There are several ways to finance a real estate project in Ethiopia, but the most common one is to get a bank loan (construction loan). Another common method is pre-selling apartment units. But what happens when the banks are no longer lending and pre-selling becomes hard due to a slowdown in the sector? For property owners, another form of financing that is becoming popular is to partner with a developer by giving up a certain percentage of ownership.
To control the galloping inflation, the government and the National Bank of Ethiopia have embarked on a monetary and fiscal policy that has effectively frozen financing activities in the country. Starting in the latter months of 2023, banks stopped giving out loans. The pain is felt across the board, but especially in the construction sector, which is heavily dependent on financing. The price of common construction materials such as cement and rebars has plummeted by as much as 25%, which is normally good news, but the lack of financing means many projects are on hold and won’t be able to take advantage of these lower prices.
Lack of financing also means buying activity is frozen, and pre-selling apartment units becomes very challenging. In this scenario, more and more property owners are handing over their plots to real estate developers in return for some percentage of the finished units (usually 30%). For example, if the developer builds 100 units, they would give the owner of the plot 30 finished units. On the surface, this looks simple, but the arrangement can be very complicated and full of potential pitfalls.
If you are considering partnering with a developer, there are some important issues you need to look into carefully. First and foremost, you need to make sure the developer has enough cash and financing to finish the project within a reasonable amount of time. Addis Ababa is littered with half-finished buildings, and some of them have been sitting idle for years. Second, you need to make sure the developer has a track record of finishing projects on time, on budget, and with reasonable quality. Third, hire a lawyer with real estate experience. It is important that your agreement clearly spells out the terms of the agreement and the type of apartment that will be built. You want to make sure the apartment is built with a reasonable quality of finishing materials. You should also include a penalty clause where the developer pays you in case the building is delayed. You can request the estimated rental loss due to the construction delay.
If the plot was your primary residence, you might want the developer to pay your rent until the building is complete. If the developer has to pay for potential rental losses and your rent, chances are delays in construction will be minimized.
Partnering with a developer can be a great way to finance a real estate project, as long as proper care is taken. It is also a great way for developers to acquire a property without any cash outlay, which can make the partnership a win-win for all involved.
If you are a property owner interested in partnering with a developer, please get in touch with us by email at info@ethiorealestate.com. We have a number of developers we can reach out to.
Editor