‘Lack of Customer trust – Advantages of the new law – Market shrinkage’
Real Estate development is considered one of the biggest business investments in the country with the transaction of billions of birr in the market. In relation to the projected future housing demand, in addition to the existing need, the actors in the sector are increasing in number, while problems that the sector faces are growing in leaps and bounds. The trend of real estate development in the country is inconsistent and lacks uniformity. Regulation for dispute resolving mechanisms between developers and clients have not been clearly established so far, but the government is taking steps to amend this shortcoming in the current fiscal year.
Delays in the original timetable due to lack of available accessible land, finances obtained from clients for housing projects being used for other purposes and the shortage of experienced and organised professional teams to handle such huge investments, have been stated to be the major challenges for the sector from registering good performance, argue experts and some major real estate developers. Delays at construction sites highly affects, not only would-be home owners, but the developers themselves. When projects delay, the initial cost which was originally estimated by the contractors for a specific project will rise considerably in relation to inflation, foreign currency exchange and other issues.
According to experts on the sector, mostly customers become the primary victims of the delay incurred, because they are definitely expected to cover the additional cost, while real estate developers also argue that the profit margin that they receive from the projects is nowhere near what the general public assumes they will get, and in fact some of them may become bankrupt, forcing them out of the market. Due to the lack of a transparent and accountable framework in the country, it has been publicly observed that some real estate developers who have not secured available plots of land available for real estate development and those who had but are not staffed by people who are professionals, therefore are not efficiently organised, have undertaken the sale of houses to the public.
Experts indicated that it is quite difficult to mobilize the capacity and other required facilities for housing projects after the sale to the public has been executed. “At the very least, the developer has to assemble professionals with the required expertise and secure the plot, before commencing the sale of houses to the public,” experts said.
“If the developer is properly organised from the start, before going through the construction process, he will at least be able to meet the major part, in terms of scheduling, of the project,” experts explained.
According to some major developers and construction experts, based on the existing situation in the country, construction projects are normally expected to delay from the original timetable, but stressed that it should not be for years. “When we look at the real estate development in the country, we observe that most of the project delays are over two years, which is seriously damaging the sector in investment opportunities and also in the delivery to clients,” construction experts said.
Even though transactions within the sector are in billions of birr, it still has been affected by shortages in finance. The sector doesn’t have additional financial resources except for the money that it collects from its customers. Therefore, projects are affected by insufficient funds, which also contributed in a major way to delays for long periods.
Real estate developers also said that at present it is difficult to obtain finance from private or state-owned financial institutions due to the government’s main focus on controlling the fast growing inflation.
“If huge finances are accessible for real estate investment, it may currently be unable to control the inflation, but in the future it is necessary,” the developer told Capital.
“The other major problem that was observed on the sector is lack of organized customers and developers’ accountability to their clients,” a real estate developer said.
Capital interviewed several customers who said that they have totally lost their trust in real estate developers in completing their projects with shorter delays and delivering their houses as per original agreement. “We understood there could be some delays, even up to one year, but the current situation indicates that most real estate developers are over two years behind schedule,” clients said. “However, personally, I paid the full amount for the house, which the developer hasn’t delivered to me for over four years,” stated one customer furiously. “I do not advice any of my friends or family to buy houses from real estate developers unless the house is fully completed,” another real estate victim complained. Currently, the government is going to pass a new real estate development and transaction proclamation, which highly favours real estate buyers.
According to most real estate developers that Capital interviewed, they will support the new proclamation, which is expected to provide guarantees to customers. They said that the new law shall confer the necessary assurance for real estate clients and encourage developers to properly and earnestly engage in projects. The draft proclamation developed by the Ministry of Urban Development and Construction (MoUDC), which was tabled three weeks ago for discussion with the relevant stakeholders, reveals that the real estate development license that will be issued to a real estate developer shall serve only for the timeframe set by the developer to complete a specific project. Moreover, it was indicated that the “Urban/ Regional administration may, where it finds sufficient reason, renew the license for an additional year upon the request of the developer”.
The law, when enacted, also prohibits real estate developers from making announcements about their construction works through the mass media or through any other means nor does it allow them to register clients and collect down payments before receiving title deed of the land that is to be used for building houses from the appropriate body. In addition to that, developers will not be able to register clients beyond the accommodating capacity of the land they obtained lawfully.
The draft proclamation, which was hailed and lauded by the general public as a break through because it protects clients, further states that, “The extension of the time limit for the delivery may not under any circumstances be extended for more than 50% of the time limit stipulated in the contract.”
The proclamation goes even further and states that the party requesting for an extension will be liable for damages sustained by the other party.
Meanwhile, real estate developers are in the process of forming their own association.
Tsedeke Yihune (Eng.), owner of Flintstone Homes, one of the latest and successful real estate firms, said that the association, that is to be formed by 20 developers, is expected to play a significant role in regards to housing development within the government’s development strategy.
“The sector is not growing at the expected speed and scale, but the market demand is vast. Due to that fact, we have to work in an organised manner to ensure the sector addresses the demand,” one real estate developer who is part of the association being set up, explained. The association will also focus on quality and the ethics expected from actors in the sector. Based on ongoing trends, real estate developers have their work cut out for them to convince future customers of their trustworthiness, because of non-delivery of housing projects on time. Even though market demand is huge, the number of real estate buyers is declining due to the lack of credibility from developers.
For instance, Access Real Estate, one of the prominent real estate developers, failed to deliver a single house to its clients numbering in the thousands, playing a significant role in the drop of demand. The confusion and animosity between clients and Access Real Estate has contributed immensely to the decline in the registration of new clients in other companies. “The registry of new customers at our company has declined by 30% in the past few months, following Access’ inability to fulfil its commitments,” one of the owners of a recently established real estate company said. Experts said that, despite the infancy of the sector, developers should be able to properly manage their affairs and do receive significant profit. “They have to be honest and able to deliver houses at fair prices in line with government strategy,” they added.
According to these pundits, public-private partnership for housing development is also vital and should be initiated by the government to alleviate the housing problem in major cities in the country.
The new draft proclamation also provides incentives for real estate developers to accelerate sector development.
One of the good news for real estate developers which is included in the draft proclamation is that a maximum period to transfer land from the appropriate authorities for development is stated clearly. It indicated that the relevant governmental body shall hand over the required plot within 30 days from the date of first payment, after such land requested by the real estate developer is granted, upon fulfilment of all the necessary requirements.
On the other hand, according to the new law, the real estate developer has the responsibility to notify the proper authorities of the time schedule set for the respective phases of the construction.
The other significant article added to the draft proclamation to boost clients’ trust is that any real estate developer shall provide legitimate receipt or a warranty approved by bank guarantee against any payment effected by the client.
The draft proclamation also addressed the issue of how many apartments and villas are to be built on one real estate development area.
It indicates that construction of apartments shall be 60 percent of the total project and the rest should comprise of villa houses.
Finally the draft proclamation declares the formation of a real estate executive desk, which will be established by the government, to regulate the progress of the sector in all areas.
Experts said that the new proclamation has considerable significance in re-establishing trust between both sides and it can protect the sector from failing abysmally.