Sunday, April 14, 2024
Money TalksFailing real estate promises

Failing real estate promises

Addis Ababa has become an over populated city where owning a house has become a rare and expensive luxury. Housing has always been the city’s problem but the rapid increase in population size since the turn of the new millennium has exacerbated the situation. A report prepared by the City Administration showed that after the administrator made available 2.7 million square meters of land in 2005, private real estates boomed in number, promising well built houses to residents desperately looking for a home. By 2018, there were 125 registered real estate companies operating in the country.  

Amongst those who joined the real estate scene, a handful tried to build and deliver on their promises, but only a few succeeded. The unparalleled success in real estate came from selling an idea of an early delivery promise, without even securing land. Many Ethiopians, including those from abroad, funneled money into the industry in hopes of getting the homes they have been promised. Some, usually the ones who can afford it, went for houses that are on the high-end quality spectrum as a safer investment alternative and others, who barely passed the middle-class cut-off point, poured their hard-earned savings into or borrowed to realize their dream houses.

The demand for housing kept increasing on a constant basis, while the ability of those real estates to deliver promised projects on time became questionable. The government targeting the lower end of the market through lower-quality affordable condominium programs meant that the middle class could afford to save to own a house. However, those who have already invested in real estate companies were left without the houses or their money; which would be worth much more, had it not been frozen in something they can’t get it back from. 

Yet, private developers attracted many average citizens and the rich, through fancy advertisements and a well-trained sales force, stretching the industry’s limits. Recently, The Reporter covered a story where the Federal High Court’s Lideta Bench suspended the transfer of apartments built by Impero real estate plc due to customer’s allegation of foul play by the company.

Impero originally promised to deliver the homes within 22 months since entering agreement with clients, between 2016 and 2019, but failed to do so and even asked for additional payments from customers. Luckily, the buyers won the court case and were granted the right to finish the building themselves, but many were not as fortunate. Customers of several real estates have often made such kind of allegations based on their experiences. Although most developers have delivered several other projects on time, the delay of the ones they are unable to deliver on time or according to the quality they have promised is reflecting poorly on them and the industry as a whole.

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To real estate companies, their customers are the main sources of their income; the same income they use to build the projects they say they would deliver. Yet, they do not consider the fact that these “sources of income” are usually not people with money to spare, rather they are everyday citizens trusting enough to invest in real estates that promise them the houses they want.

Amongst these hopeful citizens is Etenesh, a woman who entered the real estate market with the money she intended to buy a house with. She has been patiently waiting for about three years for an apartment she was promised in a span of nine months.

“At the time, I had just sold a house and I was looking to buy another. The sales people at Enyi real estate expertly told me that they have houses under construction, which are only a few months away from being finished and delivered; they even showed me these houses and told me that If I paid in full, I would have a 10 percent discount. Considering the fact that the company accepts payment based on the exchange rate at the time, I thought paying in full would be a better investment. So, I took some loans and paid the full amount to avoid added cost in the future,” recalled Etenesh.

Companies often claim that they are applying themselves to deliver projects in time and that delays are only natural especially in a market like ours that fluctuates. A study done on real estate revealed that the sources of finance for real estate developers are 0–1 percent from financers, 75 percent from client installed payments and 24 percent from their own equity/savings.

These data show that almost no loans are given to real estate developers. It is also argued that due to a lack of collateral, financers/banks do not provide sufficient loans to real estate developers, which results in substantial delay and even compromised quality. Therefore, the main source of finance for developers remains to be advance payments by the buyer and the developers own resource.

One can recall a real estate scandal such as this a few years ago when Jackros real estate promised buyers a high-end living space but failed to deliver the houses. Due to this, a court ruled in favor of the customers and gave the developer’s land to the buyers as compensation. The result was a vibrant, gated community in Gerji, which ironically kept the name Jackros.

However, taking the same measures would only partly compensate apartment buyers these days. The value of housing increases during the time buyers spend waiting for the delivery of their homes. Some customers even rent houses until they can move in their promised homes; hence, any compensation made should take into consideration expenses incurred by the customer during that time.

Some real estate companies claim that customers that pay the full amount reap more benefits than the benefits developers gain from them, since housing prices increase through time. Those who have paid the full amount would have their houses double or triple in price by the time they receive their houses. These claims suggest that developers take the hardest hit since they are the ones left to deal with skyrocketing construction costs.

More and more people are becoming customers mainly due to the lack of land in the city. The large number of buyers involved, compared to the 1990’s, is a curse in disguise. For one, if a single developer fails, the number of buyers, and by extension, families, affected will be larger. Further, the thousands of clients of troubled developers have little information on fellow buyers. This would be critical for any collective buyers’ effort to mount an organized pressure and seek compensations, and takeover construction, if necessary. But developers are not quite willing to provide such kind of transparency.

Most importantly, buyers should organize themselves with transparent and frequent communication on the progress of the buildings. Far from landing developers in jail, an organized effort would put much needed pressure on real estate companies and the government, but some buyers stated that forming a union or an organization amongst buyers is an act that is easier said than done.

“Most of us have work; our schedules are completely different. I don’t have the contact information of the people that are in the same boat as me. Forming an organization from scratch would just be time and energy consuming at best,” said Etenesh.

The major challenge, however, is the little information buyers have on their comrades; a record kept secret by developers. Opening such records to the public could be the first step taken by the government amongst other measures that might hopefully bring justice to citizens facing mishaps due to these shortcomings.

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Video from Enat Bank Youtube Channel.


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