Scramble for Properties

The Driving Factors Behind, the Implications on the Economy

For a new visitor of Addis Ababa, the thriving construction sector in many parts of the city and lofty traffic jam might suggest about the growing economy in the country. This is indeed part of a sign of an economy undergoing rapid growth for over a decade. As more and more people get richer, they tend to develop appetite for acquiring properties caused by lifestyle changes, among other reasons.
However, there is a concealed factor as to why individuals and corporate entities rush into spending their money in the acquisition of real assets such as vehicle, land and building.
In a country where population doubles every 25 years and per capita income grows fast, while real assets such as land are finite resources, it is common for buyers to rush to acquire the scarce resources. Inflation and inflationary expectations, which Ethiopia has been experiencing for over a decade, further drive the demand for property acquisition. Buyers use them as a strategy to evade the adverse effects of inflation.
The trend is dangerous because it diverts scarce resources that should be used for investment in the productive sectors of the economy. Macroeconomists argue that the situation calls for improving the entire macroeconomic governance because the continuation of resource misallocation ruins the pillars the national economy rests upon.

On December 15, 2016, Mohammed Mahmud, 22, was at the Addis Ababa Land Development and Management Bureau holding four Customer Payment Orders (CPOs) he collected from the Bureau. He deposited them initially as part of the requirement to participate in the land lease auction floated in November 2016. Each of the CPO is 10Pct of the total offers he bade for the particular plot. The 24th round of land lease auction was opened on December 05.
Mohammed, who runs a family-owned electronic shop in Nifasilk Lafto District, participated in the land auction, buying four bid documents, each for ETB350. He was interested to acquire residential plots in Nifasilk Lafto and Akaki Kaliti districts. He offered prices from ETB13,332 to ETB17,000 per meter square. However, the plots fetched prices ranging from ETB21,000 to ETB32,500. The minimum lease prices the Bureau set for the plots were less than ETB200 per meter square.
Mohammed says he has been participating in land auctions for the last two years. However, he has never won one. “I have been increasing the bid price in each round, but others win by offering an exaggerated price.” He says. Nowadays, people tend to offer an exaggerated price to own land. This situation surprises Mohammed and many in the city.
It is not only in the primary market where buyers acquire land from the government through auctions that price is skyrocketing. Even in the secondary market where people exchange land lease rights, a similar phenomenon is happening. This trend is not only limited in the capital city. Few months back, a meter square of land in a commercial district area in Bahir Dar city fetched ETB200,000.
Girma Woldegebriel, 48, has worked as a land and house broker for the last 20 years. He says the price of land is increasing by the day, because well to do people from the Diaspora and the regional states are coming to Addis Ababa in search of properties to store their liquid cash in the form of fixed asset. “I remember before 20 years, the highest sale was ETB3 million for 500 square meter of vila in [the upper scale] Bole District while a 105 square meter plot was sold for as low as ETB10,000 in CMC neighbourhood. The value of such plots has since then increased substantially.”
The trend observed in the primary and secondary land markets indicate that there is a rush to acquire land in Ethiopia irrespective of the arbitrary increase of price. Even business organizations including financial institutions and hotels and manufacturers are scrambling to acquire land.
A member of the Diaspora community who recently purchased a land explains the source of her eagerness to invest in assets like land. “Properties, especially land, appreciate in any country, but the trend in Ethiopia is abnormal,” she argues. “In Addis Ababa, you can buy a plot of land, and immediately resell it with huge profit or wait for a year, and sell it in millions of profits”
The high desire among individuals and institutions to acquire land is not a unique happening in Ethiopia. It’s just a global trend and many prefer making investment in real assets because they offer ‘safe investment option.’ Returns from investments in properties are relatively stable even in different economic environments and conditions.
Investopedia, a leading online source of financial content, defines real assets as assets that have intrinsic value and physical character. Although what is considered as ‘real assets’ is up for debate, it includes real estate, land and precious metals and fossil fuel.
In fact, real assets are known to provide value and enhance overall risk adjusted returns whether it is in recession or during periods of prosperity. This is because real assets such as land are physical resources usually with few substitutes. Thus, demand for real assets tend to be inelastic to shifting economic conditions.
Andrew Smith, Chief Product Strategist at the Chartered Alternative Investment Analyst Association, which is an education and advocacy organization based in Massachusetts, the United States, supporting the alternative investment industry, stress that real assets are scarce by nature because they are physical assets that have a finite and limited supply.
In his analysis entitled ‘An Overview of Real Asset Investing’ Smith argues that although the demand for real assets can increase due to population growth, the supply might not necessary increase fast enough to meet the demand. The result is an increase in the value of real assets, leading to a substantial monetary gain for the investor, often outperforming the returns of traditional equity and debt investments.
Alemayehu Geda (PhD), Professor of Economics at Addis Ababa University says the price of land is skyrocketing in Ethiopia because the government has gripped the supply, which could not meet the demand. “It is a simple economics, when demand outruns supply there will be price rise.” he explains.
Smith solidifies Alemayehu’s explanation. “Real assets are scarce by nature because they are physical assets that have a finite, limited supply. However, as global population grows and demand for these assets increases, the supply is not necessarily able to increase, or in some cases, the supply available to purchase, is not necessarily able to increase fast enough to meet the demand.”
Out of the total 829.1 hectares of land the Addis Ababa Land Development and Management Bureau transferred in 2015/16 fiscal year, 80 hectares were transferred through regular auction, while 40 hectares were transferred through special auction, which is a method of transferring land for hotels, real estate developers and hospitals. 440 hectares were also transferred for condominium housing projects in the city while the rest goes to government institutions and micro and small scale enterprises.
Out of the 80 hectares transferred through regular auctions, 403 plots were designated for residential purpose while 105 and 708 plots were selected for commercial and mixed use purposes respectively. Since 2011/12, the Bureau has transferred over 600 hectares through regular auction, according to data from the Bureau. Addis Ababa rests on 52,000 square meters area.
“Few years back, especially when the Bureau started floating land lease auctions every month, we thought we will fulfill the growing land demand. Now we realize that the supply will never match the demand,” said Shemsedin Dilsebo, Tenure Administration Transitional Period Service Project Office head at the Bureau. “The supply has increased [substantially]. However, we could not meet the exponential growth of demand. Since the city cannot expand horizontally, we now focus on redeveloping slums in the inner-city. [In fact] the only way out is erecting high rise buildings in those areas.”
Shemsedin says that there is no city in the world where a square meter of land costs ETB350,000 (roughly USD15,000). “The land price now has reached an alarming point. “Huge money is being wasted by people who offer overstated rates just to own a piece of land” he said.
Of course, the uncontrollability of the land market in Ethiopia can also be shown by the results of the recently concluded auction in which Mohammed participated. Although bidders offered extremely high offers, a 1,250 square meters of land in Addis Ketema District, in a neighborhood known as America Gebi fetched ETB400,000 per square meter. Although the winner didn’t show up to claim the land, the circumstance shows the extent of enthusiasm of some bidders to acquire land.
For Alemayehu this shows the absence of proper functioning land market in the country. “When a given market is filled with uncertainty and improper practice, every other market that involves participants of such improper practice will be affected,” he argues. “The spillover effect [will be felt at] national level.”
Girma, the land broker explains the unhealthy practices observed in the land market. “There are groups of high profile business people, who bid in group. All of them bid by offering big prices with small differences to outplay individual bidders. They do such until all of their members win the land they want,” he explains. “The practice discourages ordinary people.”
Land is not the only asset that individuals in Ethiopia aspire to acquire. Many corporate entities such as banks and insurances spend an enormous amount of money to construct and own buildings.
Financial institutions in recent years invest in buildings to escape the rapidly mounting operating costs. For instance, Dashen Bank owns 27 buildings, with three more currently under construction. The Bank has invested close to ETB2 billion, which far exceeds its ETB1.3 billion in paid-up capital.
Other private banks have also begun constructing and acquiring large buildings. Wegagen and the Bank of Abyssinia (BoA) are working on finishing buildings that will serve as their headquarters. Wegagen Bank’s 23-storey headquarters will be an ultra-modern complex, which they expect to finalize in few months. The edifice will be the tallest bank headquarters in Ethiopia, until the Commercial Bank of Ethiopia finalizes their new G+46 building.
Other institutions, like United, Zemen and Nib banks, launched the construction of their buildings on Ras Abebe Woldearegay Street, which is fast becoming the financial district of the country, with high-rise buildings already taking a sizeable proportion of the area.
While institutional investors like banks prefer to accumulate buildings, those individual investors that have less capability turn their eyes towards vehicle and small plots of land.
Wondirad Aschalew, who established Loyal Vehicles General Business three years ago, started car rental business by purchasing four automobiles. Currently, his company takes vehicles from individual owners and rent them to big companies and individuals. In 2015/16 alone, he claims to have rented 123 vehicles.
A vehicle purchased with a maximum of ETB500,000 can fetch ETB14,000 per month, he told EBR. “The vehicle might cost ETB1,500 for maintenance, per month if the vehicle is rented the whole year. [In most cases] the revenue of one month can cover the annual cost of maintenance. The rest is a net income for the owner,” he explains. “Even more, [the owner] can resell the vehicle with the same or [probably] more price than the purchasing price, because vehicles value appreciates in Ethiopia as time goes by.”
From institutional and individual investors point of view holding real assets such as land, building and vehicle seems logical since capital preservation and growth are the main driving factor behind investment towards real assets under any economic condition.
Studies conducted in the subject reveal that the quest for investment portfolio stability and capital growth is the main reason for individual and institutional investors to search for alternative solutions such as real asset accumulation, just in case the economy enters in to downward cycle. Here, the proverb ‘never put all your eggs in one basket’ becomes a guiding principle in economies and markets that witness constant change and unforeseen events.
According to Edward J. O’Donnell a consultant at the Virginia, United States based CFA Institute, a global association of investment professionals; one of the benefits of investment in real assets is portfolio risk reduction. In his research O’Donnell narrates: “real assets can benefit investors by diversifying portfolios and increase income since the counter cyclical nature of real assets help the overall portfolio to achieve better risk adjusted returns.”
Smith, on the other hand, argues that real assets produce noteworthy and very secure cash flow to investors, most often in a very tax efficient manner. Fortunately, such source of income fits the objectives of many investors since stable income combined with price appreciation is a highly desirable thing.
Alemayehu points out the other reason that drives people to invest in real assets. “When the purchasing power of a given currency, say, birr decreases people want to save the value of their money by investing on real assets,” he explains. “Due to their unique nature, which is their tendency of increasing investment value, real assets are an effective hedge against inflation.”
Inflation and inflationary expectations are probably the major driving forces that influence decisions on investment towards real assets. This is because many investors, more so individuals worry about how they will be affected by inflation when they decide areas of investment. This is because fixed income investors are the hardest hit whenever inflation surges.
Alemayehu stresses that such behaviours of individual and institutional investors will have damaging consequences by consuming the amount of money that should go towards productive investment. “Investment in productive sectors of the economy – one that adds value and serve as a backbone of an economy – will suffer for lack of finance,” he stresses. “Reduction of investment towards these sector means ruining the pillars a national economy rests upon.”
Investment in the productive sectors of an economy — agriculture, manufacturing and service — is very important because these sectors employ more people and improve a country’s competitiveness. This helps sustain economic growth and development through multilevel spillover effects.
That’s why experts strongly advise governments to pay attention to improving macroeconomic governance in a country so that property gamblers with less contribution to the national economy get systematically discouraged from pouring away scarce resources into less productive sectors. EBR