The Politics of Urban Land Policy, Affordable Housing

As housing affordability in the capital becomes a hot issue, the twin problems of ‘asset bubbles’ and housing affordability have challenged the minds of policy-makers, experts and the general public. The demand for housing has kept increasing in urban areas like Addis Ababa, whereas the supply of land has remained unchanged, leading to inflated prices. This, in turn, diminishes the affordability of houses for residents. Worryingly, any low and average income earners are unable to construct or buy their own houses due to the skyrocketing lease prices. While experts attribute the problem to the law governing urban land distribution, the government remains firm in its position that there is no shortage, Samson Berhane, EBR’s staff writer, reports.

Two years ago, 28 year old Biruk Assefa, who makes a monthly net salary of ETB7,000 working at a private insurance company, decided to buy the title deed of a 140 square meter plot of land in Legetafo, on the outskirts of the capital, Addis Ababa. He paid ETB300,000 for the plot, half of which he had saved over a period of three years (initially for the purpose of buying a 20/80 condominium apartment). The other half came from his family.

But the dream of owning a house never came true for Biruk. “I spent most of my savings to purchase the land so I didn’t have the money required to start construction,” Biruk told EBR. “I have been unable to start yet.”

Buying a plot and constructing a house or purchasing an already-built residence is one of the options available for urbanites like Biruk in Ethiopia. Yet, the overwhelming majority of households in urban areas like Addis Ababa aren’t able to build or buy their own homes. This is because of ballooning land prices, coupled with the surge in construction material costs, which have kept many residents from their right to housing, which is recognized in a number of international human rights instruments.

One alternative for residents of urban areas who want to own a house is to lease land from the government through an auction and build their own houses. Between 2011 and 2016, close to 134 hectare of land was leased through 27 rounds of auctioning in Addis Ababa, with the smallest area being 125 square meters and the largest being 16,750 square meters. More than 75Pct of the total bidders leased land for residential purposes, according to the Addis Ababa Land Management Bureau.

There were at least 20 bidders vying to lease each plot of land up for auction, indicating that the demand for land exceeds the supply by the same amount. Yet, residents are unable to afford the lease price. The average offer for a square meter of land grew from ETB4,716 in the first round of auctioning during 2013 to ETB20,804 in the 28th round last year, which leads to the conclusion that the minimum amount needed to lease at least 125Sqm of land at auction is no less than ETB2.5 million.

A small fraction of people in urban areas also buy houses from real estate developers. Ever since Ayat Real Estate became the first real estate company to develop houses, housing companies, both local and foreign, have flourished, delivering thousands of apartments and villas across the country. But their cost have become unreachable for low income earners.

So even the real estate sector, which contributed 12.5Pct to economic growth over the past decade, is not in a position to fill the city’s housing gap. As of 2016, there were 630 large scale real estate investments in the country, 23Pct of which were foreign owned. Moreover, real estate and rental businesses accounted for 56.2Pct of the total capital of investments that became operational in the past financial year.

The land price surge has also affected the real estate market, according to industry insiders EBR spoke to. “It is getting worse every year,” said a real estate developer, who spent more than ETB16 million to lease land on which to build an apartment building that is likely to cost her ETB80 million. “Had the land lease price stabilized, we could have bought the land two or three years ago and delivered the houses for a cheaper price than we are planning to now.”

Mulugeta Tesfakiros, founder and major shareholder of Muller Real Estate, feels the same. “I was asked to pay ETB20 million to buy the title deed for a land valued at around ETB2.6 million eight years ago. If increases in price continue like this, only those with high capital will survive in the housing market, which undermines competitiveness.”
Waiting to be the winner of a condominium house is the last remaining option that exists for residents of Addis. One million people have registered for condominiums so far. However, the government has only constructed and transferred over 176,000 condominiums so far. To satisfy the current demand, it would take over 60 years at the current rate of delivery. “It is a gamble no one can win,” says Anteneh Tesfaye, an expert with 12 years of experience in urban planning and development, who is doing a thesis on the affordability of houses to low income people.

On top of this, the rising cost of condominium houses is evaporating the slim hope of residents of Addis. The cost of three bedroom condominium house under 40/60 scheme, for instance, showed a 56Pct rise to ETB829,568 during the last few years.

The huge imbalance between the demand and supply of housing units in the capital has reached the point where there are 361 houses per 1,000 people in 2016, according to a 2017 study by the Ethiopian Institute of Architecture, Building Construction and City Development (EIABC).The demand is also expected to surge ahead as the capital, which contributes half of the nation’s GDP, experiences a surge in rural migration.

Faulty policy or implementation gap?
In Ethiopia, urban land is provided to residents on a restricted basis. This means the land use rights are obtained from the landowner, which in Ethiopia’s case is the state, for a specific period (up to 99 years). When the government became the sole provider of land through leasing and put forward a small fraction of the land in its hands on the market, the demand for land surpassed supply, and raised the lease price.

All the anecdotal and fact based evidence demonstrates that because of the urban land price surge, as well as the increased cost of construction, affording and owning housing through almost all the available options is becoming very difficult for urban residents. The price of land is also growing at a higher rate than the country’s average inflation rate; whereas average prices of land grew by 50Pct over the past four years in the capital, the general annual inflation rate averaged below 10Pct. These factors combine to make acquiring land for the middle class almost unthinkable.

Many attribute the surge in land lease price to the existing law governing urban land, which states that urban land must be held by leasehold through a modality of tender or allotment. “Using this approach had brought about shortages of land, which in turn, increased the lease price,” argues Mulugeta.

Although this is a clear manifestation of the disparity between the demand and supply of land, this argument does not hold water for the Ministry of Urban Development & Housing (MoUDH). “It is difficult to conclude that there is a shortage of land in a city where there is no clearly defined land plot registration system. It might be due to a poor land management system,” said Ethiopia Bedecha, communications director of the Ministry of Urban Development & Housing (MoUDH), hinting that a conclusion would be reached after the newly established Urban Land and Property Registration Agency digitally overhauls the country’s land information system.

For Fasil Giorghis, an expert in urban planning and a lecturer at EIABC, the price surge occurs due to the inefficiency of the urban land holding proclamation. “The proclamation doesn’t specify setting price ceilings for plots during land lease auctions in a manner that in inline with the free market principle. On other hand, although the proclamation dictates every plot of urban land should have a bench mark price, which should be updated at least every two years, the failure to do so has contributed to the crisis observed in the land market”, he said.

Jemal Aliyi, general manager of the Land Bank and Transfer Office says although the proclamation that was amended and approved by Parliament seven years ago states that benchmark prices should be revised, that has not been the case in many urban areas, including Addis Ababa. “This is a deliberate action taken by the government to control prices. Had we used an updated bench mark price, the price of land would have skyrocketed even higher,” Jemal argues.

This is, however, very concerning for Tesfaye Dina, owner and major shareholder of Boran Real Estate. “Not revising the bench mark price based on the law of the country can push bidders to make uninformed decisions,” said Tesfaye, whose company tried to buy 1,135Sqm of land for 45,000 per square metre in the 28th round of auctioning, but lost out to a bid of ETB 60,000. “I remember I leased a square metre of land for ETB256 when my partners and I decided to open a real estate development company. Now, it’s hard to get land with an offer of twenty times this amount. These increases have raised the share of land in the total cost of construction from less than 10Pct to more than 20Pct, in my experience,” Tesfaye recalled.

On the other hand, Tekie Alemu, an economist with over thirty years of experience, thinks the upsurge in prices of land was brought about by individuals. “As the requirements to participate in the land auction become looser, some bidders offer exaggerated bids, but usually fail to show up to pay the required amount,” he explained, mentioning that 32 winners faded away after offering winning prices to lease land last year.

As an attempt to combat this, the Ministry of Urban Housing & Development (MoUDH) is presently amending the lease proclamation, to include, among other things, stronger proof of financial competence, which will reduce underutilization of land, as well as the doubling of the bid bond aimed at reducing fake bids. The bill, which is still under review by the MoUDH, also requires developers to deposit 25Pct of their project costs in a closed bank account in order to lease land through a grant, according to the Ministry.

In addition to prices not being regularly revised, there are also concerns over the method of computation of benchmark prices, although it was effective in stabilizing the land market during its first two years of implementation. While benchmarks are estimated based on the income and living conditions of residents, it overlooks factors such as optimality in size of the land, distance from the center, accessibility to basic services, as well as lease period, as is pointed out by Melaku Tanku and Eyasu Kumerain a study submitted to the Addis Ababa Chamber of Commerce and Sectoral Associations (AACCSA).

Industry insiders also share this argument. “These factors are crucial in deciding the prices of houses,” said a real estate developer, who is building apartments in Arat Kilo, mentioning the case of Kenya, where the minimum price of leasehold sales are determined by the selling prices of private businesses, land use plan, site location and development level of infrastructure and other related factors.

“Following the business as usual approach is not a solution to the land shortage crisis,” argues Tesfaye. “There should be mechanism where the private sector and individuals can own or transfer the land at a reasonable price. In doing so, the demand and supply will govern the land market.”

Experts also have similar concerns. “More government involvement exposes the land market to corruption and misappropriation,” said an urban planner at EIABC with over 15 years of experiences. “Allowing the private sector and individuals to flexibly transact land is important as it can have the capacity to slow down the housing demand, at least for the middle class.”

Learning from best practices
Other countries with different urban land policies than Ethiopia have been successful in stabilizing their land markets. In Kenya, where there is a mixed land holding system by the government and private holders, supplies of urban land are determined by demand and supply. Specifically, the transfer of land use rights is through freehold sale, leasehold sale and grants. Using these approaches, the average price of land rose six-fold over the past decade in Nairobi; the price of land in Addis increased five times in only five years.

Even countries which employ a similar urban land policy as Ethiopia and recently implemented flexible land management systems are performing better. This includes Botswana where urban land can be owned by the state, but the private sector is allowed to engage in the land market using public private partnership approaches. The government then becomes a facilitator in land servicing, instead of being a sole player. This contributes to the construction of secondary infrastructural networks and supply of houses, reduced housing shortages, and saved public funds, according to a study by the Department of Architecture and Planning, in the University of Botswana. Nonetheless, Desalegn Rahamato(Prof), former head of the Forum for Social Studies believes it might be difficult to replicate this success in Ethiopia. “History and culture are crucial to making a significant change in urban land policy. Otherwise the probability of success in privatizing land is very low,” he told EBR.

Yet, studies conducted across emerging economies affirm that government intervention has an adverse impact on the housing market. Xin Janet, Siqi Yan and Wu Qun at the Nanjing Agricultural University, in their study entitled ‘Government intervention in land market and its impacts on land supply and new housing supply: Evidence from major Chinese markets’ conducted three years ago stressed that government intervention in the Chinese land market caused shortages of land supply for housing development, which then brought a decline in the housing supply.

Tekie, the economist, agrees, but has a different perspective. “It might be true that government intervention has an adverse impact on land supply, thereby affordability of houses. But even though the government is willing to privatize urban land, there is no mechanism to do it in Ethiopia,” he commented.

Experts also blame the current land allocation mechanism. “The existing proclamation has serious flaws. It is makes the government and the rich richer, while leasing land becomes a dream that can never be achieved for poorer people,” says Fasil. “Other mechanisms such as availing land based on lease arrangement, or for free to house seekers who want to build houses organized under cooperatives or unions, should be adopted.”

Fasil cites the experience of Switzerland, which managed to stabilize its housing and land market through cooperatives. After being introduced in early 20th century, cooperative housing became popular and currently constitute one-fifth of housing in Switzerland.

Actually, private housing cooperatives are not a new concept in Ethiopia. They were popular during the Dergue Regime and continued after the current ruling party took power. The City Administration provided 2,049plots, from 75 meter squared to 250 meter squared, to housing cooperatives in Addis Ababa between 1995 and 2002. The figure increased to 60,000 plots by 2005. Nonetheless, it has rarely been practiced since then.

However, the state of Oromia Land Management Bureau is currently putting the cooperative system into practice, which is making land available free of payment in towns surrounding the capital. The land, which is intended to help those troubled by the housing shortage in Addis, is available to teachers, civil servants and employees who organize themselves under cooperatives. Likewise, the state of Tigray made land available to 30,000 households using the same arrangement. “Similar approaches are going to be practiced in other regional states as a preventive measure for the housing shortage,” said Ethiopia Bedecha.

Moreover, to avert the shortage, experts such as Tesfaye listed successful strategies such as community based housing projects that were built by taking the housing demand and land shortages into account. One of them is the Community-based cost effective houses build in cooperation with Redd Barna, Norwegian Save the Children Fund, around Menen High School. Constructed during the Dergue Regime, the houses were built in cooperation with the government and the community. The former built half of the construction and the latter complete it by forming a union.

Similar projects aimed at satisfying the housing demand of low-income residents implemented in Saris, Addis Sefer. Executed with the help of World Bank, individual home seekers who organized themselves into unions were given designs to build their own houses, while the government provided utilities and sanitation facilities such as toilets. “Such self-help projects, which use bottom up approaches, will help the government ensure equitable distribution of land, and thereby houses,” said Tesfaye.

Undoubtedly, the main problem related to urban land emanates from the law that restricts and limits the supply of land, which is owned by the state. However, the experiences of many countries that follow similar urban land policies to Ethiopia demonstrate that the country can make it work by modernizing the land management system and minimizing implementation gaps.

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6th Year . May 16 – June 15 2018 . No.61