In a major economic move, the National Bank of Ethiopia has shifted from a decades-long, fixed exchange rate to a market-based foreign exchange rate. This reform aims to restore market balance and stability, ushering in a new era for Ethiopia’s financial environment. While the change has sparked debate among economists and business leaders, with public discussions on social media, the real estate sector has not received much attention. The sector may face higher costs due to currency volatility, increasing construction material prices and development costs.This article will explore these impacts and the broad implications for Ethiopia’s real estate market.
Real estate in Ethiopia is increasingly attractive for investors seeking to shield their assets from inflation. Recent years have seen significant changes due to economic reforms, a rising middle class, and urbanization. The government has introduced various policies to boost foreign investment, streamline property transactions, and simplify registration, aiming to enhance investor confidence and reduce bureaucratic obstacles. Despite these efforts, challenges remain, such as the 10% investment for banks in real estate and the 14% credit cap imposed by the NBE last year, which has unintendedly impacted bank lending. Additionally, the recent shift to a market-based foreign exchange rate and the near 100% devaluation of the birr present both new challenges and opportunities for the sector.
“The shift to a market-based forex rate presents both pros and cons,” said an anonymous real estate developer. “On the positive side, we can now issue our own Letters of Credit (LC) and purchase foreign currency at the official rate and retain, compared to the previous reliance on exporters’ LCs. However, a significant downside is the rapid increase in local market prices; for instance, steel prices have surged from 130 ETB to 180 ETB in just a week.” He added that this new forex policy exacerbates the impact of the existing 14% credit cap, potentially affecting demand in the real estate sector.
When evaluating the recent reform, it’s important to consider its effect alongside the ongoing credit cap by the National Bank of Ethiopia. Nathan Wondayehu, a Property Valuer and Civil Engineer at a Private Commercial Bank, states, “In the short term, the real estate market is likely to remain slow if the credit cap persists. According to the NBE’s strategy, the cap is crucial for reducing inflation, leading investors to redirect funds into their businesses instead of real estate. Many are even selling properties to raise capital, resulting in stagnant short-term investment in fixed assets. Long-term buyers, mostly middle- and lower-income individuals, can’t afford high-end properties, which slows the market. The new foreign currency reforms will also impact buyers, particularly those with foreign currency contracts, due to currency volatility. The long-term effects of the reforms are uncertain, but given Ethiopia’s status as a net importer, expecting sufficient foreign currency to offset these challenges is unrealistic. Buyers unaffected by the credit cap and planning long-term investments will benefit greatly, as fixed assets are a key way to protect wealth from the new FYC reforms.”
According to Leul Dereje, an experienced real estate consultant, the recent reforms have several implications for the sector. He notes that most transactions are conducted in USD due to sellers’ lack of trust in the birr’s devaluation and the need to import materials. The shift to a market-based forex rate primarily affects buyers with existing contracts, who now pay above 101 ETB per USD instead of 58 ETB. Even if buyers leave the down payment, sellers may struggle to resell due to the birr’s devaluation. Conversely, developers benefit from the dollar’s appreciation by selling at higher prices. He doesn’t anticipate a significant increase in the cost of imported finishing goods, as these are typically bought on the parallel market. Additionally, he points out that the reform will reduce developers’ costs associated with the black market, thereby making transactions appear legitimate. Moreover, Ethiopians living abroad can now safely purchase real estate through the official market, with the gap between the official and parallel markets having narrowed.
Nathan also notes that the costs of construction materials and machinery, including rebars and cement, have risen due to increased import prices, which will also drive up rental prices. Buyer sentiment might naturally lean toward investing in real estate due to the Birr’s devaluation, but this is constrained by the availability of liquid cash among high-income buyers. As a result, developers face additional challenges.
The Ethiopian real estate market faces affordability issues and struggles to meet the demand from people relocating to Addis Ababa. Leul Dereje cites contracts allowing developers to set prices freely as both barbaric and problematic. He worries that the shift will increase salaries and local prices, inflating real estate costs and complicating pricing for developers. However, he views the situation as short-term, noting, “It will be resolved once the foreign currency market becomes more familiar with the Ethiopian market.”
As a direct contribution for the country, He stated that the shift, combined with the open market for foreigners, will be a significant source of foreign currency for the country. Their involvement in the real estate sector will also spur local developers to compete more and offer more affordable housing.
According to Andualem Goshu, Assistant Professor at Addis Ababa University, the rise in local market prices will likely impact demand. He draws a parallel with Nigeria, where implementing a market-based forex rate led to a doubling of the parallel market rate, increasing import costs and inflating goods prices. He suggests that unless currency fluctuations stabilize, real estate prices will be affected. In the long term, while investors might be attracted by the depreciation of the birr, developers may shift towards local producers to capitalize on lower costs, thus promoting import substitution.
The Ethiopian real estate market is facing a tragedy with the challenge of the NBE’s last year 14% credit cap and the recent shift to a market-based foreign exchange rate. While this reform brings potential benefits, it also exacerbates existing issues, leading to soaring costs and insufficient housing supply. Immediate intervention is crucial to mitigate these effects and address the sector’s dire needs.
Experts recommend several strategies to tackle current challenges. The National Bank of Ethiopia should consider easing or adjusting credit caps for certain sectors and promote large-scale affordable housing projects through public-private partnerships, along with providing incentives like tax breaks and low-interest loans. Strengthening real estate regulations by standardizing buying, selling, and renting processes is also advised. Developers should keep informed about capital market and currency trends, adapt their business practices to move away from reliance on contract down payments, prepare for heightened competition, diversify their offerings to cater to different demand levels, and adjust contract terms as necessary. They should also consider using floating birr for transactions and employ a range of marketing strategies to appeal to the diaspora and increase foreign currency inflow. Additionally, assembling a diverse team of professionals can improve operational efficiency and cost-effectiveness. Many buyers are reluctant to read the terms and conditions, which is barbaric. They should thoroughly review these terms when signing an agreement and also keep themselves informed about trends in currency fluctuations and real estate prices.
Activating mortgage banking to leverage retirement deposits for long-term home loans could stimulate job creation and address housing shortages. Additionally, strengthening regulations to ensure market stability is crucial. The current inefficiency in real estate services across various ministries suggests the need for a dedicated ministry focused solely on real estate to effectively address these challenges. Furthermore, the country should utilize its land more effectively; currently, only a small portion is cultivated. Expanding cultivation and adding value for export can increase foreign currency supply, reduce the trade deficit, and promote industrial development.
As Ethiopia implements this economic shift, understanding the impact of the market-based foreign exchange rate on real estate is vital for stakeholders. Key strategies include investing in local materials and construction innovations to stabilize costs, adopting flexible financing models to widen buyer access, and implementing dynamic pricing to stay competitive. Additionally, training real estate professionals can enhance decision-making and efficiency. These approaches will help Ethiopia’s real estate sector adapt to the reform and explore new growth opportunities.
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