Real estate companies promise to deliver apartments after a certain fixed period of time. There are many instances where real estate companies promised buyers a high-end living space but failed to deliver the houses and many more very high success stories.
However, to learn from failures and succeed, a new real estate company shall consider the following major corporate governance paradigm shift or business operational core principles:
- Real estate developers take the hardest hit in dealing with skyrocketing construction costs since housing construction materials prices increase over time unless the real estate company joins the market with a previous effective project execution record on hand or with a new strong human and technological project execution corporate governance structure. Hence, transferring the house with full pay, just after the effective short-term project execution, will benefit both the real estate and customer avoiding any customer complaints about the delay and additional construction costs for the real estate developer.
- To real estate companies, their customers are the main sources of their income; the same income they use to build the projects they say they would deliver- the inflation and project execution delay will be a great blow to the company. A study done on real estate revealed that the sources of finance for real estate developers are 0–1 percent from financers, 75 percent from client-installed payments, and 24 percent from their own equity/savings. Therefore, the main source of finance for developers remains to be advance payments by the buyer and the developer’s own resources. A new company planning to join the real estate business shall balance in choosing among the three sources for success.
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- For over four decades, until 2010, Construction and Business Bank (CBB) was the only mortgage bank in Ethiopia, providing a 20-year 4 percent loan for new house construction, before it was acquired by the Commercial Bank of Ethiopia in late 2010. After May 2014, housing and car mortgage loans were on the rise in the private banking industry, benefiting employees of international organizations and staff of banks. However, the existing banking sector is allocating only 15 percent of its overall credit services to the growing construction sector and even lesser to the housing subsector. As of January 2022, the share of mortgage loans from the credit portfolio of commercial banks is below three percent. This shows a huge deficit in financing for the housing subsector in Ethiopia. Hence, a dedicated housing bank has come up, in early April 2022, narrowing down this financing gap. Ethiopia’s first self-proclaimed private mortgage bank, Goh Betoch Bank, joined the banking industry with a paid-up capital of 521 million birrs and a subscribed capital of 1.1 billion birrs announcing its plans to disburse one billion birrs in mortgage loans and collect 1.3 billion birrs within ones fiscal year through availing low-interest loans, expecting borrowers deposit up to 20 percent of the value of the house they would like to buy with a repayment period of 30 years. Selam Bank is another financial institution which is formed recently to provide mortgage banking services.
- It is now becoming clear that some of the banks are making to the housing sector, not just attracted by the return offered by the long-term mortgage loans, but rather focusing on retaining the potential client like the diaspora community and the foreign currency gains. In addition, many real estate companies just after finishing real estate apartments, eye diaspora home buyers than local purchasers offering some more attractive packages.
A report by Addis Ababa City Administration showed that after availing 2.7 million square meters of land in 2005, private real estate boomed in number, By 2018, reaching 125 registered real estate companies operating in the country. After 2012, inflation and devaluation clearly became forced out of government control. However, the price of a plot of land, which after the 2004 mandatory lease holding tender rule, falls in the hands of the discretionary power of the government.
For a middle-income community, aspiring to have a real estate home, purchasing power is continuously pickled by inflation and devaluation. The limited available housing banking loan, the interest rate of 18%, and the lower constant monthly income of the middle-income community made the purchasing power much lower. Hence, to solve in a comprehensive way, the focus shall be on factors that can vary in relation to a change in a single possible factor than isolating or referring to a single or multiple variables (inflation, devaluation, purchasing power) and holding everything else constant( real estate problems).
The government shall, at least for the short term, lower the lease amount allotted for real estate per square meter three-fold or waive the lessee rights which could at least lower the price/increase the supply or enable existing projects to reach the line. Ethiopian Real estate shall be saved from exaggerated prices attached to land to realize a home for aspiring middle-income communities hit by inflation and devaluation. That is why, I strongly argue, Ethiopian real estate could be saved by mutatis mutandis than by Ceteris paribus