Advisory Center for Affordable Settlements & Housing

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Document Type General
Publish Date 29/11/2017
Author Duncan Kayiira
Published By Country Report
Edited By Suneela Farooqi
Uncategorized

Landscape of Investment in Ethiopia

Landscape of Investment in Ethiopia

Introduction:

This country report forms part of The Centre for Affordable Housing Finance’s Investor Programme which aims at addressing key information asymmetries on who, why and how investments are made in the African housing sector. With the intention of identifying and championing increased investment in affordable housing, the report includes insights and analysis into the depth and breadth of investment in Ethiopia’s housing and housing finance sector. The overall goal of this project is to quantify the breadth of investment activity with respect to housing and housing finance across Africa and to establish a mechanism to track this on an ongoing basis. This project has collected data and highlights gaps and opportunities in the investment landscape. With the aim of stimulating greater investment in affordable housing and connecting investors with potential investments, the report profiles investors and investment instruments with the greatest impact on the housing finance market in Ethiopia.

Growing financial sector experience and increasingly sophisticated financial instruments are driving investor interest in African real estate. This includes new market opportunities related to a rising urban middle class, an increasingly localized construction material industry and innovations in housing finance such as the emergence of Real Estate Investment Trusts and mortgage liquidity facilities across Africa.

Landscape of Investment Activity in the Ethiopian Housing Industry:

This sections analyses the different investment tools targeting the housing and housing finance sector in Ethiopia, their investment horizon and the period of investment.

How the IHDP Works:

The CBE is a government owned bank, whose mandate is to provide finance for commercial purposes allowing municipalities to purchase bonds in order to finance the implementation of the IHDP. The city of Addis Ababa, sells bonds to the CBE to finance construction costs. The Bank provides funding for the total cost of the program’s implementation in Addis Ababa and in the regions. The Bank also provides a loan-service to all condominium beneficiaries, whereby the Bank pays 60, 80 or 90 percent of the unit price on behalf of the beneficiary at the handover of the property (the beneficiaries, depending on economic level, pay the remaining per cent down payment themselves) and the families enter into a loan-agreement with the CBE to pay back this amount subject to interest.

Top Performing Investment Tools:

Social housing (through the IHDP – low cost housing program) constituted about 40 percent of the instruments/tools used to invest in Ethiopia’s housing and housing finance sectors. The initial goal of the IHDP was to construct 400,000 condominium units, create 200,000 jobs, promote the development of 10,000 SMEs, enhance the capacity of the construction sector, regenerate inner city slum areas, and promote homeownership for low income households. Although the program has not met its original targets it has built 171,000 housing units to date. Housing units by international property developers constituted about 30 percent of the investment tools/instruments.

Impact of Landscape of Investments on the Ethiopian Housing Industry:

Presently, a significant number of Ethiopians (particularly low and lower middle income groups who constitute more than 50 percent of the population and earn between US$200 and 400) build their houses through formally registered housing cooperatives that obtain loans from the CBB. Ironically, over 50 percent of the middle and higher income households (who constitute 20 percent of the population and earn between US$ 1,000 and 2,400) choose not to borrow, but prefer to finance housing out of personal savings, to avoid debt and the complexities of the mortgage system. Building incrementally, and financing construction from savings and current income, is the normal method used in the construction of informal housing. About 30 percent of the population build houses informally. Financing for housing is leveraged through “edirs” and community savings schemes with close to 400 million ETB (US$50 million) currently saved in credit unions which can be mobilized towards housing and infrastructure improvements.

Housing Finance Products:

Commercial banks in Ethiopia favour short-term loans. The low degree of penetration of formal housing finance institutions means that the housing financing sector has had a minimal impact on the development of the broader financial system. The lack of functioning mortgage markets in Ethiopia impedes the emergence of both savings institutions and long term financing facilities. Risk bearing financing is provided in other countries by venture capital institutions, which are non-existent in Ethiopia. In the short to medium term, therefore, it is unlikely that such institutions, which are capable of mobilizing substantial resources to finance the housing sector, will be developed in Ethiopia.

Opportunities/ Challenges to Deepening and Broadening of the Investment Landscape in Ethiopia

Ethiopia does not have a securities market, and sales/purchases of debt are heavily regulated. GOE is drafting legislation to regulate the over-the-counter market for private share companies. Moody’s rated Ethiopia’s credit worthiness a ‘B+’, while S&P and Fitch gave it a offers a limited number of 28-day, 3-month, and 6-month Treasury bills, but prohibits the interest rate from exceeding the bank deposit rate. GOE began to offer a one-year Treasury bill in November 2011. Yields are below 2 percent. This market remains unattractive to the private sector and over 95 percent of the T-bills are held by the state-owned Commercial Bank of Ethiopia and public enterprises.

Landscape of Investment

Conclusion:

The partial liberalization of the housing sector has been possible, thanks to a shift in policy, premised on a market oriented system to housing development. For the past two decades, housing development has undergone a significant paradigm shift, from the provision/supply of heavily subsidized residential housing, to interventions that are dictated by the market. Historically, the CBB was the sole provider of mortgage loans to home builders. By 1995, the CBB had given out subsidized mortgage loans at below market interest rates to a tune of US$42 million for the construction of 26,912 residential houses. 14,881 houses of the total units built, were built by borrowers with a monthly income below US$52 demonstrating the key role CBB played in financing the middle income group of society for housing construction.

Also Read: Ending homelessness in Central and Eastern Europe: making the shift to a housing-led system in Slovakia

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