the role that marketing plays in establishing a real-estate company

8/4/2019 The Role That Marketing Plays in Establishing a Real-estate Company

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THE ROLE THAT MARKETING

PLAYS IN ESTABLISHING A REAL-

ESTATE COMPANY.

The case of Access Real-Estate S.C.

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ACKNOWLEDGEMENT.

I would like to convey my deepest gratitude to those who

contributed to the success of this thesis.To all staff of Access Real estate for their support andadvise that they have given me and for providing somematerial support and encouragement.

I thank you.

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Table of Contents

1. Executive Summary------------------------------------52. Introduction -------------------------------------------73. Methodology---------------------------------------------94. Analysis ----------------------------------------------10

a. Housing demand ---------------------------------------11b. Income and employment of Addis Ababa

Residents ------------------------------------------------18

c. Target Income groups. --------------------------------20d. Ethiopian Diaspora -------------------------------------25e. Housing supply -----------------------------------------25f. Land supply --------------------------------------------31g. Expansion area -------------------------------------------38h. Real Estate developers -------------------------------41i. Sector Comparative ranking --------------------------45

j. Development of Industrial and business

Buildings ------------------------------------------------47k. Startegic Overview. -----------------------------------48l. Conclusion -----------------------------------------------58m.Limitations ----------------------------------------------59n. Bibliography --------------------------------------------60

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EXECUTIVE SUMMARY

Philip kotler, the Marketing guru, has said that marketingdeals with identifying and meeting human and social needsprofitably. It is crucial to break down this statement in tothree parts. The first is to identify the human and socialneeds, second to meet those needs and the third is to meetthem with profit since we are taking business in toconsideration. All the three parts are equally important as itis a one package deal if it is to succeed.

In the pages to follow, Ill try to cover what this statementmeans in practice and how they were applicable in Accessreal estate (ARE). I would like every one to note that AREis under formation and the scope of this thesis is the impactthat marketing had on the path to the smooth integrationand establishment of the company.

This includes various researches made regarding the realestate opportunities in the city of Addis Ababa which givesa clear picture of the supply and demand of housing units ina city whose population is increasing in an alarming rateevery year. The result of this research is crucial in the stepswhich follows the research.

Another important point to discuss is the brand equity of

the company. Building the brand equity is extremelyimportant and it should start, if possible, before thecompany is fully established. The report will try to coverthe strides that ARE has taken to build its brand equity.

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As I was working in marketing division particularly sales, Iwas responsible for various responsibilities includinghandling different potential buyers of shares by contacting

them and briefing them about our company, assisting incoordinating the sales effort to a certain degree and so on.The introduction part will try to cover these activities indetail and I will also try to evaluate the efforts taken basedon the results achieved.

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INTRODUCTION.

In establishing a company, the activities of differentdivisions like human resource, finance, marketing, andinformation technology, each with their own immensecontribution to the over all success of the future of thatcompany play a major role.

Overlooking the proper functioning of these units is thetask of a brilliant top manager or CEO but individually thesignificance of each of these units is undeniable.

The Marketing unit has an equal, if not more, significancein contributing to the desired success. The contribution arethe major tasks of marketing which includes research, sales,creating brand equity, developing core competencies and

others as well.

Each of this tasks are carefully scrutinized from differentdata acquired from the company itself through variousforms of interviews, research data and from my personalexperience and observations while working for thecompany and come up with a fair conclusion and therefore

my recommendations if any.

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Basically, this research aims to identify the role thatmarketing plays in establishing ARE and what are thechallenges that were faced and how they were controlled.

As we all are aware of, real estate development is a line of business which requires huge resources starting frommoney, skilled man power, and various other thingsspecially when present in a country whose businessenvironment is not that much liberal yet.

This makes is even more difficult to take the building up of

the company smoothly in to previously anticipated resultwith out any difficulty. It makes the work of the topmanagers difficult as they deal with various unnecessaryproblems which could arise because of this.

Inspite this, a good deal of research has been done on thedemand and supply of the residential houses in Addis

Ababa, capital city of Ethiopia, which is crucial to properdesign of strategies to attract potential share holders anddeposit the capital of the company.

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METHODOLOGY

Primary Data.

One to one interviews. Conversations from staff of ARE.

Secondary Data.

Text books. Journals from Ethiopian Economic

Association.

Research made by Access real-estate S.C. Internet.

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ANALYSIS

Introduction

The marketing department had the task of conducting alengthy and careful research on the supply and demand ofresidential housing. This is important as the company needsto know how successful it is going to be if it is to set out inthis line of business.

The research has indicated that the city of Addis hasexpanded mainly to the east, south and southwest, since thehigh-relief topographic feature which marks the north,northwest and west fringe of the municipal boundaryprohibits advancement of human intervention in the form ofany physical development. In the far south, southwest andeast (Akaki-Kality, Nafas-Silk Lafto, Kolfe Keranio, Yeka

and Bole) the topography is relatively flat providingsuitable conditions for construction of buildings anddevelopment infrastructures.

In Addis Ababa land use usually occurs along major streetsor corridors and land use along the Ring-Road has pickedup since its completion.

In general, space occupation along corridors at the centralparts of the city is compact and dense, while as one goes tothe periphery less dense and more scattered developmentand vacant spaces are observed. This is usually driven byaccessibility of an area and existence of utilities.

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Housing Demand

As of 2007, both international and domestic estimates putAddis Ababas population at 4,700,000 people. The mostrecent official census was in 1994, when only 2,046,491were counted, but undercounting and continued evidence ofrapid growth, makes 4.7 million a reasonable estimate. Thecurrent urban growth rate in Ethiopia is estimated at 4.1%,but others have estimated an annual growth rate as high as

8% for Addis Ababa. In any case, it is clear that the city iscontinuing to grow, although some of the growth may becirculatory, with migrants leaving their families in ruralareas and coming to work in Addis Ababa on a short termor seasonal basis.

The 2002 Addis Ababa Structure Plan: Housing

Component document calculates that in 2002 there was a backlog of approximately 233,000 units. This was thenumber of units needed to meet the pent-up demand forhousing that is currently overcrowded, and to replace theseverely-deteriorated or grossly illegal housing. However,it also estimated that by 2010 (just three years from now)an additional 223,000 units would be needed to house newhouseholds at the medium variant growth projection for thecity. This amounts to a total of 456,000 units needed by2010. If we were to go out another 5 years to 2015 (a totalof 8 years from now), an additional 91,000 units will beneeded or about 550,000. This would require theproduction of about 70,000 units per year.

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Fig. Growth trends between 1982 and 2007 in AddisAbaba

Urban area built before 1982

Urban area built between 1982 and 1992



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Pent-up and projected housing demand (2003- 2015)

The focus of current housing implementation in AddisAbaba has been the Low Cost (Condominium) HousingScheme, now known as the Integrated Housing

Development Program (IHDP). It was conceived as a wayto privatize current kebele housing using low-cost materialsand methods to provide housing below cost to low-incomeresidents.

12

2010428,125

27,875

456,000

2003 2004 2005 2006 2007 2008 2009 2010

Pent-up

emand 233,000 260,875 288,750 316,625 344,500 372,375 400,250 428,1Deman

currentyear 27,875 27,875 27,875 27,875 27,875 27,875 27,875 27,8

Total

emand

260,87

5

288,75

0 316,62

5

344,50

0

372,37

5

400,25

0

428,12

5 456,

2011 2012 2013 2014 2015

456,000

474,200

492,400

510,600 528,800

18,00 18,200 18,200 18,200 18,200

474,20

0

492,40

0

510,60

0

528,80

0 547,000


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About 3,000 units have been completed to date, with theexpectation of completing another 28,000 30,000 withinthe year.

In the mean time, costs rose from an estimated 850 birr persquare meters to about 1,400 birr. Most units are occupiedby higher income households who could afford to pay full price (35,000 60,000 birr or more) at one go or abetter down payment. Even with low-interest loans, thedown payment and monthly payments are not affordable to80% of the population. Units have been sold for as low as

30,000 birr, and as much as 100,000 birr. 50,000 birr is probably typical. But to the 60% of Addis Ababahouseholds earning below 700 birr per month, thedifference is unimportant. Any requirement of paymentmore than 50 150 birr per month, or a deposit of morethan perhaps 1,000 birr, will be unaffordable.

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Annual housing demand by income distribution (2007 to

2015)

Established Household Income Distribution for Addis

Ababa

- Low-income 0 to 1,100 Birr per month- Middle-income 1,100 to 1,600 Birr per month

14

nco

e

tego2007 2008 2009 2010 2011 2012 2013 2014 2

w-com

5%)279,281

300,187

312,093

342,000

355,650

369,300

382,950 396,600

45

iddl

com

0%)37,237 40,025

42,812

45,600

47,420

49,240

51,060 52,880

50

gh-com

5%)55,856 60,037

64,218

68,400

71,130

73,860

76,590 79,320

80

otal

mad 372,3

75

400,25

90

428,1

25

456,0

00

474,2

00

4924

00

510,

600 528,800

5

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- High-income 1,600 Birr and above per month

Ring roadRing road profile (planned)Major boulevards for transport.Proposed roadsInterchanges and roundabouts.Centre.

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It is simply unrealistic to expect any significant cost-recovery for capital costs from households earning less than

700 birr per month and this is 70% of Addis Ababaspopulation! These residents could be expected to pay 15 25% of their incomes toward housing in the range of 40 150 birr per month. While this is not enough to providesignificant capital cost recovery, it could be an importantcontribution to ongoing operation and maintenance of thebuilding.

But, so far, efforts targeted at solving the housing problemin Addis Ababa have always fallen short of theaccumulated demand. Shortage is especially acute for low-income households that account for over 80 percent of thecitys population. Shortages for medium income groups are just as acute. Overcrowding and deterioration widely prevail. An estimated 60 percent of the city's core is

dilapidated, and about a quarter of all housing units havebeen built informally.

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3. Income and Employment of Addis Ababa Residents

The table presented below is an attempt to update thedistribution of income levels based on the best availableinformation:

[*Accurate current income data for Addis Ababa is notavailable. Where data is available it appears that the reportof expenses often exceeds the report of income, most likely

indicating an underreporting of income. (See Bertaud,Alain et al. "Improving Delivery of Urban Land andHousing in Ethiopia: The Case of Addis Ababa (Draft)."Addis Ababa: The Cities Alliance, April 28, 2004.) Thefirst estimate is based on a combination of data provided bythe Central Statistical Authority (2001, based on a 1998survey) and the PADCO study (1997, based on datacollected in 1995). This breakdown is also used by The

Structure Plan: Housing Component (2002). The top endof each category has been increased slightly from thePADCO and CSA categories. **The 2006 estimateattempts to correct for the underreporting of income (inrelation to expenses) and to account for a small increase in

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middle income households. It is probably a "high end"(optimistic) estimate. ***Using midpoint income of thegroup.]

Source: Supplying Central City Housing for all incomegroups Addis Ababa: Choosing Public Policies thatFacilitate Mixed-Use, Mixed-Income Redevelopment usingLand Regulation and Cost-Sharing Approaches,Rosemary T. Curran, Ph.D, April, 2007

Based on this distribution, it is likely that the medianhousehold income is around 500 to 525 birr (about US $60)per month. The employment levels in Addis Ababa make itevident why so many households remain very poor. Only

about 27% of the population is formally-employed, about43% are informally or self-employed, and about 30% areunemployed. Income in the informal sector, is unreliable,inconsistent, and holds little hope for advancement or long-term security. It also provides no opportunity for obtaininga housing loan.

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4. Target income groups

A.Domestic Client Base

Based on the Estimated Household Income Distribution forAddis Ababa, it is likely that the median household incomeis around 500 to 525 birr (about US $60) per month. Theemployment levels in Addis Ababa make it evident why somany households remain very poor. Only about 27% of thepopulation is formally-employed, about 43% are informally

or self-employed, and about 30% are unemployed. Incomein the informal sector, is unreliable, inconsistent, and holdslittle hope for advancement or long-term security. It alsoprovides no opportunity for obtaining a housing loan.

The income groups who can afford monthly mortgagepayments are either high earning business people that are

paying their government taxes by the book:;o 6,132 people that are making 500,000 birr or more and

o 132,100 making 100,000 to 500,000 birr per year and

o 430,000 who are earning less than 100,000 birr per

year but more than 50,000 biiro 8,240 paying Federal Taxes and incorporated under

PLCs

In addition there is a large underground economy, (thosethat are making their money dealing in contraband trade,currency changers, and those whose transactions aregenerally not reported or under reported for tax purposes)

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whose size is rather difficult to determine but estimated tobe just as high, if not higher than the formal sector.

There is considerable concern that income is under-reported by Addis Ababas residents, as it is in many partsof the world. The recently completed (2006) PASDEP(Plan for Accelerated and Sustainable Development to EndPoverty) report uses measures of total and per capitaconsumption to estimate income/consumption forhouseholds. The methodology is somewhat complex, buturban per capita consumption for 2004/2005 was put at

1,909 birr/year. Based on an estimated 4.3persons/household, this would be 8,208 birr per household per year. This is effectively an average householdconsumption rather than a median or a distribution. Anaverage such as this will be skewed upwards by the highlevel consumption of a relatively small number of middleand well-to-do households. Nevertheless, along with the

PADCO estimates, it gives a broad idea of averageincome/consumption level.One characteristic of Addis Ababa, which is true of manycities in the developing world, is that its rapid growth islargely due to a continuing influx of rural-born residents.Rural-born residents were a majority of the citys population through the late 1980s while accounting fornearly 47% of the citys population in 1994. As a result, avast majority of Addis Ababas residents seem to preferhaving some type of courtyard, or outdoor space, eventhough their home itself may be extremely small. Wherehomes are very crowded together or face directly on the

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street, residents do seem to use communal or shared spacefor many functions.

On the other hand, middle and upper class homes areadorned with reclusive fencing and gated compounds withtypically spacious grounds. More and more, extravagantfences and gates are starting to serve as a symbol of socialstatus

B. The Ethiopian Diaspora

The population of the Ethiopian Diaspora is variouslyestimated to reach up to 2 million. There are between500,000 and one million Ethiopians in North Americaalone and they represent a significant number of immigrantpopulations in some major cities of North America. Theireconomic strength, educational as well as professional backgrounds and entrepreneurial skill are widely

acknowledged in many North American, European andother countries. A great many of them have achieved a fairmeasure of success in their adopted homelands as eminentprofessors, researchers and scientists and other professionalpositions. What is common among the Ethiopian Diasporais their cultural heritage and their deep attachment to theircountry of origin. Many Ethiopians at least believe thatthey should make a genuine effort to help their country oforigin in some way.

The impact of the Ethiopian Diaspora is already significantto the domestic economy. Remittances are estimated tohave exceeded the $1 billion mark a few years ago

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according to the Ethiopian Economics Association. Directinvestment into businesses in the construction,manufacturing, industry, agro-industry and other major

development sectors is already estimated to be in thehundreds of millions of dollars. However, considering thepotential that exists, this is only a drop in the bucket. As aquick illustration, even if only 8,000 of them buy or buildhouses worth about $50 thousand on annual basis, Ethiopiawould stand to earn about $400 million annually or $12 billion in the next thirty years. As a comparison, thisamount would be four to five times larger than the current

amount of foreign investment in Ethiopia.

o Net receipts from private money transfers increased

from USD 671.3 million in 2003/04 to USD 810.8million in 2004/05 mainly due to a significant increasein private individual transfers.

o Private individual transfers surged by 58.8 % over the previous year largely due to the conductiveenvironment that eased the transfer of money by theEthiopians in the Diaspora thru international moneytransfers such as Western Union and Money Gram incooperation with domestic commercial banks.

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0

100

200

300

400500

600

700

800

2002/03 2003/04 2004/05 2005/06

Private transfers as reported by NBE

private individualscash

in-kind

underground

Private individual transfers increased by 26.6% over theprevious year (2004/05) level of USD 582.8 million mainlydue to 72% rise in underground transfer in kind.

A large portion of the Ethiopian Diaspora in NorthAmerica, Europe, and the Middle East are living onrelatively good paying jobs but that can not provide the

price the real-estate developers are currently asking for attheir domicile. Substantial numbers of this section ofDiaspora do not participate in the various retirement planstheir companies are providing, except for maybe socialsecurity. But they support their families in Ethiopia bysending money on regular bases via informal and formalmoney transfers and would welcome the opportunity toinvest in a home for their retirement. Affordable housing

would be in the range 300,000 to 700,000 Birr and morelikely to be paid by their remittances.

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A series of measures taken by the Government in order tofacilitate Diaspora engagement, including, among others,the opening of Diaspora Departments within two federal

ministries, the creation of Diaspora regional offices andcommunity outreach and constituency building roles byEthiopian missions. Programs and mechanisms areestablished to encourage Ethiopian Diaspora involvementin the country's capacity building efforts, with a view tofurthering the discussion and identifying the way forward.As a result there is growing momentum among expatriatesto get involved in the development of their country and

there are many in number. This was especially so since theevolution of information and communication technology(ICT) now presents options to contribute without the needfor permanent or physical relocation.

5. Housing Supply

A study conducted by the City Administration estimatedthat there are a total of 640,000 housing units of whichabout 35.3% are owned by the occupants and 40.9% arekebele rented. The rest are rented from relatives, nonrelatives, subsidized by organizations, etc. 83.9% ofdwellings area made up of mud and wooden structures,10% made of cement blocks and brick and 2.4% are madeof cement and stone. 99.6% have roof covers of corrugatediron sheet. Private flush toilet account for only 9.4%, flushtoilet shared 6.1% of household and pit latrines private andshared 26.15% and 45%. Electrification of private andshared runs the range of 52.1% and 44% of householdrespectively.

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0

20

40

60

80

100

Owner

occupied

Kebele

rented

Mud &

wooden

structure

Cement

block &

bricks

Cement &

stone

pesentage

pesentage

After the 1975 nationalization of rented houses, about 73%of the housing stock became kebele housing. During thisperiod and subsequently, mixed land use and mixed socio-economic groupings were the rule rather than theexception. Only 5% of the population owned 95% of theurban land at the time of the 1975 nationalization and mostof the development of Addis Ababa was characterized by

its unplanned, spontaneous growth.

The outcome of the nationalization policy is well known:The higher-end rentals, those with rents over 50 birr permonth were managed by the Addis Ababa Rental HousingAuthority while the lower-end rentals were handed overto kebele management, and had their rents reduced to makethem affordable to the very poor.

Rents became as low as 0.5 birr per month with a monthlyrental of 2 or 3 birr often the norm. As a result, Kebelerenters are quite stable- 52% of the households had lived inthe area for more than 25 years, and 80% had lived there at

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least 10 years. Once established in a kebele house, tenantsare not likely to risk relinquishing it. 1

The 1986 (E.C.) Addis Ababa Master Plan proposed thatnew housing in expansion areas to solve the then identifiedhousing problems in the city. Accordingly, a total of 6,400hectares (25.9 million square meters) of land at Kotebe,Keraniyo, Mekanissa, Kotari and Kaliti expansion areaswere proposed to be developed for residential uses. Reviewof the implementation of the Master Plan (2002) showedthat an estimated 55%of the total proposed expansion areas

have already been developed and 45% has not beenutilized.

The major reason for this is that the formal land provisionhad been discontinued for significant number of years. Inaddition, the whole process has been highly constrained,inefficient and complicated, creating huge backlogs of

housing in the city. As a consequence, informal/squattersettlements have proliferated. And within the recent past,the informal sector has produced the largest number ofresidential units in the expansion areas of Addis Ababa.

The growth of illegal units is a somewhat recentphenomenon for Addis Ababa, which historically did nothave a large percentage of units built on illegal land,although it had many informal or extra-legal units. Nevertheless, informal housing has infested the Kotebe,

1Supplying Central City Housing for all income groups Addis Ababa: Choosing Public Policies that Facilitate Mixed-

Use, Mixed-Income Redevelopment using Land Regulation and Cost-Sharing Approaches,Rosemary T. Curran, Ph.D, April, 2007

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Akaki, Lideta, and Nefas Silk,Kara-Ajo,Lafto,Kality andCMC areas of the city. At present an estimated over300,000 people live in these informal settlements. The

estimated number of units in these settlements is about60,000. The housing condition in these informalsettlements is generally poor, but there are some exceptionswhere quality housing can be found.

The national average occupancy rate areas is about 2.2 persons per room and significant number of multiplehouseholds co-inhabit housing units.In Addis Ababa, one

and two-roomed houses make up about 60% of the housingstock and most of these houses are less than 30 sq. mtseach.

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The population number is significant, because estimates ofexisting housing units have been in the range of 370,000 to380,000, with the number of households put at just over

400,000. In order to reconcile these two numbers, therewould need to be nearly 9 persons per household or close to10 persons per housing unit. Several sources, based on the1994 census indicate only 5.5 persons per housing unit.Either household size has increased dramatically (and thus,over-crowding), or 40% of the population is homeless, orthere are more housing units created than have beenofficially counted or estimated. With 5.5 persons per

housing unit, and a population of 4.7 million, there wouldneed to be nearly 636,000 housing units.

Currently housing covers 80% of urban land in Addiscompared to about 60% in most developing countries, and40% in developed countries.2 In order to meet its goals of preserving and increasing green areas, limiting

infringement on surrounding farmland, and buildingsufficient, affordable housing, Addis needs to expandvertically rather than only horizontally. There is no need toinundate the city with hectares of high-rise apartmentblocks. The current densities could be replicated on halfthe horizontal space, by rising to just G + 2 or G + 3residential buildings, leaving an equivalent amount ofsurrounding garden and open space. Semi-privatecourtyards can be maintained, along with balconies, roofgardens and/or roof-top areas for drying laundry. 60 to 100households on a hectare (or less) of land is a very livable

2 Ibid. p. 29

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density, if adequate open space and amenities areprovided.3

6. Land Supply

The Addis Ababa Master Plan with a goal of addressing the backlog housing demand has allocated land in theexpansion area:

Table 2: Addis Ababa Master Plan Expansion Areas

Location

1st Five Year Plan:

(1996 2001)

2nd Five Year Plan:

(2002 2006)

Land

Area

# of

Household

s

Land

Area

# of

Household

s

East

Expansion(Yeka &Bole)

2,070 ha 97,290 2,000 ha 94,000

West &SouthExpansion(Keranyo &

Lafto)

1,300 ha 61,100 1,200 ha 56,400

SouthExpansion(Akaki-

298 ha 14,010 325 ha 15,280

3 For comparison, in 1999, the 11th arrondissement of Paris, its densest area, had a density of about 372persons per ha., or well over 100 households / ha.

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Kality)

TOTAL

3,668 ha

(13.8

MillionSq.

Meters)

172,400

3,525 ha

(14.7

MillionsSq.

Meters

165,680

Source: Master Plan

Overall proposed expansion area, of which up to 15% will be used for large and unforeseen developments equals8,950 hectares or 36.2 million square meters. Of the 54,000

hectares of land that makes up Addis Ababa approximately35,000 are already occupied.

Urban land has been mostly available on a lease-auctionbasis. The auction prices vary depending as they do ondemand and the limited supply at any one time, but areoften quite high. Kirkos, Addis-ketema and Arada are the

most expensive areas for acquiring land through the(auction) leasing system in the past, fetching an average of1,914 birr, 1,659 birr and 1,444 birr per square meterrespectively. Followed by Akaki-kality (734 birr/sq. meter)Bole (687 birr/sq. meter), Kolfe-keranyo (622 birr/sq.meter) and Yeka (661 birr/sq. meter). In Gulele, Lideta, Nefas-silk Lafto land has been leasing at a comparatively

cheaper price of under 400 birr/sq. meter or there about.

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01 , 0 0 02 , 0 0 03 , 0 0 04 , 0 0 05 , 0 0 06 , 0 0 07 , 0 0 08 , 0 0 09 , 0 0 01 0 , 0 0 0

Kirkos

A.Ketema

Arada

AkakiBole

Keranio

YekaGule

le

LaftoLidet

a

H i g h e s t l a n d p r i c

B i

Between 1994 and 1999 (1987 and 1992 E.C) a total ofonly 440,240 square meters of land was made available for business, industry and in the later years forapartments(close to 100,000 square meters of land in threeyears). Notice the total absence of land allocation forresidential purposes in the earlier years.

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Land allocation prior to 1999 ( 1992 E.C.)

0

20,000

40,000

60,000

80,000

100,000

120,000

1987 1988 1989 1990 1991 1992

BusinessIndustry

Residential

Total

The level of land grants has greatly accelerated since with atotal of 9,265,665 square meters of land being allocatedthrough the land lease system in the years 2004, 2005 and2006-07 (1997, 1998 and 1999 E.C.) in the fiveKifleKetemas of Yeka, Bole, Akaki, NefasSilk and Keranio.

This includes land for real-estate, apartments, business,industry, schools, hospitals, universities, market halls, gasstations, etc

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Total land allocation in expansion areas in 2004, 2005

and 2006-07

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

Yeka Bole Akaki Lafto Keranio

square meters

In the years 2002 to 2006 (1995 to 1999 E.C.)

approximately 1,400 permits were granted for theconstruction of commercial buildings, for purposes ofoffice space, stores, shops, factories, etc. (one storey to 16storey buildings). According to our survey conducted inApril 2007, only 28% of the total were fully completed andready for occupancy; 6% were at three quarter-completion;9% half-completed; a quarter of the work was done for

about 10% of the buildings. And fully 48% show no sign ofconstruction activity at all. Only in AddisKetema,AkakiandKirkos were completions ahead of non-starts.

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0

10

20

30

40

50

60

70

A.Ketema Akaki Arada Bole Gulele Keranio Kirkos Lideta Nefasilk

Completions vs. non-starts

100%

0%

Land acquisitions from the government for business andindustry in Akaki, Yeka, Bole, Lafto and Keranio amountsto 1.5 million square meters.

Land allocation for business and industry in 2004, 2005,

2006-07

7. Expansion Areas

35

800,000


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7. Expansion Area

There is hardly any open area available in the center ofAddis Ababa where administrative, commercial and mixeduse residential development overlap. It is denselypopulated and land prices are relatively high. So is cost ofrelocation. At present, various parts of Addis Ababaexhibit different density levels ranging from 75 residents

per hectare at the expansion areas to 2,500 residents perhectare at the city core. In general the further away fromthe city center the less the density of the settlement and onebegins to see open and less developed areas.

For more detailed information on the expansion areas see

8. Real-estate developersIn these same three years alone 2004, 2005 and 2006-7(1997, 1998, and 1999 E.C.) land allocated through theland-lease system for real-estate development andconstruction of apartments in the expansion areas is huge.The highest allocations took place in Bole Kifle Ketema(about 1.5 million square meters) and practically none inAkaki.

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Land allocated for real-estate development and

apartments

Of the 220 real-estate developers that are licensed today

only three ( Ayat, Berta and Ropack ) were existence inwhen Mayor Arkebe took over in 19??? In total, over 2.7million square meters of land have been leased by thesereal-estate development companies. About 30 of thedevelopers have taken 50,000 square meters or more; 27 ofthem have taken more than 20,000 square meters and thereare about 75 so called investors (or speculators) are listedhas having leased more than 10,000 square meters or more.Although the list of real-estate developers and speculatorsis extensive, only few are serious and have actually startedconstruction of any kind. On top of that, time is running outon the majority of the holdings, the use it or loose it lawwill soon apply In the mean time, it is disclosed that a huge

38

0

200,000

400,000

600,000

800,000

1,000,000

1,200,0001,400,000

1,600,000

Yeka Bole Akaki Lafto Keranio

Real-estate

Apartments


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and complicated web of corruption involving those whogranted the land and the recipients in all five sub-cities.

In the last few months, the real estate development sectorseems to have gotten into gear, perhaps in the hope ofcompleting condominium construction by the millennium.Nevertheless, construction of houses and condominiums inAddis Ababa is grossly inadequate with an estimated 2,000to 2,500 units under construction, at the most. It certainlyis no where near meeting even the current demand ofapproximately 28,000 units, let alone the additional pent-up

demand of 233,000 housing units.

Construction condominium apartments is concentrated in anumber of locations in Addis Ababa: at Kazanchis (behindECA), Besrate Gabriel neighborhood (300), Gerji (500),about 400 units just east of Ayat a few hundred unitsbehind CMC (site of the Saudi-German Hospital), 200 units

in front of CMC and CMC road itself 200 to 400 units morenext around the Civil Service College, and a few hundredmore units scattered around town. All of them are currentlyunder early construction phase with exception of thecondominiums being built by Sunshine Construction atGerji which are nearing completion. To mention a few:

o Clearly the front runner of the real-estatedevelopment is Sunshine Construction. It hasacquired 291,628 square meters of land in severaldifferent locations in including Gerji (28,760 squaremeters), opposite CMC and behind CMC (138,500sq. meters). Construction of condominiums

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apartments in Gergi is nearing completion and issold out at an average of 700,000 Birr per unit. Thehousing development at Merilookis on the high end

and rage in price from 1.3 to 2.4 million Birr. TheDiaspora is 70 to 75% of the market.o Ayat is another major player in the residential real-

estate sector with Ayat Settlement as its anchor withapproximately 3,000 homes. Originally selling forabout 400,000 Birr, some six years ago, housesfetched 650,000 Birr 2 years back and are nowasking for one million Birr or more. Average rent is

about 3,000 birr. Even the secondary market ispredominantly the Diaspora or repatriates who haveno where to invest their money but in real-estate.Ayat has also building condominiums behind theECA (approximately 250 units) The EthiopianDiaspora is making its presence felt here too,buying up 85% of the homes at Ayat Settlement and

fully 70% of those who are renters are also from theDiaspora and actively looking for an opportunity toinvest in a home.

o Trakcon Trading is another real-estate developerwhich has acquired 50,000 square meters of land inNefas-silk Lafto sub-city in Lebu area sufficient to build 46 villas and condominium that will

accommodate 539 house holds. Pricing is ratherhigh raging from 1.5 million to 2.6 million(including VAT) for the houses. Three bedroomapartments will cost 743,000 birr, 2-bedroom527,000 and 1-bedroom 321,000 birr including vat.They are at the registration stage.

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o Ambassador Real Estate has secured 75,000 square

meters plot of land for the construction of villas and1,319 square meters plot of land for the construction

of condominium apartment. The apartment will belocated near to the African Avenue, in front ofAlem Cinema and prices range from 2 to 3.7 millionbirr for the houses and in the range of 1.7 millionfor apartments. Clearly targeting the high end of themarket and registration stage.

o Nasew Real Estae has taken 24,000 sq. meters of

land on lease at Nefas-silk Lafto ( Makanisa RingRoad) and is ready to construct fourteen (G+5)apartments. Has already started construction ofvillas and will soon start condominiums. Cost ofapartments range from 380,000 to 600,000 birr.

o Habitat New Flower Homes has acquired plots intwo sites: Kolefe 45,329 sq. meters and KalitiPrices rage from 1.5 million to 2.8 million birr plus

the land lease. Again the high end market andclearly the Diaspora.

o 3M Real-Estate has acquired across the street from

Imperial Hotel and AMCE on the Ring Road and building apartments and houses. Houses sale forabout 2.4 million and apartments for 800,000 birr

o Berta Construction was granted 120,000 sq. meters

of land near CMC. I t expects to build 500 villasand 500 condos. It has requested an additional100,000 sq. meters for its second phase project.

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Below are cost comparisons of the major real-estatedevelopers for apartments that are 100 square metersincluding VAT.

Cost comparison for three bedroom

0

200,000

400,000

600,000

800,000

Sunshine Tracon Gift 3M NM Average

Cost per sq. mt Total cost

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0

1,000

2,0003,000

4,000

5,000

6,000

Sunshine Tracon Gift 3M NM Average

Cost per square meter three bedroom

Sunshine

Tracon

Gift

3MNM

Average

Problems faced by the real-estate sector:o Delivery is a huge problemo Lack of mortgage financing

o Upfront cash payment to buy a house or condominium

apartment discourages potential buyers who otherwisemight afford a 10 to 30% down payment and amonthly payment

o Volatility of price in material used for construction

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II. SECTOR COMPARATIVE RANKING

Construction of condominiums

According to Addis Ababa City Administration, there is atremendous demand for housing in the city. The numbersare actually staggering. This year alone the demand(including pent-up demand) is 55,800 for high-incomehouses, 35,230 units for middle-income and 279,300 unitsfor low-income housing. 4

Just three years from now (2010) the projected demand inAddis Ababa will jump to 68,400, 45,600 and 342,000,houses and condominium units respectively and will onlyincrease the following years as the population multiply andthe city expands. It will be necessary to build more than70,000 houses and condominium units annually for the next

eight to ten tears.5

It is difficult to determine how thisnumber was arrived at. But even if these numbers are off by50%, the demand is so high it would still presents anexcellent opportunity for investment.

It is evident that as far as investment opportunities inresidential real-estate is concerned it is located mostly thefive designated expansion areas ofBole, Lafto Yeka,Keranio and a lesser extent Akaki. Here the roads andinfrastructure are well developed and in place or in the

4Supplying Central City Housing for all income groups Addis Ababa: Choosing Public Policies that Facilitate Mixed-Use, Mixed-Income Redevelopment using Land Regulation and Cost-Sharing Approaches,

Rosemary T. Curran, PhD, April, 2007.5 Ibid

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process of being developed and land-leased for real-estateand apartment construction is at its highest.

However, opportunities for building apartment buildings insmaller plots are also available in the inner core of the city.But there the cost of land and relocation are higher. Forexample, in the most recent auction in Addis-ketema landfetched as much as 10,000 birr, in Kirkos 4,000, and Arada2,500 birr per square meter; where as in Bole, Lafto,Keranio, and Lafto land was only commanding an averageof 600 to 800 birr per sq. meter.

There is great opportunity in the construction ofcondominiums for the middle-income population andresidential housing for the high-income, in partnership withthose who own land or acquisition of the land out right.Most of the land was acquired from the government in theyears 2004, 2005, and 2006/07 (1997, 1998 and 1999 E.C.)

with a maximum of three years time limit forcommencement of construction. Prices could be negotiatedin the absence of bank loans that is not so readily available.

A total of 1.9 million square meters of land allocated forreal-estate development construction of apartments building in Bole Kifle Ketema alone; in Lafto another650,000 and a further 780,000 sq. meters is allocated inYeka and Kernio. There is no land shortage in AddisAbaba; the city is growing and the only thing that holding itback is shortage of living space. (See page 14 for chart)

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Development of industrial or business buildings

There is also an opportunity to get involved in the

construction of business and industrial buildings. Againthere is plenty of land holding in the name of industrialdevelopment. Land acquisitions from the government for business and industry in Akaki, Yeka, Bole, Lafto andKeranio amounts to 1.5 million square meters.

Of the 1,400 permits granted for the construction ofcommercial buildings; for purposes of office space, stores,

shops, factories, 48% show no sign of construction activity.Only in AddisKetema,Akaki andKirkos were completionsahead of non-starts.

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III. STRATIGIC OVERVIEW

1. Economic Factors

The economy has enjoyed a strong and steady growth in the past three years after a significant drought-relatedcontraction in 2002/03. This strong growth performanceresulted in real per capita income increasing at 7% perannum, the fastest in Ethiopias recent history. However,this has been accompanied by rising inflation, withconsumer price accelerating to 19% in February 2007.

Strong economic growth is expected to continue in2006/07. Real GDP growth is projected to hold at about 9 % as productivity gains in agriculture continues and non-agricultural activities, especially manufacturing andconstruction, expand further. Inflation is projected todecline to about 15% at the end of 2006/07, in light of

completion of the pass-through of fuel price increase andfull adoption by farmers of the new pattern for food supply.

Agriculture sector the growth rates of other sectors(industry, service) have been relatively stable. But in spiteof relative stability of other sectors, due to the dominanceof agriculture in the economy, the variability in the growthrate of the agriculture sector will influenced the growthperformance of the overall economy. Similarly, owing tothe high population growth rate, the growth rate of the GDPhas not been high enough to improve the standard of livingof the population.

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The official exchange rate for the birr remained relativelystable at around birr 8.7 per US dollar in 2005/06. After a period of relative stability, the depreciation of the birr

against the US dollar is expected to continue, reflecting therecent external balance developments.

The Ministry of Finance and Economic Development(MoFED) forecasts that Ethiopias economy is due to growby 10.1% this year. The largest contribution to this growthis to come from agriculture sector which is expected toexhibit 10.9% growth; industry and the service sectors are

also projected to expand by 10.9% and 9.6% respectively.However soaring inflation (the official figure puts it at13.5%) while there are those who claim even higher figures(19%), is taking a bite out of peoples pockets. But in arapidly growing economy there is more money in peoplespockets and demand in ahead of supply.

2, Interest rates

The Nation Bank of Ethiopia gradually liberalized interestrates. The only interest rate that is now administratively setby the NBE is the minimum on savings deposit that wasslashed five years ago to a deposit rate of 3% prompted byconcerns of potential deflation that was hovering at thetime. Things have changed since then and there is littlerational for maintaining the interest rate at this level. Aspurchasing power erodes continuously, the economy couldrun the risk of plunging itself into deflation.

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In the meantime, due to the ascending inflation rate, realinterest rate has nose-dived into the negative and moneyhas become cheap and easy to obtain. When real interest

rates are in the negative savers are the ones that shoulder hecost and investors go on a borrowing binge.

In the face of upward movement moving prices andplummeting real interest rate, there should be little rationalfor maintaining the minimum of 3%. The possibility thatbanks raising their lending rates following an adjustment oninterest on deposits which would choke additional

investment worries some. And besides interest rates is not aweapon for runaway inflation or the only instruments forcontaining it. However, a gradual move to positive realinterest rates would help to contain inflationary pressures.

3. The Banks

The banks have played an important part in the commercialreal-estate development in the last few years. Total housingand construction loans disbursements for all banks, publicand private, increased from 372.5 million Birr in 2003/04to 626.5 million Birr in 2004/05 according to NationalBank figures. This represents 68% increase for the period.Outstanding loans and advances showed a steady increasefrom year to year

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0

0.5

1

1.5

2

2.5

3

3.5

1997/98 1198/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06

Total outstanding loans for Housing & Construction

in billions of Birr

The amount of new loans disbursed by the banking systemwas Birr 3.0 billion during the first quarter of 2006/07,indicating a growth rate of 36.2 percent on annual basis, butdeclined by 5.1 percent on quarterly basis. The quarterlydecline was due to 42.8 percent slowdown in loandisbursements by public banks. Loan disbursements byprivate banks, however, rose by 23.4 percent. About 99.0percent of the fresh loan disbursement was channeled to the

private sector. Sector wise, loan disbursements to foreigntrade accounted for 25.3 percent followed by domestictrade (20.1 percent), housing & construction (14.6 percent)and industry (13 percent). Similarly, the share of transport& communication and agricultural sector amounted to 10.6and 10.4 percent, respectively. The private banks gaveabout 75.0 percent of the total loan disbursed during the

quarter.

Construction and Business Bank has recently rumored tohave decided to abandon the loan market putting itself in adeep freeze. An indicator that the bank is either concernedabout the soundness of its past loans or it is no longer as

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liquid. Share of Housing and Construction Loans wasrunning at 29.1% and loans in the legal department at17.4% (2005). In the mean time CBB construction loans

increased by almost 60% from 64 million in 2004 to 108million birr in 2005 and by another 51% to 213 million Birrin 2006.

Other banks are said to be applying the brakes on allloans including construction loans, making such loansavailable at a considerably slower rate especiallyconsidering that they made increasing amounts every year

for the past few years. Perhaps they foresee a crunch hasborrowers find it increasingly difficult to make paymentson time with additional thousands of square footage ofretail and office space under construction. Perhaps they areasking the same questions we are, namely whether all thisconstruction is demand driven.

But it would not make any sense to freeze loans onresidential real-estate since the demand is so high.

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0 5 10 15 20 25 30

NIB

CBB

CBE

AIB

BOA

UB

DB

Persentage of laons and advances disbursed for

Housing & Construction

%

Sources: Annual reports of NIB June 2006; CBB June2005; CBE June 2005; AIB May 2005; BOA November2006; UB June 2006; DB November 2006.

CBE is the only bank that can afford to give construction

loans with comparatively smaller percentage of share inBuilding & Construction loans of only 6% and greaterliquidity than the private banks. But currently CBE isreluctant to make such loans available. This situation willnot reverse in the foreseeable future.

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4. Urbanization

The tremendous demand for residential housing is fuelled

primarily by a population explosion in Addis Ababa that isgrowing by leaps and bounds:o Ethiopia's current population size is 80 million, which

is second only to Nigeria in Sub-Saharan Africa. Thepopulation will be 129 million by the year 2030, at anaverage growth rate of 2.5 percent.

o But Urbanization is at its lowest level in Ethiopia

compared to other African countries. Only about 15 %of Ethiopia's population lives in urban areas.Moreover, 40% of the urban population is found inonly one city - Addis Ababa.

o The urban population of Addis Ababa is currently

estimated at about 4.7 million while the populationgrowth rate is pegged around 8%.

o UNFPA pointed to rural-to-urban migration trends,

rather than the more common natural populationincrease, for the increased urban growth observedacross all of the major cities in Ethiopia, especially inthe capital Addis Ababa.

o No country in the industrial age had ever achieved

significant economic growth without urbanization.And urbanization is inevitable in Ethiopia, as one out

of four (4) Ethiopian will be an urban dweller in alittle over ten (10) years.

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Growth of Addis Ababa population at different rates

-

500,000.00

1,000,000.00

1,500,000.00

2,000,000.00

2,500,000.00

3,000,000.00

3,500,000.00

4,000,000.00

4,500,000.00

5,000,000.00

4.10% 4.70% 5.50% 6.30% 7.10% 8%

2007

5. The land factor

In Ethiopia, land is public property. Individuals, companiesand other organizations have only the use right of land.Peasant farmers are entitled to use right for an indefiniteperiod, including the right to transfer the land to legal heirsand to lease it to third parties. The maximum limit on rural

landholding has been set at 10 hectares per household.

Urban land is divided into land for industrial use and landfor other activities. Industrial land is given much attention by the government and the necessary infrastructure

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connections (roads, electricity, water, telephone) arefacilitated. Industrial land in Addis Ababa and in parts ofthe Amhara and Oromiya regions comes at a low fixed

price and the administrative machinery is fairly efficient.Land for export-oriented industries, for example, is gen-erally available at a very low rate. The EthiopianInvestment Commission now has the authority to facilitatethe acquisition of land by FDI projects throughout thecountry.

In principle, the lease value of the land as well as the fixed

assets on it can be mortgaged or pledged as' collateral, andbanks may accept such collateral, perhaps at a discountedrate. In practice, this does not work smoothly. The price ofurban land and the difficulty of using leases as collateralare among the primary concerns voiced by investors in thiscontext.

6. Housing Styles and Preferences

One characteristic of Addis Ababa that is true of manycities in the developing world is that its rapid growth islargely due to a continuing influx of rural-born residents.Rural-born residents were a majority of the citys population through the late 1980s, and in 1994, stillaccounted for nearly 47% of the population. As a result, avast majority of Addis Ababas residents seem to preferhaving some type of courtyard, or outdoor space, eventhough their home itself may be extremely small. This alsomeans they have historically preferred a single-storey

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private house to living in a multi-family, multi-storeybuilding.

Where homes are very crowded together or face directly onthe street, residents do seem to use communal or sharedspace for many functions. However, for middle and upperclass homes, it is certainly the case that fences and gatesenclosing private space are considered a necessity. Notonly do they provide privacy, but they provide an indicator

of status. Fences, especially the front piece together withthe gate design, acted as the main status markers ofhomeowners

7. Construction cost

Cost of building depends on the type of construction

materials used, type of construction, wall height, finishingand location. According to Ethiopian InvestmentCommission costs raged from $127.9 to $406.95 per metersquare in 2004. (1,126 birr to 3,581 birr per sq. meters).

In the last couple of years cost of building has gone up to3,500 to 4,000 birr per sq. meters to build an apartmentcomplex and 2,500 to 3,000 for an office structure. Thecost of construction has escalated in the last couple ofyears. Cost of steel, cement (although it has come down abit) finishing material, cost of aluminum, labor and the costof skilled and semi-skilled labor have all gone up.

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CONCLUSION

Tremendous effort has been done to investigate the housingneeds of Addis Ababa putting various variables and issuesin consideration.

Over all, the city of Addis Ababa, with respect to itspopulation growth, needs innovative and new solution toresolve what could become a major problem.

The number of rural inhabitants flocking to urban areasposes a major treat to the economy if not handled well.

It could create a problem of unemployment, increase incrime in the city, increase in street dwellers etc.

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LIMITATATION OF THE STUDY.

There was a lack of adequate time to write this thesis.I was, for most of the time, involved in the actualwork in Access Real Estate. There for finding time toconcentrate and work on this thesis has proven to bedifficult.

I was not able to have a formal or informalcommunication with the founder and CEO of AccessCapital services S.C. If I had, it would have addedmore perspective on the thesis.

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BIBLIOGRAPHY.

1. Central Statistical Agency, Report on the 2006 UrbanEmployment Unemployment Survey.

2. National Bank of Ethiopia, Annual report 2004-

2005.

3. Addis Ababa Master Plan.

4. Report on the Ethiopian Economy, EthiopianEconomic Association

5. Addis Ababa City Administration

6. Fortune magazine.

the role that marketing plays in establishing a real-estate company

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