Investing in prime residential Real Estate has generally been a hot topic in Addis Ababa. After all, there are several people that have made a killing doing it. The turmoil surrounding the COVID-19 virus seems to have slowed down this momentum, buyers and sellers are currently assessing the consequences of this event. For now, the industry is facing an acute working capital crisis which is essential to restart the business and keep it moving. As for housing prices they have not dropped significantly in the way some may have expected; clearly the future of the market remains uncertain.
First, a look at how the Real Estate industry evolves…
The Real Estate cycles when left to work through the markets typically transition through the following supply and demand phases. In the expansion stage supply peaks and prices somewhat max out to then stabilize gradually; at this stage a transition takes place in the market where buyers chase premium properties and push price levels even higher. In the recession cycle, when typically there is income disruption, people can’t earn enough to provide for their families, and satisfy their debt obligations. This is the phase where the Real Estate cycle begins to contract.
An event like the COVID-19 crisis would dramatically reduce most home transactions; and although some prices have been lowered here and there, there is no dramatic move in prices. But what one can see, and what has not been seen before, is that this time sellers are more inclined to negotiate.
How do Ethiopian house buyers respond to an event like this? Would the market become risky for investors over the next two to three years?
The way investors and consumers engage in dealing with the COVID-19 crisis will determine how quickly the country will recover from the economic downturn to reach 2018-2019 levels very quickly. Anecdotal evidence suggests, high value house price levels remain high right now, while demand has already started to collapse. It would appear that home sellers are reluctant to decrease pricing as aggressively as potential buyers are exiting the market. Eventually, the lack of real demand will prompt price levels to contract to attract interested buyers. As we’ve seen in many places, when prices start to decline – a vicious cycle begins where potential buyers wait out the bottom offers because they know the dynamics of the markets have changed in their favor.
When large numbers of people or businesses suddenly lose their sources of income, this creates a significant disruption in the supply/demand side of the Real Estate market. How extensive is this disruption in AA? We don’t know. What we know, is it’s hard for prices to move when there aren’t as many housing transactions to make prices move in aggregate. It’s also hard for prices to move as long as there is no pressure on Real Estate firms from banks pulling out capital or asking repayment of loans. Real Estate companies will continue trying to seek peak price levels even when sales activity continues to decrease. How can that be??
Simple supply and demand theory suggests when prices are high and buyers begin to lose faith in future price increases – the cycle shifts from rising price levels to falling price levels as buyers begin to wait out the better deals and wait for the bottom in the markets to setup.
At this stage, given the virus crisis, the erratic nature of ethnic politics in Addis Ababa – in addition to a potentially explosive national election, plus the recent banking regulatory requirements and the reluctance of foreigners to move until there’s a vaccine – the housing market is on pause – buyers and sellers have left the market, transactions have dropped in response, and prices aren’t moving.
So what’s next?
From both theory and experience, we know that the more you let the market determine your price the better off the economy will be. But can the market fix the housing sector? Not really. At a minimum you need government to develop policies encouraging developers to build housing that the modern economy demands. The Government needs to avail land for developers to build affordable housing and vibrant neighborhoods. It also needs to provide subsidy and incentives for affordable housing. In short, free-market solutions although desirable must take into consideration the complex interrelationship of people’s culture, building costs, wages and the economy in general.
Finally, one sensible recommendation for those with money on hand waiting to capitalize for when house prices come down: Don’t despair there is a slight advantage in your favor! It could be twelve to eighteen months before you see the best opportunities.
COVID-19 crisis hasn’t lowered AA house prices – Yet
NBE buys gold worth $72 mln in a month
Total export last year was only $197 mln
In the first month of this budget year 2020/21, Ethiopia secures over 72 million dollars from the export of gold, which is one third of the total earning the country secured in a full year in the last budget year.
In a press conference held on Tuesday August 18 Yinager Dessie, Governor of National Bank of Ethiopia (NBE), said that only in July, the first month of the 2020/21 budget year, the country secured USD 72 million from gold export.
He said that the government’s new approach is working to amass the gold from miners and control the illegal trade.
The amount secured in a single month is more than 36.5 percent of the total revenue secured in the full year of the last budget year.
In the 2019/20 budget year Ethiopia earned USD 197 million from gold export, which is 85 percent of the target. Moreover in the 2018/19 budget year only USD 27 million was earned from the precious metal export, which is the worst performance ever in the recent gold export history.
“We have undertaken massive study regarding the illegal trade on gold that led us to improve our price to buy the metal from miners mostly artisanal miners,” the Governor said.
“Due to policy change we managed to buy USD 60 million, USD 50 million and USD 72 million worth of gold in a single month in the past few months,” Yinager added.
In the past budget year the trend of the hard currency earnings from the precious metal returned back as one of the major hard currency sources for the country.
At the good time in 2011/12 budget year the country secured USD 420 million from gold export. Mostly the production of artisanal miners, who sold the metal to NBE that is responsible for export, is the major source for Ethiopian gold export.
Tigray, Benshangul Gumuz, Southern Nations, Nationalities and People’s Regional State and Oromia are the major areas for artisanal miners. Besides that new resource locations are found for the precious metal in the regions mentioned above and other regions like Afar.
Globally the price of gold has surged and surpasses USD 2,000 per ounce, which is unseen in the gold market history.
India has handed over a consignment of medical aid
India has handed over a consignment of medical aid consisting of 100,000 HCQ tablets and other essential drugs including life saving antibiotics on 21st August 2020. Dereje Duguma, State Minister of Health, while accepting the consignment, conveyed his gratitude and appreciation for this assistance. The handing over ceremony was held at the premises of the Embassy of India and was attended by officials of Ministry of Foreign Affairs, Ministry of Health and other dignitaries.
The donation of medicines was made in fulfillment of announcement made by the Prime Minister of India in April 2020 to combat COVID-19 pandemic to assist 25 African countries including Ethiopia.
India’s cooperation in the health sector with Ethiopia includes support for training and capacity building, supply of equipment and medicines, telemedicine facilities and continuing medical education for health care professionals as well as facilitation for treatment at tertiary care facilities in India. India has donated a 64-Slice CT Scan machine to Black Lion Hospital in Addis Ababa and provides fully-paid training opportunities to hundreds of Ethiopian doctors, paramedics and other health care professionals under the Indian Technical and Economic Cooperation programme as well as the India-Africa Forum Summit initiative.
Pencil maker Apex says sales down to zero
The prominent pencil manufacturer and player in the market, Apex Plc, disclosed that its sells have almost goes down to almost zero in the last five months after the government decided to suspend education because of COVID 19.
The company that is a pioneer and the only manufacturer of pencil in the country said that because of the pandemic its business is seriously affected.
The company told Capital that it has a capacity to produce about 400,000 pencils per day and actual production of 80,000, but since the pandemic forced the government to suspend education as of mid-March its sales dropped immediately.
“The situation push us to just settle wages for months without operation,” one of the senior management at the company, that produced Dot Pencil, said.
“For instance this time is the peak season for the stationary market, but there is no change in our market,” the senior management member, who demands anonymity, told Capital.
He reminded that during the past in this period not only the market demand is very high but shortage also occurred.
The company is not only the first to produce the stationary product in the country but its way of production makes it unique and one of the very few in the continent.
The major input for the pencil production is recycling scrap papers like used newspapers.
“We are not using wood or tree products like the traditional input for the pencil industry,” the source says adding “we are contributing for mitigating the environment impact since we use waste paper.”
Dot Pencil is well accepted in the country. Besides its quality it has played significant role to replace the imported pencils.
The source said that the company has a capacity to fill the local demand, meanwhile there are some imports including illegally imported products by the same brand of Apex.
“There were individuals who tried to use our brand and import the product from abroad, but they have been legally penalized,” the source explained.
The company located at Gelan, in the south east outskirt of Addis Ababa in Oromia region, has more than 160 employees.
“We are paying their salary meanwhile our sales and production is zero,” the source added.
The government disclosed that after the first COVID 19 case was reported on Friday March 13 schools all over the country were closed to control the pandemic.
Currently the global pandemic is significantly spreading not only in the world but also in Ethiopia.
The government has not yet set a given time frame when schools will come back to their operation, but because of the spread of the corona virus it is not expected that education centers will return soon.
Capital observed that the stationary market particularly that are directly associated with students has significantly dropped.
Sources at Apex also said that not only their business is affected by the situation but those who are engaged on wholesale and retailing of Dot Pencil are also affected. “It is easy to know the effect on others since they do not come and buy the product from us,” the source said.
