Land acquisition for real estate development in urban areas of Ethiopia

Real Estate Gazette 26
  • Getu Deme

The real estate sector has been one of the fastest growing segments of the Ethiopian economy.

The sector has contributed 12.5 per cent to domestic growth in the past 10 years. The residential real estate market in Addis Ababa (the capital city and seat of the African Union, with a population of more than 3 million) is evolving into a varied mix of extensive government-built condominiums (supposedly for low-income groups), mid-market developments by housing cooperatives, and largely high-end homes built by real estate developers and/or homeowners themselves. The Government initiated an urban housing project in 2004 and it has constructed and transferred about 200,000 houses to homeowners so far. Currently, there are around 800,000 registered persons on the waiting list for the condominium houses. The Government's focus is on meeting the housing demands of those on low income, whilst the private real estate companies aim to attract mainly high-income home buyers. However, a huge gap remains in the housing market, and the needs of the middle-income urban population in particular still require to be met.

Investment opportunity

Ethiopia's investment policy encourages foreign investment in the real estate sector, and there has indeed been an increasing number of foreign investors in this sector. Chinese developers are at the forefront of this trend. For instance, Tsehay Real Estate's Poli Lotus International Centre and Sinomark Real Estate's 21-tower Royal Garden developments can be given as examples of Ethiopia's biggest real estate schemes. It remains the case, however, that most of the private real estate developers in Ethiopia are local investors.

Private investment in the real estate sector is expected to grow in the coming years. There are a number of factors driving this. These include (i) overall economic growth (as real GDP has grown by an average of 10.8 per cent per annum in the last 10 years); (ii) demographics (the urban population continues to rise and the population of Addis Ababa is expected to more than double by 2040 to reach around 8 million); (iii) a long history of unmet housing demand; (iv) the expansion of city roads and infrastructure (such as the construction of the Addis Ababa Ring Road and other major roadways, Addis Ababa's urban metro system which is the first in Sub-Saharan Africa, the improvement of numerous regional roads, and the wider reach of electricity and water services to the edges of the city); and (v) tax and investment incentive schemes, involving a broadening of investment areas, extended lease periods, and reduced income tax.

Supply and price of land

Ethiopia has a federal system of government constituted by nine regional states and two city administrations, with a dual land tenure system (for urban and rural land). Land in Ethiopia is the property of the public and can generally be acquired only on the basis of a lease. Private ownership of land is prohibited. In many residential urban areas, there are freehold plots owned by private individuals outside of the lease system, but even for these plots of land, the owners technically own only the buildings on the land and not the land itself (which remains public property). Transfer of any freehold with or without a property on it triggers the immediate conversion into the lease system. This means that the transferee is required by law to enter into a lease agreement with the relevant government authority. Once acquired through a lease, the land cannot be mortgaged or sold, but the lease value of the land (the down payment and annuity paid) and the fixed assets on that land may be mortgaged or transferred to third parties.

Land administration is delegated under the constitution to the regions (for rural land) and to city governments and municipalities (for urban land). Accordingly, regional governments and municipal administrations are authorized to lease rural and urban land under their respective laws. In the city suburbs, the Government reserves what it calls a land bank for investors, which, having compensated the landholders, it provides to investors engaging in real estate development. An investor who acquires land under a lease has to enter into a land lease agreement with the Government and obtain a lease holding certificate issued in its name. The minimum lease down payment is 10 per cent of the total lease payment. The remaining balance of the lease amount is to be paid in equal annual instalments over the payment term. Interest is to be paid on the remaining balance, in line with the prevailing interest rate on loans offered by the Commercial Bank of Ethiopia.

The lease contracts normally include provisions to regulate when construction will start, how long it will take to completion, the payment schedule, grace period, rights and obligations of the parties, as well as other relevant details. The down payment of the lease price must be paid prior to signing the contract. The duration of an urban land lease for real estate development is 60 years for Addis Ababa (the capital city) and 70 years for other cities and towns in Ethiopia.

Except for investments in the manufacturing industries and commercial agriculture and government projects, investors can only access land through a tender-based lease system. Accordingly, real estate developers have to participate in an open and competitive tender process to acquire the land they need. However, regions and city administrations are required by law to prepare in advance plots of urban land, to be assigned by tender, for "mega" real estate developments, to be undertaken by the private sector. Mega real estate is a housing development involving the construction of at least 1,000 residential units, for sale or to rent, with the purpose of alleviating the housing shortage in urban areas. Every plot of urban land must have a benchmark lease price that serves as a floor price for the tender process.

A recent report on real estate by Access Capital indicates that there are both challenges and opportunities in the real estate sector in Ethiopia. The key obstacles facing the sector include land policies, the scarcity and cost of construction materials, infrastructure, and financing. In terms of opportunities, the report highlights the potential of four segments of the real estate market: city-centre commercial developments; residential developments, including apartments, focused on middle income groups; new developments based on innovative and cheaper construction materials; and commercial parking developments.

Mehrteab Leul & Associates is a member of the DLA Piper Africa Group, an alliance of leading independent law firms working together in association with DLA Piper across Africa.

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