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THE IMPACTS OF FINANCIAL CHALLENGES IN CASE OF REAL ESTATE

DEVELOPERS IN ETHIOPIA

Article · February 2021

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 Sambodhi ISSN: 2249-6661
(UGC Care Journal) Vol-44 No.-01 (XVI) January-March (2021)
THE IMPACTS OF FINANCIAL CHALLENGES IN CASE OF REAL ESTATE
DEVELOPERS IN ETHIOPIA

Mikiyas Mulugeta Gebreyohannes

(Ph.D. Scholar), Parul University, Faculty of Management, Vadodara, India

Abstract
There is a high gap between the demand and supply of housing in Ethiopia particularly in the capital
due to rural to urban settlement. This paves the way many real estate developers to invest their
capital in the sector. The main objective of this research is assessing the impacts of financial
challenges on the real estate development sector by engaging sixty three developers in the capital
Addis Ababa. The study employed descriptive research design in order to get details and explain the
phenomenon and the researcher employed purposive sampling technique based on the developers’
years of operational experience. The collected data were presented in tabular forms and analyzed to
give meanings by triangulated with literatures. The main impact of financial challenges in the real
estate industry are failures to provide houses as per the consent with customers and it result low
quality of houses at the end of the project these resulted from lack of long term loan and other
financial sources. Based on the findings most of the developers need support from the government by
policy frame work including regulations. As the real estate sector contribute 12% for the Ethiopia
GDP the government must give attention for economic purpose and the sector also accommodate
employees directly and indirectly. To enhance the function of developers they work together by
forming association to tackle problems in the industry. Currently there are many developers in the
country especially in the capital their ultimate buyers are high income segmented customers so in
order to reduce the demand of housing the public private partnership also suggested by the
researcher.

Key Word; Real Estate, Finance, Real estate developer

1. INTRODUCTION
1.1 Background of the Study
In Ethiopia the real estate sector including with construction sector contributed 12.5% to the GDP.
From this share to GDP the real estate sector alone account about 60% and the remaining is
considered to be a part of constriction sector. Both components in the sector have developed by a
total of 25% in the previous consecutive years when compared to the total GDP average growth of
10% (Natnael 2018). In recent years, investors have considerably accelerated development, mainly in
the more urbanized cities like the capital Addis Ababa. The real estate market is in increasing rate in
the city, pulling capital from overseas and domestic investors due to fast urbanization and elevated
demand in the housing. While, this is not served sky-scraping number of Ethiopians who do not
possess a house since the segment has been the one in quarrel mostly when it comes to delivery and
high pricing. The mainstream of the developers who received plots failed to give timely as they had
contracted with their customers (Natnael 2018). The difficulty and to a great extent, its capital
intensive nature needs good and sufficient financial support to create housing development possible.
Ease of use and trouble-free access to real estate finance in adequate amount accelerates housing
development process. Access to property finance by investors and profits groups is then significant
in ensuring ample delivery of houses (UNCHS, 2008). The price and ease of use of finance for real
estate development can pressure the practicability of housing projects.
1.2 Statement of the Problem
The setback of housing is mainly associated with the increasing population and urbanization. The
speedy rate of urbanization has severe impacts on needs for housing not merely in the number
although in quality too. The unfulfilled needs for housing provide climb to fertile growth lead to

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uncomfortable houses. If not outstanding consideration is given to the method of solving
accommodation problems in Addis Ababa, unexpected settlement, homelessness and street dwelling
can be outside governmental and urban management concern and may have unpleasant result on
local society. Therefore, the crisis of right of entry to appropriate housing has reached a disaster
circumstances due to quick population growth, speedy pace of urbanization and relocation from rural
areas to urban areas, decompose of the presented housing stock and lack of basic facilities. The
enormous shelter needs are doubtful to be met by the micro scale housing cooperative, government,
and private households. Real Estate developers contain to be vigorously occupied in the make
available of much more houses in the country (Getachew 2018).
The key rationale why this study focused on the variable of finance is that the majority other factors
including industrial capability, punctual delivery of resources and human resource, companywide
ability are straight or indirectly linked to the availability of finance. From the perspective of the
decisive significance of housing finance, this study paper focused on the impacts of financial
challenges of real estate companies.

1.2 Basic Research Questions

This study aimed at answer the following research questions accordingly.
1. What are the major finance sources for real estate development in Ethiopia?
2. Is the finance sources provide adequately for real estate developers in Ethiopia?
3. What are other main challenges in the real estate sectors in Ethiopia?

1.3 Objectives of the study

The main objective of this study is assessing the impacts of financial challenges on real estate
developers in Ethiopia. Specifically the study aimed to attains;
 To assess the major finance source of the sector.
 To examine adequacy of finance in the real estate sector.
 To identify the prominent challenges in the real estate sector of Ethiopia.

2. LITERATURE REVIEW
The concept of real estate finance explained as the way by which the creation and acquiring of house
by a person is financed. Real estate finance is basically required by both sellers and buyers. The real
estate developers demand huge finance for land purchase, buying of construction materials and
building associated actions. The end users require finance to buy building of new homes, for
maintenance, renewal and extension of already existing houses. Housing is elongated long-lasting
asset; the finance necessary is commonly a stretched term credit in character (David, Doris 2015).
Real Estate finance structure in Ethiopia is not feasible and this makes mobilization of funds and
loan for housing development complicated. The segment of real estate doesn’t have supplementary
financial funds apart from for the money that it collects from its clients. Hence, projects are
influenced by inadequate resources, which also provided in a main technique to delays for extended
periods. Deficiency of viable and enough finance market affect the affordability of houses which also
limits the possible needs and market leftovers very slim and illiquid. Small segment from the
population in Addis Ababa would be in a place to get the credit offers from the bank beneath
obtainable housing loan laws. The finance capability is also influenced by both the ease of use of
collateral to assurance and the buyers’ capability and document precision with the creditor. The
common tendency of selling real estate houses to clients from real estate developer is mostly is on
installment plans, payments are made at diverse stages of the building of the house and its services.
Trade of readily accessible houses is not frequent in the market. The present fact of sharp foreign
exchange deficiency foremost to costly exchange rates for main currencies is another difficulty. This
twist influences the usual operation and causes cost increase of local resources and human resource.

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The access of proper finance service to the metropolitan real estate finance market has been least
over the earlier decades as consequence of the administration rigid financial regulations.
Furthermore, since of the risk of credit and shortage of capital for asset formation in the real estate
segment, the provision of the rising and quick increasing private financial institutions in giving
enduring housing finance is unimportant (Tesfaye 2011). Inadequate source of finance from
regulators and private financial institutions and lack of support from the stake holders in providing
amenities where only little part of households in Addis Ababa would be in a position to availability
of loan in presented housing and credit laws which has made the majority of Addis Ababa dwells
unable to suit the strict necessities of the financial institutions (Getachew 2018).
The result of insufficient finance could be principally marked in the real estate housing sector,
though, known the influence on sellers that discover it hard to begin and finish the developments
lacking sufficient granting funds and in the sides of buyers who are frequently not capable to get
adequately reasonable loans (Access Capital Report 2016).
3. RESEARCH METHODOLOGY
This section of the paper covered the research methodology employed. The instruments and
procedures utilized to gather data and methods used in data investigation were discussed. The
research design, population, sample size, data gathering and discussion were also presented under
this part of the study.

3.1 Research Design

The author of this paper employed descriptive research design in order to show the impacts of
financial challenges on real estate developer firms in detail. The survey was
prepared by gathering and analyzing the data from drawn sample from real estate developer firms
that were measured to be representative of the whole group. In other terms, merely a piece of the
total real estate firms were studied and results from the sample were presented.
3.2 Sample and Sampling Technique
According to Investment commission of Ethiopia there are 630 registered real estate developers in
Ethiopia. But due to the current Covid 19 Pandemic the researcher was unable travel across all main
locations while almost most of the real estate firms are found in Addis Ababa and this opportunity
gives the study to focus in Addis Ababa a capital city of Ethiopia with almost contained 4.5 million
dwells and the city hits by rural migration. The researcher used 10% from the total population which
gives 63 real estate developer companies. The researcher also purposively selects the most active
developers that deliver residential and commercial houses for their customers. In addition the
researcher made virtual interview via zoom regarding the impact of financial challenges on the
overall effectiveness of the real estate development firms.

3.3 Data Collection

In order to get primary data for the sake of first hand information the researcher developed and
distributed questionnaires for respondents. The questionnaire was heading to the real estate
companies of financial mangers whom information were formed and who utilize to compose
financial decisions. From the distributed questionnaires all of the respondents were back after filled
it. Qualitative data gained from interview from two real estate developer companies were analyzed
and triangulate with quantitative data.
3.4 Method of Data Analysis
The collected data were analyzed by using descriptive statistics this technique provide in order to
explain and describe variables in appropriate manner. To be the study scientific and reliable SPPS
version 2018 were used and results were presented and triangulated with empirical and theoretical
literature.
4. RESULT AND DISCUSSION

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The findings of this study were presented in detailed manner as follows. As the questionnaires were
distributed for different professionals in the real estate companies and their role in their relative firms
were presented below.
Table 1. Participants’ Role in their companies
No Participants frequency percentage
1 CEO of the company 11 17.6%
2 Project Head 3 4.7%
3 Finance Department Head 49 77.7%
4 Other
Total 63 100

As the above table indicated the majority of the 77.7% of the respondents of this study are finance
department heads so that this gives a better detail on the topic while 17.6 of respondents were Chief
Executives of the companies and the rest 4.7% participants were project heads who are leading
construction sites with contractors.
Table 2. Forms of business entity of developers
No Forms of Business Entity frequency percentage
1 Private Limited Company (P.L.C) 52 82.5%
2 Sole trader --
3 Share Company 11 17.5%
No Description of variables 1 2 3 4 5 Mea
Total 63 100 n

The forms of business entity of real estate in Ethiopia are organized in the way of Private limited
company and as this study participant 82.5% of them are private limited companies and the rest
17.5% are legally organized as share companies and they sold their ownership for the public. In
terms of the time of their operational experience most of the developers had five years experience in
the sector which accounts 97.4% whereas the remaining real estate developers taken for the purpose
of the study are operated below five years in Addis Ababa.
Table 3. Sources of Capital
No Description frequency percentage
1 Equity Capital 15 23.8%
2 Pre collection from clients 10 15.8%
3 Loan 38 60.4%
Total 63 100%
The majority of 60.4% were found their finance in the form of loan from different finance
institutions, 23.8% get their capital from by selling shares when they established while as the finance
managers briefed in the interview session most of the real estate developers were use their own
personal and other sources and the remaining 15.8% were collect cash from clients before or in the
construction phase of houses and this issue sometimes bring disputes with customers due to failure of
the projects on delivering houses as proposed due to several reasons.

Table 4. Impacts of financial access on real estate housing development effectiveness

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f % f % f % f % f %
1 Lack of loan for house buyers 4 6.4 9 14. 15 23. 3 55. 4.62
3 9 5 4
2 Inflation on construction materials 14 22. 4 78. 4.23
2 9 8
3 Insufficiency of long term loan 4 6.4 24 38. 3 55. 4.11
2 5 4
4 Increment on land acquisition cost 2 3.2 1 1.5 25 39. 18 28. 1 27 3.70
7 6 7
5 High level of tax 8 12. 19 30. 28 44. 8 12. 4.13
6 3 5 6
6 Low level of house buyers in the market 17 27 1 25. 13 20. 9 14. 8 12. 3.91
6 3 8 3 6
9 Scarcity of finance reduce the quality of 12 19. 35 55. 1 25. 3.74
housing deve’t 4 5 6 3
10 Inadequacy of funds have impact on delivering 17 27 26 41. 2 31. 4.08
houses 3 0 7
11 High bureaucracy to get land as per the 12 19. 1 15. 18 28. 20 31. 3 4.7 4.52
proposal 2 0 8 6 7
12 Low government encouragement on the sector 1 23. 11 17. 18 28. 1 30. 4.32
5 7 4 6 9 3

5=strongly agree 4=Agree 3=Neutral 2=Disagree 1=strongly disagree

As the above table indicated, lack of loan for house buyers accounts 79.3% as the respondents were
agreed on the issue with the mean value of 4.62 hence the 6.4% of participants were disagree on
there is an option to get loan for house buyers. The continuous construction material escalation affect
the housing development process and the overall activities of the real estate developers in this case
78.8% of participants responded and agreed that the material costs are inflated time to time and this
huge factor affected their company financial status which directly impacted on the performance and
effectiveness of projects. In term of long term loan 38.2% and 55.4% strongly believed and agreed
there is no sufficient long term loan from various financial institutions and recently one financial
institution is in the process of set up to deliver long term loan for real estate developers this gives
much hope for companies that are struggling with the current system but only one bank is not solve
the overall challenges as participants were discussed in the interview session.
5. CONCLUSION AND RECOMMENDATION
The major participants of this study were financial managers of selected real estate firms also two
Executive officers were held virtual meeting with the researcher and they give a details about the
current perspective of real estate development. As they indicated the practice need overall
modification from stakeholders especially from government to facilitate the activities to be
accomplished in future. The problems like lack of finance and availability of long term loan and high
cost of construction materials were the major problems in the sector also some of them are going to
close their company due to such challenges.
The researcher suggests some recommendation in order to improve the impacts of financial
challenges in the real estate sector:
 The government must motivate real estate development banks in order to provide sufficient long
term loan for developers and it is believed foreign banks entry may improve this while the country
policy does not support it due to the protection of domestic banks.
 Rules and regulations must be revised to give much room for investors in the sector.
 Real estate developer also segmented only high income group they must include the middle as well
as the low level income groups as much as they can.

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 The stockholders in the sector must continuously assess the main challenges regarding finance and
other variables by establishing their own associations.
 The creation of public private partnership is also creating a good environment in the sector if it is
supported by policy framework.

References
[1] Access, C. (2016). Sectoral Report Real Estate. Addis Ababa: Acess Capital.
[2] Daniel, A. Ankeli, O. Adeleye, A. Oluwasegun “Decision Theory and its Relevance to Real
Estate Development Decisions”, British Journal of Economics Management & Trade
[3] David, Doris (2015); Essentials of real estate finance. Kaplan Ink Publishing.
[4] Deme, G. (2016). Land Acquisition For Real Estate Development in Urban Areas Of Ethiopia.
Addis Ababa: Dla Real Estate Gazette.
[5] Gordon Mcgranahan.(2009). Africans Urban Transition and the Role of Regional
Collaboration: International Institute for Environment and Development.
[6] Getachew Genzebe (2018) effect of financial challenges on real estate housing development
project performance in addis ababa; Addis Ababa science and Technology University.
[7] Tesfaye, A. (2011). Problems And Prospects Of Housing Development In Ethiopia.
[8] William, Jeffery (2011); Real Estate finance and Investment 14th ed; Mac Grew Hill Series.
[9] Zerayehu (2015). Performance, Challenges and Prospects Of Real Estate Financing In Addis
Ababa: Micro-And Macro Economic Implication. American Journal of Economics, Finance

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