million at Summit to as much as three million in Arat Kilo and Lideta condominiums.
Those in the second category are apartments built by real estates. Prices for real estate apartments, which match with the 40/60 condos, range between two million and five million Birr. The third category includes villa houses built by real estate developers, which currently cost between eight million Birr to ETB20 million based on the location, floors, quality and financier.
The fourth and the emerging segment of the housing sector, on the other hand, is run by individual builders and smart-mouthed brokers. Both of them engaged in the housing sector without having a proper license from the government. Currently, one can find villas built in the outskirt of the city for as low as ETB2 million.
Houses developed by individuals are becoming a new trend accustomed by some business people and engineers who really saw opportunities while at the same time bridging the demand of house buyers who cannot otherwise 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 the city government, these unlicensed individual developers usually buy land from people who have plots of land but are also in short supply of finance. The usual trend is land owners lay the foundation of a villa house before they sell the plot to the individual developers. This is because they cannot directly sell a vacant plot because land is the property of the state as per the constitution of the country. The buyers then finish the construction and sell it for a higher price.
“Currently, the number of people who want to sell their land is rising. These people leased the land from government to develop it by themselves, inheritance or any other means, but they fail to access the finance to build a house on it,” says an engineer, who bought land plots with up to ETB1.2 million to four million Birr using such arrangements. “We finalize it within three to five months using chemicals and modern construction technologies. As soon as the house is finalized, the price of the houses appreciates. One can then sell it for double the buying cost.”
The engineer says other similar builders, who build apartments or shopping malls, offer some floors to the land owners, in addition to money. “Many constructions, which are undergoing in different parts of Addis Ababa, are started under such arrangements. But the villa business is currently hot in Legatafo, Nifas Silk, Kaliti, Ferensai Legasion, Sebeta and Gelan as well as other surrounding parts of the capital,” he says. Construction costs for private developers is currently between ETB25,000 and ETB35,000 per square meter, while their selling price is between ETB45,000 and ETB70,000 per square meter, according to the engineer.
Besides engineers, others are also using the opportunity by acquiring land from individuals and selling it after constructing a house unit 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,” says Tamrat Girma, a well-recognized and self-promoted broker on social media.
Individuals, who are involved in illegal activities and cannot save their money at banks in fear of a government crackdown and confiscation, are also amongst those who are developing houses by hiring engineers who may not have a license. In fact such individuals are at the moment investing considerable amount of money in such schemes as rumours about government’s plan of changing the local currency note simmers across the city.
Perhaps it could be attributable to the rising transaction of houses and plots of lands across the metropolis, that the Documents Authentication and Registration Office (DARO), a government agency responsible to document, authenticate and legalise transaction of houses, cars and other private properties, suspended its services of processing such transactions two weeks ago. The decision of DARO is also attributable to the rampant grabbing of public plots of land in the outskirts of the city and suspicious transfer of condominium houses in recent weeks.
Meanwhile, real estate developers, who have had an opportunity to lease land from the government are losing their reputation gradually 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.
According to a report presented two years ago to the Addis Ababa City Council by Takele Uma, Deputy Mayor of Addis Ababa, the city administration reclaimed 41 hectares of land illegally possessed by real estate developers. The city administration also nullified 46 hectares of land acquired by a business man who proposed to develop a bogus agro industry plant in joint venture with the farmers recently. The land has been given back to the peasants.
The measure is part of an ongoing land audit launched by the City Land Management and Development Bureau more than a year ago. The audit included 139 real estate developers who leased land since 2005 but failed to deliver on the houses. The audit also found out that 1,743 housing units built by four real estate developers and transferred to buyers have no title deeds. “Houses are not being transferred to buyers timely, mainly because of the absence of proper regulation and the greediness of developers,” said the deputy mayor, while addressing members of the council back then.
Despite the presence of such problems, the real estate sector has been performing better, growing by 14Pct over the past decade. There are now 630 real estate companies with a registered investment of ETB3.5 billion capital. But there is fear that the growth momentum will be reversed as people are choosing unlicensed developers over the licensed real estate developers.
“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 a higher quality,” says a senior manager at the Real Estate wing of JH Simex, the sister company of 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.”
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 value added tax, whereas the buyer pays less in the form of title deed transfer fee, which is normally six per cent of the total price tag. The broker, on the other hand, earns a lump sum for his job, which is normally two per cent of the transaction.
“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. However, the strength and quality of the houses are very poor, including their structure as the developers use adhesives and chemicals because they focus on finishing the project in a couple of months,” 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 revenues but the house buyer is the one losing the most,” says Tamrat, who recommends that the government needs to establish a system that can efficiently maintain housing standards and give approval. “House 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 senior official at Land Bank and Transferring Office of the Addis Ababa city administration.
Shimelis Eshete, a senior expert at the Ministry of Urban Development and Construction, 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 a 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.” EBR
9th Year • July 1 – July 15 2020 • No. 88