Ethiopia has a growing housing finance sector. As the mortgage market does not yet meet the breadth of the population who might afford a mortgage, most households still finance their housing independently, with savings or non-mortgage credit.
The lowest recorded interest rate on a mortgage in Ethiopia is 14 percent, as of September 2016, and requires at least a 10 percent down payment. The cheapest newly built house by a developer recorded by CAHF is US$ 7 397, which is for a 55 square metre unit. Cement prices are higher than the continental average, at US$ 14 for a 50-kilogram bag.
With an urbanisation rate of 4.78 percent, demand for affordable housing will remain strong, both for rental and purchase. Housing microfinance will play an important role in increasing the supply of housing, and efforts to increase access should be undertaken. The government has engaged in ambitious urbanisation programme, financing the construction and purchase of housing with its Integrated Housing Development Program (IHDP). This is an attempt to address the estimated one-million-unit urban backlog. Dangote Cement recently opened a factory in the country, which will likely decrease cement prices. With a good macroeconomic environment, sound policy, better data and increased access to affordable credit, an enabled housing market can increasingly provide housing that the average household in Ethiopia can afford.
Find out more information on the housing finance sector of Ethiopia, including key stakeholders, important policies and housing affordability:
- Access to Finance
- Housing Affordability
- Housing Supply
- Property Markets
- Housing Policy and Regulations
- Housing Sector Opportunities
Each year, CAHF publishes its Housing Finance in Africa Yearbook. The profile above is from the 2016 edition, which has up-to-date profiles for 51 African countries.Download yearbook
Over the past decade, economic growth in Ethiopia averaged 10.8 percent exceeding its regional peers and other developing and emerging market countries, as recorded by the IMF (2015). Rapid economic growth driven by large public investment and growing services has halved the proportion of people living below the national poverty line from 48 percent in 1990 to 29.8 percent in 2011. Poverty levels are expected to further decline to 23.4 percent in 2015, which is below the MDG target of 24 percent. Furthermore, with a Gini coefficient of 30, Ethiopia remains one of the most egalitarian countries in the world.
Ethiopia is the second most populous country in Africa after Nigeria with an estimated 90 million citizens. Agriculture is the foundation of the economy (followed by the services and industrial sectors) accounting for almost 40 percent of GDP and 80 percent of country’s employment. The country is currently facing its worst draught in 50 years due to the El Nino weather system. As a result, analysts predict economic growth will slow to between four and seven percent this year.
Ethiopia is among the poorest countries in the world, and according to the UN’s Human Development Report (2015) the country has a very low human development ranking of 174th out of 188 countries. Despite having one of the lowest rates of urbanisation at only 19 percent (well below the sub-Saharan average of 37 percent), Ethiopia is now one of the most rapidly urbanizing countries in the world. According to the World Bank, the urban population will reach 30 percent by 2028 and be tripled by 2034. The main drivers of urbanisation include: natural growth; migration to urban centres and the reclassification of villages into towns; and the expansion of urban centres.
The combination of high population and urban growth rates, coupled with a high prevalence of urban poverty has placed enormous strain on Ethiopian cities. To accommodate the rising levels of urbanisation, significant investment in basic infrastructure such as health, education, housing, roads, water and sanitation and recreational facilities are required. Since 2004/05, the government has focused more on developing housing, upgrading slums, providing infrastructure and promoting small urban enterprises. The Growth and Transformation Plan (GTP2) for 2015 to 2020 will continue to target infrastructural development with the view of the country being classified as a “middle income” by 2025.
Access to Finance
Ethiopia’s financial sector includes banks, microfinance institutions, insurance companies and pension funds. Banks dominate the financial sector. There are 19 banks – 16 of which are privately owned. The total capital of the banking system reached ETB 31.5 billion (US$ 14 billion) with private banks accounting for 56.5 percent of that figure. The largest bank is the government-owned Commercial Bank of Ethiopia (CBE) which accounts for 34 percent of the total capital of the banking system. According to the IMF, the NBE regularly monitors adherence to Basel I capital adequacy requirements; and in 2015 the system-wide capital adequacy ratio was 16.6 percent (double the minimum requirement). Returns on assets and equity showed solid performance, at three and 45 percent, respectively. The non-performing loan ratio was a low 2.4 percent. Total savings have increased to about 19 percent of GDP, reflecting a solid growth in private savings. However, given the investment target is 40 percent of GDP, more resources are needed. In general, access to financial services has been improving and the total number of bank branches reached 2 693 in 2015 – 36 percent of which are located in Addis Ababa. This increase has brought down the ratio of bank branches- to- population from 39 834 to 33 482.
Ethiopia’s banking sector is shallow, offering a limited range of products and services. The sector remains closed to foreign investors, and formal capital markets are non-existent. There is no stock market and treasury bills are the only active primary securities. Ethiopia lacks a public credit registry or private credit bureau, making it hard for financial institutions to assess the creditworthiness of borrowers. Lending is therefore mainly collateral-based thereby excluding the vast majority of small businesses and households. The World Bank’s 2016 Doing Business Report showed that almost 93 671 individuals and 6 778 firms were recorded on the public credit registry (an increase from the previous year), but representing just 0.2 percent of the population. As a result, Ethiopia continues to underperform with respect to getting credit and is ranked 167th out of 189 countries.
According to the latest figures from the IMF, in March 2015, there were only 24 Microfinance Institutions (MFIs) providing financial services; and their penetration ratio is still low, with less than four percent of the population being served. Although deposit taking MFIs are growing in number, their coverage is insignificant relative to the size of the unbanked population.
Historically, lending for housing (both development and mortgage finance) was carried out by a specialist lender, the Housing and Savings Bank (HSB). HSB granted long-term loans at a subsidised rate for residential housing and commercial building construction, purchase and renovation, time deposits and long-term borrowings. It was succeeded by the Construction and Business Bank (CBB), a wholly government owned public enterprise which has the additional mandate of universal banking. A loan by the CBB requires a deposit of 30 percent up front, with generally only a five year tenor. Another major player in the mortgage market is CBE which has grown since the introduction of the Integrated Housing Development Programme’s current project in Addis Ababa, in which it plays an important role in the provision of mortgage finance. Mortgage rates for the company’s 40/60 programme are estimated at 14% over a ten year period with a 40 percent down payment.
A key challenge to housing affordability is the absence of a diversified and flexible housing finance sector. Approximately 90 to 95 percent of the working population is employed in the informal sector, making the vast majority ineligible for formal finance. As a result, only upper income groups and members of the diaspora can afford newly constructed housing built by the private sector. Although mortgage lending is growing, cash is the predominant form for purchasing formal housing. Houses tend to be constructed progressively on an instalment basis.
Traditional construction techniques involving the heavy use of bricks, blockets and cement are expensive, inefficient, and time consuming. There are few factories producing construction materials, and locally available inputs are in short supply.
According to Delz (2014), the government’s Integrated Housing Development Programme (IHDP) has compounded the housing affordability issues for lower income residents. Compliance to financial provisions of the banks has resulted in a housing typology that does not offer incremental stages of construction nor the use of alternative building materials. This dependence on specific materials has contributed to rising construction costs and steadily increasing housing price units. In June this year, the Commercial Bank of Ethiopia and Ministry of Urban Planning and Housing, revealed that the new 40/60 condos are with an additional ETB 2 100 (US$96) per square meter from their current price. This price increase is due to rising construction and labour costs which have forced the Addis Ababa Savings & Houses Development Enterprise to re-evaluate their prices, taking into account the current market, land, water, electricity and building design prices. If the revised prices are reviewed then the cost of one-, two- and three- bedroom condos (currently valued at ETB 162 000 (US$7 397), ETB250 000 (US$11 416) and ETB386 000 (US$17 626) respectively) will increase accordingly by the square meterage of the apartments. The apartments are 55, 75 or 100m² in size. The increased costs of construction, and thus the down payments as well as mortgages have placed additional financial burdens on the poor. As a result, many beneficiaries from low-income groups have rented out their units to more affluent citizens. In turn, the unit owners tend to stay in their original substandard dwellings or have returned to another precarious housing type.
The existing housing stock, particularly in Addis Ababa, is generally of poor quality, with many settlements congested and unplanned. Using the UN-HABITAT slum definition, 80 percent of Addis Ababa is a slum with 70 percent of this comprising government owned rental housing. Only 30 percent of total housing stock is in fair condition, while the remaining 70 percent is in need of total replacement or significant upgrading. Ethiopia’s housing deficit is between 900 000 and one million units in urban areas, and about 300 000 housing units are required in Addis Ababa alone every year in order to meet the projected demand of 1.5 million new homes by 2025.
There are four categories of new residential developments taking place in the housing sector: (a) government-initiated condominium buildings; (b) residential neighbourhoods initiated by developers; (c) owner-built housing dwellings; and (d) new home activity driven by housing cooperatives. In addition, there are two other major categories of housing units in Addis Ababa: kebele-rental housing (very old stock), mainly for those on low incomes, and informal settlements.
- Government-built Condominiums: Since 2005 Ethiopia has been implementing the Integrated Housing Development Programme, an ambitious government-led low and middle income housing programme. This programme was implemented in Addis Ababa and 55 other cities. The first phase of the IHDP has been successful in many respects and has built 171 000 housing units. There were, however, a number of unanticipated challenges facing the program that are supposed to be addressed in a new and enhanced second phase of the IHDP which was launched in 2011.
This second phase involves a new condominium housing project in Addis Ababa divided into three different categories to accommodate monthly earnings ranging from US$23 to US138. The payment allows the buyer to make a down payment equalling 10, 20 or 40 percent of the unit cost, and then to pay off the balance through a mortgage.
Currently there are 38 790 condominium units that are under construction at 13 sites. The new condominium houses that are being built will be 18 storey buildings. According to the latest figures available, 154 000 of the 160 000 people registered under the scheme are saving money each month toward acquiring a home. Out of these, 11 800 have paid the full amount and around 29 000 have paid 40 percent of the total cost. The ones who have paid in full will have priority when the condominium units are handed over to the home owners.
Residential neighbourhoods initiated by Real Estate Developers: There are approximately 50 private real estate companies operating in Ethiopia that are almost exclusively focused on high income groups. These higher end units tend to be located within estates approximately 20km from Addis Ababa or in the Kazanchis business district in the heart of the city. It is estimated that Ethiopia now has 2 700 millionaires, reflecting an increase of 108 percent between 2007 and 2013- the fastest growth rate in Africa.
Owner-built housing construction: Self-built housing was by far the most common type of housing delivery approach before the introduction of the IHDP. Though relatively limited now, this building approach is still active in older residential neighbourhoods. Costs for owner-built construction are generally higher and this segment of the market tends to include the full range of housing units from modest homes constructed over extended periods to large and luxurious homes often built by razing or replacing older properties.
Home construction by Housing Cooperatives: Cooperative housing developments, organised by groups that share a common employer or membership, have been a long-standing feature of the residential real estate market. The city administration has registered more than 500 housing cooperatives. The minimum membership in a housing cooperative is 14 while the maximum is 24. Many cooperatives members are middle-income, based on employer associations such as Ethiopian Airlines or other state-owned companies.
In the World Bank’s 2016 Doing Business Report, registering a property requires seven procedures, takes 52 days and costs 6.1 percent of the property value; for this, Ethiopia ranks 141th globally. This is still cheaper and quicker compared to the rest of the region. However, key obstacles remain, including land policies, the scarcity and cost of construction material, the lack of basic supporting infrastructure and the lack of long-term financing.
All land is owned by the state and foreigners are barred from owning property in Ethiopia. Property rights and regulations governing the acquisition, benefit, use and sale of land are not clearly defined. According to Delz, even though Ethiopia’s land policy does not allow for the private ownership of land, the IHDP has created indirect private ownership, as the housing program forces dwellers to either acquire the provided private poverty, or to leave their neighbourhood.
Land administration is divided between municipalities (for urban land) and regional governments (for rural land). In urban areas there is a system of leasehold tenure, which has replaced the permit system; in rural and peri-urban areas a permit system (based on use rights) applies. In terms of the leasehold system in urban areas, individuals lease land from the government for up to 99 years. Regional governments are expected to allocate land to investors within 60 days of receiving their applications. The lease price of urban and rural land varies according to the location, type of investment and class of land. The land cannot be mortgaged or sold, but the lease value of the land and the fixed assets thereon may be mortgaged or transferred to a third party. The government has the right to take the land back, on payment of compensation for improvements made. Compensation is not paid for the value of the land itself. In the conversion from the permit to the lease system, government converts the permits to leases when a land transfer transaction is being carried out.
In urban areas, formal land delivery is through planning and public auction by city government. New parcels of land are leased with a fixed lease period and conditions according to a land use plan. Alongside this land delivery system a cash land market operates in which people exchange leases or permits through sale agreements. Buyers pay property transfer taxes and commissions to middlemen. Within the city boundary, new parcels of land come onto the market through an informal system without planning or documentation. The exchange is usually among personal connections, and a simple sale agreement confirms the transaction. About 90 percent of these parcels are subdivisions of land with ‘permission to occupy’ rather than titles.
Housing Policy and Regulations
A number of policies govern the housing sector, including the following:
- Urban Development Policy (2005): Formulated by the Council of Ministers of the Federal Democratic Republic of Ethiopia to link together the small-scale efforts made by regional governments and cities since 2000.
- The Federal Rural Land Administration and Land Use Proclamation No. 456/2005: Enacted for the purpose of ensuring tenure security, strengthening property rights of farmers, sustainably conserving and developing natural resources, establishing land data base, and establishing an efficient land administration in the country.
- Expropriation of Landholdings for Public Purposes and Payment of Compensation and Council of Ministers Regulation No. 135/2007: The Federal Constitution vests in the government the power to expropriate private property in the public interest, provided it pays compensation prior to acquisition and in an amount commensurate with the value of the seized property.
- Ethiopian Building Proclamation 624/2009 formal sector: A legal document outlining the building regulations and requirements, for use by local authorities to ensure building standards are maintained in their jurisdiction. Parts of Ethiopia are located in an earthquake zone and a code exists to ensure buildings resist maximum predicted earthquake loads. The codes are only used and enforced in buildings developed in the formal sector.
- Proclamation (number unknown): Allowed the importation of cement as the lack of locally available cement caused major construction delays for condominium projects
- A number of proclamations exist between 2002 – 2005 deal with the lease holding of land, condominiums and land expropriation provisions.
- Regulation No. 15/2004: Outlines the establishment of the Addis Ababa City Government Housing Development Project office and outlines its duties and responsibilities.
- Regulation No. 12/2004: Outlines the condominium regulations for Addis Ababa city, regulating further details to Proclamation No. 370/2003.
In late 2015, there were reports of a new Bill to be tabled for Parliament by the MWUD. The new Bill aims to govern the housing rental market for both the public and private sectors.
Housing Sector Opportunities
Like many other African countries, Ethiopia has a great need for affordable housing delivery. Housing finance markets are destined for growth at virtually all income levels, but particularly within the lower to middle income ranges. Private real estate developments have tended to focus on the high end of the market but there is considerable unmet demand for less expensive homes for lower income earners. Private sector efforts could and should complement the government’s housing delivery by providing new approaches, technologies and building alternatives.
A sector that warrants further development and exploration is Ethiopia’s microfinance industry, one of the largest in Africa. Given relative tenure security, this creates enormous potential for the development of housing microfinance products which are appropriate for low income earners. Formal encouragement of self-build construction is required, especially through regulatory reform around building standards and greater product innovation by banks.
Due to expensive and inefficient building materials that are imported, there is a huge requirement for cost-effective housing at a faster speed and larger scale. Developers with cheaper and unconventional construction materials have significant advantages over competitors. Promising prospects include the use of pre-fabricated boards, steel-based construction of high rise buildings, and locally available environmentally friendly building materials. Given the considerable need for skilled manpower, it would be an added value proposition for any investor to train local Ethiopians to fulfill these roles rather than relying on more expensive migrant labourers.