Everything has changed. Yet, nothing has changed. This appears to be the story of the real estate sector in Addis where the only difference as to which option you choose from the paradoxical pairing, depends on how far you’re looking into the future.
Overview
- Never before has business (or life in general for that matter) been so universally impacted as it has been worldwide due to the Corona pandemic
- Real estate is no different in the short term with a virtual stoppage of activity observed in Addis early into the days after the first COVID-19 case was reported here
- How the sector will perform in the near, mid and longer term will be a test of its traditional ability to weather exogenous shocks
Backdrop
The arrival of the first known COVID-19 case to Ethiopia on March 13th brought the sector to a virtual standstill. Prior to that however, real estate had enjoyed a strong period dating back about a year or so when the increasing availability of long term mortgage instruments had catalyzed robust buying (and to an extent, building) activity in the sector.
Despite the lion’s portion of such mortgages being reserved to attract foreign currency – from buyers in the Diaspora or as employee retention programs at international organizations that regularly bring in their operating costs in forex – there was an elevated level of activity across the entire sector. Increased transactions via cash or other payment modalities over and above mortgage backed purchases were a key feature of the sector’s strength. But early 2020 had already brought challenges to the fore in the form of liquidity issues and increasing political uncertainty before the first announced Corona virus case eclipsed everything else and shut down buying activity almost completely.
It could actually be argued that the timing of the pandemic’s officially known arrival Ethiopia, may have been somewhat fortuitous. It happened to coincide with the conclusion of what is generally the busiest season for real estate sales (Dec-Feb); when the number of Diaspora visitors in town wanes significantly and the start of the fasting season depresses domestic activity in some measure. Furthermore, a severe liquidity crunch affecting the wider business community and growing apprehension of the upcoming elections, then less than 6 months away had already taken a bite out sales. So from a real estate perspective, if a pandemic was to unavoidably arrive within our borders at some point, this was as good a time as any.
Immediate Impacts
Understandably, effective buyer interest was dramatically reduced immediately upon the announcement of the first known COVID-19 case on March 13th. The earliest glimpse of what could happen to the global economy was just becoming evident and uncertainty reigned worldwide. Even more concerning, there were loud voices proclaiming how much worse the pandemic’s impact could be in Africa. The Ethiopian government reacted relatively quickly and aggressively, partially shutting down government functions and seemingly moving towards a lockdown that never actually transpired. However, it contributed to a virtual stoppage of non essential, discretionary business activity anyway, especially of the big ticket kind. We were in uncharted waters and it seemed like the nation was holding its collective breath.
The slowdown was exacerbated over the following weeks as secondary market transactions – normally a strong driver of follow on sales from both primary and secondary market inventory – were tied up due to DARO’s suspension of officiating such transactions for an indefinite period. Even amongst those who were on an existing path for the purchase of real estate, a combination of general uncertainty and in some cases, an inclination to wait out the market for potential bargains (for the most part unfulfilled), purchasing delays were consistently observed.
At the beginning of May however with the lifting of this suspension as well as what seems to be a waning of the shock from COVID-19’s arrival to Ethiopia, buyer inquiries are rising once again and transactions have also resumed, if somewhat intermittently. The worst fears about the pandemic’s spread in Ethiopia have not been realized (although we may not be out of the woods yet) but more Ethiopians have seemingly come to grips with current state of affairs and the potential after effects, resulting in a more pragmatic outlook that has lifted buying sentiment from its earlier malaise.
Of potentially some relevance to the market is an adjunct effect on the rental market for housing. Specifically, in the higher segments dominated by expats – there was/is a virtual halt of new residents arriving to Ethiopia with the small numbers likely to be greatly exceeded by a minor exodus of foreigners back to their domiciles. This has also included a number of citizens of foreign countries of Ethiopian origin. That has inevitably resulted in lower demand and pricing for apartments in this segment. While this may enter into the considerations of some buyers, this effect is not likely to persist in the long term and may even be mitigated by the virtually complete lack of short term investments which could offer a practical alternative. Especially to the individual investor. And especially given the rapidly declining purchasing power of the birr.
On the supply side, no discernible impact has been observed whatsoever. Government has virtually mandated that projects under construction must not be halted or even slowed down in order to save the jobs of daily laborers in the sector who may number in the hundreds of thousands. Money has been flowing into the sector heavily in the recent past, driven by increasingly negative sentiment from other areas of the economy beaten down by unrest or uncertainty in various parts of the country. In fact, it may not be a stretch to say that the push for new real estate projects has held steady or even increased this year.
In summary, the short term impact of COVID-19 appears to have been dramatic in the earliest days but waning somewhat as we close out the month of May. The potential for an increased uptick also looks good as business & economic activity slowly reverts back to ‘normal’ or at least as normal as can be in the new world.
In the Long Term
We have jumped straight from the immediate (short term) impacts to the long term because it is the easiest to address. Here, we will assume (as we must) that global economic activity will gradually climb back to prior levels over the next 2-3 years at the outside. Under that assumption, the most fundamental factors driving real estate activity in Ethiopia – outsized demand for too little supply – will remain the primary driving forces over the long term. It is true that supply is increasing at greater levels than ever observed before. However, the same is true of demand. In fact, in relative terms the growth in demand still outstrips that of supply by significant margins due to organic factors such as population growth and urbanization. Of late, this has been exacerbated even further by increased regional migration to Addis in the face of continued political uncertainty that is weighted more to outlying regions than the capital.
Only much greater provision of housing (in the tens or hundreds of thousands, not the much lower levels still in play) will affect the long term balancing of supply and demand. Elevated and sustained political uncertainty and/or disturbances can certainly play a role in larger mid term effects but are unlikely to have much more going forward.
Mid Term Prospects
Given the underlying truths regarding demand and supply that can be expected to persist for many years if not several decades, the primary consideration that will drive actual activity is how buyer sentiment may oscillate in the mid term. To consider that, we will have to broaden our view to other relevant factors that could play a role in determining the eventual outcome.
The Macro Context
Ethiopia’s macroeconomic prospects are of course an important context for the consideration of any sector’s future in the mid term. However, both by default and by design, it would appear that there are some mitigating factors which may moderate the pandemic’s otherwise severe effects.
A large proportion of the nation’s economy is based on rural agriculture, primarily practiced by a highly dispersed population less likely to be susceptible to the virus’ worst effects. Construction – another significant mainstay of the economy – has been virtually mandated to continue as is – either by dint of the numerous government projects in progress or by explicit decree. Not that construction timelines can be affected significantly on short turnaround to begin with. With the exception of flowers (and to a lesser, more temporary extent – textiles), Ethiopia’s exports are less likely to take a significant hit. Although floriculture has indeed been virtually decimated as of now, it will probably recover in short order to reclaim its place as one of the brightest growth areas for Ethiopian exports. Of greater concern to mid term forex inflow is what will likely be a lasting hit on tourism, air travel and remittances. We can only hope that lower prices in imports – oil, capital goods and the like – will help offset that loss somewhat. So too might lower demand for forex driven by the continuing depreciation of the Birr which will continue to close the gap further with the black market. Finally, the fortuitously timed injection of structural support from the World Bank and IMF (chief amongst others and already in the pipeline) in addition to foreign aid specific to the pandemic, will help offset its impact further and perhaps position the economy with good prospects for a strong takeoff on the other side.
Other Factors – Election, Liquidity, Mortgage facilities
In actual fact, there are other adjunct matters which may have an equal or potentially even greater effect on the real estate market over the mid term.
- Election uncertainty can probably be expected to depress market activity in the sector for some period of time around it, whenever it ends up being rescheduled to. Indeed it had already begun to do so before the pandemic’s arrival to Ethiopia and the consequent announcement of postponement.
- Liquidity challenges had made themselves felt in the market since well before Christmas and still persist to this day. Policy moves to enhance liquidity as part of the fight against the pandemic may help as could the injection of stimulus funds from foreign aid to the extent that it is circulated in the economy outside of subsistence type programs.
- A general pullback on mortgage facilities appears to be taking shape amongst banks and that may actually end up having the greatest impact on the real estate market over both the mid to long term. In fact, the dearth of long term capital in the nation’s financial system is a structural impediment to the availability of long term mortgage instruments at scale. And one that is not likely to be overcome anytime soon unless Ethiopia’s financial sector is opened up to foreign players.
- The rental market has long been a strong driver of growth for the overall market and the high end segment of residential rentals has taken a big hit which will probably persist over the mid term. However, thus far most prospective (and recent) buyers seem understanding of the reasons for this and appear to be accommodating of temporary shortfalls in rental yields.
Mid Term Supply and Demand
Trying to determine the aggregate effect of all the above is by no means an exact science. However, it is clear that the balance of pressures on buyer demand overall, will be downward. Even then, more likely to be moderate than highly significant pressure.
Demand from abroad will see the biggest hit given what appears to be the pandemic’s disproportionate impact on the United States and Europe – by far the biggest sources of real estate transactions from abroad. Ultra low interest rates and aggressive stimulus spending by the relevant governments may moderate these impacts yet but even that will only apply to a small minority of potentially affected prospective buyers.
Domestic demand will probably also suffer to some extent due to the negative impact on the service sector in Addis (by far the largest in the city) but again may be mitigated somewhat by sideline capital moving into real estate – already happening in some measure on the supply side from well before the start of the pandemic. The increasingly rapid decline (in official terms) of the birr’s value is sure to offset some of the negative effects of the pandemic. Now at about 34 birr to the dollar, it is projected to be just under 40 a year from now according to private equity firm, Cepheus Capital’s macroeconomic report for Q1 2020.
Overall, there is plenty of demand to absorb current and mid term supply several times over. Even a dramatic drop in previously seen demand will simply allow actors previously priced out of the market to access it particularly given product and pricing flexibility amongst developers in particular.
Conclusion
Real estate investment should generally be viewed as a long term exercise. And in that context, very little has changed here as a result of the pandemic. Even in the mid term, outside of moderate and temporary fluctuations, it will settle back on its generally organic upward march until its fundamental underpinnings see substantive change going forward. So despite the enormous global changes taking place around us due to the pandemic, on the balance it is more accurate to say not much has changed or will change in the sector for a while.