Hopefully, Murphy’s law doesn’t apply in the Ivory Coast

Here’s one one more thing that can go wrong in Ivory Coast’s real estate market. Apparently the following fraud has occurred recently:

1) A fraudster pays a corrupt official at the Ministry of Construction, Habitat and Urbanism to obtain a backdated title for an empty plot of land belonging to someone else.
2) Then the fraudster starts construction on the plot of land.
3) The real owner shows up and protests, but the fraudster keeps ownership of the land due to having paid for the construction and – I assume – having  contacts at the Ministry of Construction

It seems one’s property rights are stronger when there is a building or construction on one’s land.

Will the rents be paid?

Investment success

I have been talking a lot of the investment in Yopougon “working out”, but never clarified what I mean by it. A meaningful definition of working out is that the return on the investment over time including repairs and rent collection costs is at or above the interest I would get on a mortgage from a bank in Abidjan, which last time I checked was in the 11% – 14% range.

Since the plot of land was obtained for free through an inheritance, I have a bit of a margin of safety. Still, the following needs to work out to get the required return:

• The construction costs need not to exceed budget by too much.
  Costs were on budget.
  
• The demand must be sufficient to fill the apartments.
  They are not yet filled, but the demand seems to be high, so it’s looking promising.
  

Portfolios of the Poor

Looking around on the internet to figure out what I can expect from my tenants in Yopougon, I found that there is some recent academic research focused on understanding the economic lives of the poor. Notably, there is a book called Portfolios of the Poor (Princeton University Press, 2009) based on a study of 250 families in India, Bangladesh and South Africa.

Construction Completed

On budget, not on time

The building in Yopougon is now finally completed on budget but with a month’s delay.  It consists of six studio apartments and I had hoped to rent them for 20,000 CFA Franc (30.5 EUR) per month each.  It turns out that the demand is quite large. We have a list of 10 prospective tenants that have expressed interest and a few of them have even called multiple times insisting on renting one of the apartments.   The demand, however, seems to be very price sensitive, and 20,000 CFA Franc per month is probably the upper range of the rent. The actual rent could well go down to 15,000 CFA Franc  (22.9 EUR) per month which is a bit of a disappointment but no disaster.

The thing is, to offer apartments for which people pay 20,000, it would probably have been good to spend a bit more on the construction, but I was advised that it would be a better idea to not have it stand out too much from the rest of the neighborhood where rents for similar apartments are closer to 15,000. This neighborhood is average for Yopougon or even slightly below average, and location matters greatly.

Next up is the screening and negotiating process with prospective tenants and taking of the deposit which will be five months’ rent.  I might put up an online ad for it, mostly to check if anybody answers, but I suspect online ads aren’t very useful in this part of the market.

A note on the area

Yopougon is – I think – the largest of Abidjan’s municipalities both in terms of square kilometers and population. Though Yopougon has nice parts and outright slums are only a minor part of Yopougon, it is not a well-off area and one could even say it has a somewhat bad reputation.  I have seen ads of people looking for an apartment in Abidjan including “not in Yop”.  As mentioned in the No Grunge post “quartier populaire” areas such as Yopougon are a bit like many small villages next to each other and it is difficult to do business there without a local connection.

Abidjan

Still, it is in this type of areas that a majority of West Africans will live in the future, if they don’t already form a majority (accurate statistics are hard to come by) .  What happens in these type areas is roughly what happens to Africa in terms of human development indicators, poverty reduction, economic growth etc.
China’s tremendous growth involves people moving from the rural parts of China to Yopougon-style areas of China’s cities where they take the step into the middle class, and hopefully Africa is on the same (but seemingly slower) path.

When cellphones were first introduced in Africa, the big operators initially expected that they would only reach the super-rich elite and the small middle class, just like other expensive and advanced technological products such as the laptop.  However, with prepaid call credits, cellphones became widely used in the Yopougons of Africa, thus becoming a success story and reaching a much larger market than expected. The purchasing power of poor, but not destitute, turned out to be greater than expected.

The Tenants

So I’m looking forward to getting to know my tenants in Yopougon.  Unsurprisingly I’d like to see if they’ll pay the rents so the investment will work out, but I also think the tenants will be a reasonable proxy for how people live and how things are going in Yopougon. I’d guess they will have cellphones, and radio or tv, but beyond that I’m not so sure. Stuff I’d like to figure out (while respecting the tenants privacy):

• How many occupants will there be in each apartment?  What’s their age?
• Where does their income come from?
• What’s the income level per person? How many euros a day?
• How big part is the rent approximatively of their total income?
• Have they moved to Abidjan from other parts of the Ivory Coast or were they born there?
• What are their dreams, goals and aspirations?
• What are their most expensive possessions?  On what do they spend their money?
• Do they have relatives abroad?
• Have things gotten better for them along with Ivory Coast’s reported GDP growth over the last 6-7 years?
• Are they literate?

If it works out well, I could multiply this investment by five or ten, and beside a good passive income, it would bring some interesting data of  the goings on in Yopougon.

More macroeconomics

British economic historian Niall Ferguson recently made a speech on Fiscal Crises and Imperial Collapse which has absolutely no connection to the Ivory Coast or lifestyle design, but was great, so I’m going to comment on it anyway.

Ferguson says that today governments have world war size debts, without having had a world war,  and lists what governments with world war size debts historically have NOT done:

• Slash expenditures and entitlements
• Reduce marginal tax rate on income and corporate profits to stimulate growth
• Raise taxes on consumption to reduce deficits
• Grow their way out without defaulting or depreciating their currencies

If politicians in general are analysed the same way as Ivory Coast’s president Laurent Gbagbo, ie they’ll do what it takes to stay in power, the above makes perfect sense as all the points are likely vote-losers.

Ferguson goes on to list what governments with huge debts USUALLY do:

• Oblige central banks and commerical banks to hold government debt
• Restrict overseas investments by firms and citizens (capital controls)
• Default on commitments to politically weak groups and foreign creditors
• Condemn bond investors to negative real interest rates

Of these only the third is really contributing to solve the problem, and the fourth is a consequence of inflation. Ferguson says that many assume that that governments will inflate away debt, but says it is harder than we think, because there are fewer naive investors now than in 1945, mentioning his grandmother losing money on British war bonds. Seeing the risk of deflation or default, Ferguson says, markets will ahead of time drive up borrowing costs, which can and has historically, lead to a nasty scenario with high real interest rates and deflation, forcing massive spending cuts and the fall of empires.

So, if Ferguson is right, it would mean deflation is more likely than inflation.

So far I have not taken any loans to invest in the Ivory Coast, but I am considering it, and having a loan when there is inflation is great – having one when there is deflation is clearly less great.

Destruction - Thomas Cole's 3rd painting in his 5-part series "The Course of Empire" from 1836

In other news a team of scientist have created the first artificial cell. Well, human kind, that was a nice 100,000 year streak!

Risks – part 2

7) Tenants damaging or neglecting essential upkeep of the property
This seems to be a big worry among Ivorian landlords. I don’t really have any experience or statistics to support claims that properties are not well taken care of, but one worry is that it is not uncommon to keep animals in the middle of city of Abidjan – and we are not talking chihuahuas here, more like chickens, sheep or goats.

Probability: ?   Impact: Medium

Goats in Abidjan

Risks – part 1

Time for a run down of risks associated with real estate investments in the Ivory Coast. What they are, their probabilities, potential impact and how to deal with them:

1) Violent conflict in Abidjan
As discussed in the more politics post, violence erupting in relation the upcoming election is not an unlikely scenario.  It’s the scale and length of it that matters, sporadic small scale violence has happened before and doesn’t affect demand for real estate that much or prevent people from paying their rents.  On the other hand, larger scale, and especially longer lasting violence a la Liberia or Sierra Leone in the 90s, would  be devastating not only destroying demand and making it hard to collect rents, but weakening the rule of law and making it dangerous if not impossible to do business at all.

Probability:  Low but non-zero for the worst case violence    Impact:  High

Riot police in Abobo in the northern part of Abidjan in 2008

Well, Western World, that was a nice 500 year streak

Global macroeconomics

I have been looking at a recent working paper from the Bank for International Settlements, and well, it’s pretty alarming stuff.  They are essentially saying that even with  significant budget cuts practically all large Western countries plus Japan have debts that will spiral out of control.

Ivorian blogs

I’ve finally found some quality Ivorian blogs. First l’Actu Web d’Edith which is about the web in the Ivory Coast and about Ivorians involved in blogging and other Internet-related activities. It’s a goldmine to find good Ivorian blogs.

Found these via Edith’s blog:

http://allerdelavant.ivoire-blog.com/ Aller de l’avant – personal comments on current events in the Ivory Coast and the rest of the world

http://kouamouo.ivoire-blog.com/ Journalist Theophile Kouamouo blogging

And a few others I haven’t looked at very closely yet:

http://www.jpehouman.com/

http://blog.diabymohamed.com/

http://okibourse.com/

No cold calling here

Falling for the current craze

Feels like everybody is setting up, or talking about setting up, an online business right now to make money  through advertising, affiliate marketing, selling ebooks or other products or services.

Guess I’m a very late to join the bandwagon, but I thought it would be fun to run a site and learn, and see how it works out, and have a source of passive income that is not linked to real estate in West Africa.

So I contacted a guy that had a site for sale (I’m too lazy to build my own) who quite honestly and interestingly explained that to come up with a sale price he assumes that the site revenue will drop by 10% a month if no further work is put into the site due to competition.

10% is huge, and a good reminder of why I like real estate so much.

A few advantages of real estate compared to website businesses:

-Unless you buy during a boom you can realistically expect the value of a property and the associated rental income to increase over time with inflation. Not decrease by 10% per month. This is of course reflected in the prices of websites vs property, but:

-With real estate you have a stable income, so you can plan ahead and slowly but steadily re-invest your earnings. You can estimate where you will be in ten years and even see that your grand children can inherit a real estate portfolio. With a website earnings fluctuate wildly, and you have absolutely no idea where your website will be in 10 years. I think this is the kind of the reason Warren Buffett isn’t too much into investing in technology companies – it’s just too hard to look into their future.

-I have heard a saying that “all entrepreneurs or anybody in business is ultimately a salesman“. This is a bit of a problem since sales isn’t my thing. I’m into stuff like investing, math, finance, negotiating, interacting with people of different cultures (especially Africans, but not necessarily selling stuff to them), psychology (but more of the theoretical “finding interesting biases in human behaviour” sort than practical salesman psychology ) .

I’m interested in businesses where the sales part isn’t the key part, and contrary to the saying, I believe there are such businesses and that buy and let real estate is one of them.  In the tv show The Apprentice with Donald Trump most episodes are about sales, but there are exceptions such as in the first series when the contestants are asked to rent a luxury apartment with a great view.  Potential tenants enter the apartment, get the wow-feeling, and from there on, it’s all about negotiating and not about pure selling.  Loved that episode!

In real estate, as I see it, the investing part is critical, and then there is a bit of a marketing part to get buyers to be aware of your property, and a bit of a sales part to make the property look nice for prospective buyers, and to say smart things while the prospective buyers view the property, and then an important negotiating part.  Admittedly negotiating can be seen as a part of selling, but it’s about psychology in combination with numbers, calculations, discount rates and forecasts, and that I like.

-I thought making ad revenue from a website didn’t involve much selling.  Sure, the website needs to be made to attract viewers, but beyond that I thought basically one signs up to Adsense and watch the money roll in.  However, having looked into buying a website I’ve realised that one can sell links on it too, that Adsense isn’t enough and often one needs to sell the site directly to advertisers, and that getting people to link to you looks uncannily like a saleman’s job.

Other paths out there!

After having said all this, I still want to take the plunge and own a income generating website and maybe challenge my aversion to selling. But I would love to see someone who is currently making passive income on websites only, trying one of the many other ways of making passive income. There are other paths out there!

Deposits

Plot of land in Cocody*

It turned out that the seller of the plot of land I was interested in in Cocody, could not show the paperwork he claimed to have. So this is the second potential purchase I call off this year. It’s a bit frustrating, but I guess one has to be strict with the due diligence process and have patience. I’ll continue to have people to check out further plots of land in the Cocody area in the coming weeks.

Cocody

Building in Yopougon*

Now that the Yopougon building is nearing completion, there’s already been a few potential tenants seeing it and expressing interest. With a little luck I might even have it filled up without needing to post any ads, and thus not being able to answer the question of whether you can reach people who rent their main accomodation for 30€ a month through online ads.

One issue that has come up is the size of the deposit. It seems like standard procedure in the area  is a whopping 6 months’ deposit, which says a bit about the expected credit worthiness of the tenants and maybe also of the usefulness of the Ivorian legal system.

On the other hand, in Lagos in Nigeria, it seems, according to this video , that landlords can ask for the rent to be paid 2-3 years in advance. The size of the deposit or advance rent being asked is an interesting measure, the question is just what it measures. My guess is that it is a combination of the effectiveness of the rule of law/ legal system and some sort general level of trust as well as the wealth in the local area.  From what I’ve seen, within Abidjan, deposits become smaller the wealthier an area is, but still staying above West European levels even in middle class areas. It would be interesting to see if there are areas that buck this (negative) correlation between deposits and wealth.

*Yopougon and Cocody are both parts of Ivory Coast’s commercial capital Abidjan