A Hundred-Year Old House

1912 – 2012

I recently found this quite remarkable photo:

1912

This in north east Italy in 1912, some 40 km south of the then border to Austria-Hungary. What’s happening is that electricity cables are being set up with a ladder on wheels. My main interest though, is the house in the background and the second fellow from the left who is my great grandfather (While being Swedish I have some Italian roots).

My great grandfather had the house built in 1909, and he must have done a pretty good job, because the house is still standing today relatively unchanged. I visited it two weeks ago and tried to take photos from the same angle. There is now a quite heavily trafficked road on the spot where the photographer from 1912 stood:

2012

Nice work great grandpa!

When done right real estate can be a truly long term investment.  Even if one assumes –  following the lessons of the Herengracht index –  that the price of the house has more or less just kept pace with inflation since 1909 (with a temporary dip in 1944-45), the value in  housing provided over 100 years is immense.

Starting with the telegraph which came before electricity and is the black tube sticking out from the right of the house in the 1912 photo, to central heating and most recently internet broadband, the house has seen plenty of upgrades and modernisations.  However, in inflation adjusted terms, I don’t think the cost of any of the upgrades are on the same magnitude as the initial cost of building it in 1909.

So essentially my great grandfather managed to provide mortgage-free housing for  his descendants for 3-4 generations, and given the excellent shape of the house I don’t see why it wouldn’t keep going for another 100 years and 3-4 more generations.

In the long run we are all dead, but our houses will still be there

I’m thinking that if my great grandfather managed to build a house lasting over a hundred years back in 1909, I should be able to do the same in the Ivory Coast today.

It kind of raises the question of how to value and look at investments with a horizon longer than a lifetime. First  there is the financial way of looking at it. One can get the exact price today of one euro in 2112, by using the current market based discount factor. However, knowing that I most likely won’t be alive in 2112, is that one euro (or whatever currency will be used in 2112) still worth something to me today?

I guess my grandfather would have said yes to that same question if asked back in 1912 when he was 62 years old. And I am also thinking a euro in 2112 or maybe even 2212 has a non-zero value to me.  I think there are evolutionary reasons for wanting to provide for one’s offspring even after one’s death – a bit like the ideas in The Selfish Gene.

And regardless of descendants I think many people – me included – would take pleasure in knowing they are doing something that will leave a positive mark beyond their lifetime.  Not sure if it’s an ego thing, some sort of  wish for immortality, or a way of seeing the whole of humanity as one’s descendants, which genetically speaking I would think is a pretty correct way of looking at things.

Either way, if in 2112 a great grandchild of mine found this blog it would be pretty awesome, especially if there was still something left of my investments in the Ivory Coast (or elsewhere) that were useful to the grandchild.  Not sure of the longevity of blogs though, guess I’ll have to complement with more analogue media.

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Abidjan Real Estate

Real Estate ads

I recently got a reader question about how much an apartment in the Plateau district of Abidjan would cost.  And I actually have no idea. One of the differences between the real estate market in Abidjan (plus I guess other major cities in West Africa) and Europe is that sales of individual apartments is relatively uncommon.  Instead, more often, whole multi-storey buildings bought and sold, and the owner of the whole building lets the individual apartments.

Here are real estate ads from Ivorian newspaper Nord-Sud as of 11/11/2011:

(Click to enlarge)
(click to enlarge)

Five billion, special price only for you my friend!

In Plateau we have

Plateau : 02 immeubles R+5 et R+8 RM : 52 millions à 5 milliards

This very small ad is for two buildings, ground floor + 5 storeys and + 8 storeys, sold together for 5 billion CFA Francs or 7.6 million euro, with a stated return of 52 million CFA Franc (79,300 euro) per month.

Not quite for the small scale investor in other words. Quite cool that a whole building is advertised in the same way as a used car though, and seems to be almost as easy to buy.  Unfortunately out of my league though.

On this whole page of real estate ads there are only two ads for individual apartments for sale, and none in Plateau.

Luxury villas

Another thing with these real estate ads is the dominance of luxury villas for rent. Examples:

Marcory résidentiel : (remblais) une villa duplex de 15 pièces haut standing meublée + piscine. Prix :8.000.000

II Plateaux 3ème tranche: villa duplex de 13 pièces haut standing neuf sur 1000m². Prix : 2.300.00

COCODY DANGA
Villa duplex 6P avec piscine – 1 500 000F/mois
Villa duplex 6P avec piscine – dépendance – 2 500 000F /moi

The top one is a two floor 15 room villa with swimming pool, in an upscale residential area for rent at a not-so-modest 8 million CFA per month ( 12,195 euro).

Guess  the luxury part of the market is where estate agencies make most commission.  Online, the top end segment is less dominant, but it’s still a big part of the market.  One reason is probably the income distribution with 0.5% or so super-rich, a far too small middle class, and all the rest.

In Europe luxury villas like these are more often bought than rented. In the Ivory Coast I guess you have executive level expats from the private sector, NGOs and the diplomatic world, that all require high standard living on a non-permanent basis.

I still kind of think that the prices are surprisingly high in Abidjan. I looked at rental prices for top end villas in Sweden and they are lower than in Abidjan. The whole developed world – developing world difference seems to break down in the top end segment.  Essentially, for 8 million CFA Franc per month  you can get anything you want in Sweden.

 

Secure Title

Titre Foncier
I got the question below from a friend about “Titre Foncier” which is the final title deed for land ownership in the Ivory Coast.
How do you know that the Titre Foncier is genuine, when there has been so much corruption and fraud up to the highest level, and you have a judiciairy which is just as corrupt and corruptible?
Investor Stephen Jennings from the A Bull on Africa post said that “In urban real estate we are looking for very large conurbations in fast growing countries with reliable property title and reasonably sound rule of law.”   So this question is about the two latter issues which are very fundamental to real estate investing in Africa. Here’s my reply:
Well, the short answer is that  that’s why there is a risk premium for investing in Africa.  Returns on paper are much better than in the developed world.
As for Titre Foncier, I have yet to hear of a case where someone holding a titre foncier has lost a property outright,  but heard many cases of problems with “lettre d’attribution” and “terrain villageois”. Corruption is not uniform, the risk reward from the point of a corrupt official looks much better when rules and paperwork are less clear.  And with a Titre Foncier that’s as clear as it gets.
One has to put much more effort into due diligence when doing real estate deals in the Ivory Coast compared to the developed world. The more due diligence is done the more expensive it gets for somebody to bribe officials. For a small plot of land it could be worth it for an official at a local municipality, but less so at the Ministry of Construction.
I think for most of the cases the main risk is a dishonest counterparty (possibly cooperating with a dishonest/fake notary and agent) trying to sell something he doesnt own, or selling the same plot multiple times or something like that, without having any links to the adminstration.  A bit of natural skepticism and checks at the local municipality or at the Ministry of Construction should avoid these types of frauds.
Close call
Another thing to watch out for is if the land is disputed. It can look fine at the Ministry of Construction, the seller’s identity matches the owner’s and everything, but then there is someone else claiming ownership through a legal process that can last several years. And such a legal process is definetly not something one wants to be involved in. Heritage Foundation writes:
The judiciary [in the Ivory Coast] is constitutionally independent but slow, inefficient, and subject to executive branch, military, and other influences. Judges serve at the discretion of the executive, and some are open to bribery.
This is exactly what happened with the first Cocody plot I looked at. A  friend who is a lawyer fortunately checked at the “Cour de Cassation”  [the Ivorian High Court] and found that there was a legal claim from somebody other than the seller –  so I backed out of that one and bought another pretty equivalent plot nearby instead. That was a close call, and these due diligence checks can really be the difference between success and failure.

A Bull on Africa

An Investment Banker speaks about Africa

I just read a very clear argued case for investing in Africa by Stephen Jennings of Renaissance Capital – an investment bank specialised in emerging markets.  Here are the parts I especially liked, but the whole thing is worth a read:

Over the last few years – indeed, since Renaissance entered Africa in 2005 – rarely have I found myself preaching to the converted. My usual opening statement, that the 21st Century is Africa’s Century, is usually met with some bemused smiles. This is supposed to be China’s Century, or Asia’s Century, or the Century of BRIC or emerging markets, but definitely not of Africa.

Today, I think I notice more nodding in agreement.

In the last years I have also noticed that perceptions about investing in Africa are changing, as mentioned in the Is it getting trendy to invest in Africa? post. It is an interesting development, but it actually shouldn’t be surprising.  Looking at the numbers Africa has had great growth since the mid-90s – quite a long time.  It’s just that perceptions started out at rock-bottom.

Here is an income per capita historical graph from Gapminder for the Ivory Coast, Nigeria and Ghana:

And the thing is, Ivory Coast is the exception above, most African countries’ graphs look like Nigeria’s or Ghana’s. And with a post conflict recovery, and Ouattara not messing up, Ivory Coast’s future graph (forgetting about the inevitable crisis dip) could look even better than those for Ghana or Nigeria.

Back to Stephen Jennings, here are his key points:

  • Economic growth in Africa has averaged 6% over the last decade, greater than that enjoyed by India between 1995 and 2005.
  • Today 8 of the 20 fastest growing economies in the world are from Africa. Stunning as it may sound, Ethiopia’s growth has been on a par with China’s over the last decade.
  • The resurgence is broadly based – between 2000 and 2008 economic growth accelerated in 27 or Africa’s 30 largest countries. Remarkably, of 43 sub-Saharan countries only Madagascar had negative growth last year in comparison with more than a dozen such economies in the mid-90s. The naysayers’ tired refrain, ‘what about Zimbabwe’, holds little weight today.
  • Analysis by McKinsey suggests that natural resources account for only a quarter of Africa’s growth with those sectors that benefit from strong domestic activity accounting for the majority.
  • Similarly IMF data show that GDP growth is remarkably similar between African countries with significant resource exports and those without and the IMF has concluded that “natural resource endowments and geography…..have not been decisive factors in explaining the growth takeoff since the mid-90s”.
  • In 2009 despite the massive collapse in virtually all commodity prices Africa was the only region of the world not to record a single quarter of negative growth. Just compare the performance that year of two oil-dependent and supposedly hopelessly managed emerging markets: Russia which suffered a 7.5% economic collapse and Nigeria which achieved a stunning 7% growth rate.
  • As in Asia in the 1960s, the acceleration of growth coincided with the cessation or reduction of wars and conflict.  Post conflict, economic growth rates increased by 10 percentage points in the DRC and 15 percentage points in Sierra Leone for example.
  • Africa’s macroeconomic performance has improved very significantly – between the 1990s and the 2000s inflation has fallen 64%; government debt by 28% and fiscal deficits by 60%.
  • Finally, according to World Bank indicators the majority of African countries have implemented successful microeconomic reforms and those countries implementing the most reforms and greatest trade liberalization have experienced the greatest acceleration in economic growth. By some measures Rwanda is the fastest reforming country in the world in terms of the ease of doing business.  [Good work Petter!]

A Chile or Taiwan in West Africa?

Jennings on where to invest in Africa:

One of the questions I am most frequently asked about Africa is: which countries and regions of Africa will be most successful and where will the most attractive investment opportunities be? Once again, useful parallels can be drawn between Africa and Asia. We tend to talk about Asian growth as a collective concept, as if growth had been uniform across the continent in a steady process of improvement. This is, of course, misleading. Different countries have enjoyed radically different growth paths at different times.

Africa is just as much a geographic term as Asia. Loose talk about a great African revival risks confusing geography with economics.

While the acceleration of economic growth across Africa is very broadly based, there are major regional differences. When it comes to picking specific winners I confess that I prefer circumspection to bold predictions.  Africa will have its Chiles and Taiwans. It will also have its Argentinas and possibly (but hopefully not) its North Koreas.  How all of this will play out is unclear to me. Most accounts of why a particular country has taken off at a particular point in time amount to ex post or rear vision mirror analysis. The same applies to theories as to why today’s laggards will never make it. These theories often have a cultural or historical bent. Unfortunately their predictive power is virtually nil and they are quickly modified as the view in the rear vision mirror changes. In one decade we are told that Confucianism is a barrier to capitalism; in the next experts extol the Chinese work ethic. India’s colonial past goes from being a liability to an asset.

Wise words, and quite in line with one of my favourite books on the subject: The Elusive Quest for Growth by William Easterly.

I think though, that if political leaders behave like a Kim Jong Il, you are likely to get North Korean economic results. And it’s not so difficult to spot a potential Kim Jong Il (Mugabe anyone?), or even an Argentina-style not as crazy and ruthless but still bad leader. Respect for civil liberties and political rights is quite easy to observe (Is the leader murdering persons expressing critical views or not , what’s Amnesty saying?)  and if these things are bad, usually all the rest is bad too: economic policy, economic freedom, corruption, rule of law, bureaucracy etc.

I think with Gbagbo, not long after he came to power it became pretty clear that he was bad news  – I’d put him somewhere between North Korea and Argentina.  But what’s interesting is that West Africa quite recently has gotten rid of almost all of the obviously bad leaders. I think it’s only Yahya Jammeh in the Gambia and Faure Gnassingbe in Togo left now, and those are pretty small countries (plus maybe Blaise Compaore in Burkina Faso too).

And there seems to be a dynamic where West African democratic leaders who are now in majority, take a stance against wannabe Mugabes  in other countries in the region, as we saw in the ECOWAS stance on the Ivory Coast, and that’s great news.

What about Real Estate?

Here’s Jenning’s take on infrastructure and real estate:

The final reason I expect outsized economic growth in Africa relates to demographics and urbanization. It is no coincidence that the fastest wave of urbanization in history occurred in the last ten years, at the same time as the fastest period of economic growth in history. Population growth in general and urbanization in particular are drivers of growth, and they are happening faster in Africa than anywhere else on earth. Of the top ten fastest growing cities in the world today, one is in China, two are in India and three are in Africa. Similarly, Africa’s labour force is the fastest growing in the world.

Yes, exactly!

These types of opportunities are not limited to natural resources. Renaissance Partners, our principal investment arm, together with Kenyan partners is building a new multi-use city for 63,000 residents and 30,000 daily visitors on the outskirts of Nairobi. The next stage of the project, called Tatu city, involves USD250 million of investment in roads, water, sewerage and electricity distribution. As we prepare to break ground in Tatu city, we are beginning to roll out similar projects in Ghana, Angola and the DRC.  On April 15th we launched a pilot 100 hectare development in Lusaka which is already largely sold. These are not invest-and-exit projects. They will take many years to implement, and world-class teams with Africa experience. But what we are already finding is: if you build it, they will come. Meaning, when we seed high quality projects with capital for land and infrastructure, global and domestic retailers, corporations, banks and property developers – come calling. They are ready to put their Africa footprint on our developments. It’s good business for us. It’s also good business for Africa. When these projects mature, we will have provided well in excess of 10,000 jobs from Nairobi to Lusaka and beyond, not to mention raising the bar for the quality of urban development and playing a significant role in opening up middle-class mortgage markets in these geographies.

Ok, I have to admit, these guys do things on a somewhat grander scale than me.

In urban real estate we are looking for very large conurbations in fast growing countries with reliable property title and reasonably sound rule of law. Our major real estate project is in Nairobi where, as I mentioned, we are building a new city for 63,000 inhabitants which will be one of the largest ever foreign direct investments in the country.

They face the same challenges though – reliable property title and rule of law.

Hyperinflation

Mugabe Style

I have been doing some reading up on hyperinflation. The obvious way it could happen in the Ivory Coast is if Gbagbo somehow manages to create a new currency and starts printing it Mugabe-style to cover all his regime’s needs. A more far fetched way, but scarily not entirely unconceivable, is if the Euro countries don’t sort out their budget deficits and the ECB keeps on massively printing euros to buy Portoguese/Irish/Greek/Spanish government bonds. Then the CFA zone would import euro inflation.

Aside of the above scenarios, the effects of the current very unusual situation in the Ivory Coast with a banking system collapse and dramatically decreased trade and business activities, are very similar to the effects of hyperinflation.

What about real estate?

One of my favourite financial bloggers Gonzalo Lira has written extensively about hyperinflation, often with a starting point in the Chilean experience 70-73.  I think many of Lira’s points, such as real estate prices dropping, and prices of basic consumable necessities for life increasing, are applicable to the Ivory Coast.

As for real estate, sellers are often hesitant to drop prices which become “sticky to the downside”. If sellers don’t have any problems with their immediate needs, and expect the crisis to end and things go back to normal, then real estate prices won’t drop very much.  However with the days passing, the economy worsening and Gbagbo showing no signs of letting up, it looks plausible that Ivorian real estate prices could drop in the same way as in Chile in 73.

Here is an excerpt from a Lira post entitled Hyperinflation – What it will look like :

After all, if the prices of consumer goods and basic staples are rising in a hyperinflationary environment, then asset prices should rise as well—right? Equities should rise in price—since more money is chasing after the same number of stock. Real estate prices should rise also—and for the same reason. Right?

Actually, wrong—and for a simple reason: Once basic necessities are unmet, and remain unmet for a sustained period of time, any asset will be willingly and instantly sacrificed, in order to meet that basic need.

To put it in simple terms: If you were dying of thirst in the middle of the desert, would you give up your family heirloom diamonds, in exchange for a gallon of water? The answer is obvious—yes. You would sacrifice anything and everyting—instantly—in order to meet your basic needs, or those of your family.
So as the situation in Chile deteriorated in ’72 and into ’73, the stock market collapsed, the housing market collapsed—everything collapsed, as people either cashed out of their assets in order to buy basic goods and staples on the black market, or cashed out so as to leave the country altogether. No asset class was safe, from this sell-off—it was across-the-board, and total.

A true story: In ’73, at the height of the Allende-created hyperinflation, an uncle of mine, who was then a college student, was offered an apartment in exchange for his car. That’s right—an apartment. He owned a crappy little Fiat 147—a POS if ever there was such a thing—but cars in Chile in the middle of that hyperinflation were so scarce, and considered so valuable, that he was offered an apartment in exchange. To this day, my uncle still tells the story—with deep regret, because he didn’t follow through on the offer: “That Fiat was in the junkyard by ’78, but that apartment still stands! And today it’s worth nearly a half a million dollars!” Actually, I think it’s worth a bit more than that.

Continue reading “Hyperinflation”

The Upside

An Apartment-hotel in Abidjan

I have written a lot about risks , problems and worries about real estate investments in the Ivory Coast. Thought it might be time to speak about the upside.  Last time in Abidjan I found a great example of a successful real estate-based business that’s within reach for small scale investors such as myself.

Let’s start with a question, who makes more money, a senior manager  at a big multinational corporation based in Western Europe, or the owner of a small apart-hotel on this street in Abidjan:

The apart-hotel is not visible on the photo, but it’s 200 meters ahead on the left hand side.

I had a chat with the owner who is a quite inspiring Ivorian lady in her late 40s. She says she bought the plot of land for 4.5 million CFA Francs 20 years ago, and has plowed in practically all her savings into constructing the apart-hotel, adding little by little. At one point when she lived in France, she took a loan from a French bank to construct a house in France, but instead used the bulk of the funds for the Apart-hotel in Abidjan. Continue reading “The Upside”

A very long view on house prices

The Herengracht house index

One of my favourite pieces of academic research is a study of house prices along the Herengracht canal in Amsterdam made by real estate finance professor Piet Eichholz of Maastricht University. Thanks to outstanding dutch record-keeping,  Eichholz managed to construct the Herengracht house index covering house prices from the contruction of the Herengracht in the 1620s all the way to 1975 at first, and later extended to 2008.

Herengracht

Continue reading “A very long view on house prices”

Lessons from letting to poor people in rich countries

Get Rich Slowly

I just read a three part story on the lovely named blog “Get Rich Slowly” about an investment in a low income area in an American city (I think it’s Indianapolis). It’s about a 23 year old guy starting out in real estate by buying a cheap 8 unit apartment building with no money down, which on paper looked like a great investment. And well, then the problems start. Here’s the story:

Part 1 – How I Bought an 8-Unit Apartment Building with No Money Down and Walked Away with $1000 Cash at Closing

Part 2 – Lessons Learned from Rushing Into Real-Estate Investing

Part 3 -How My Real Estate Investing Adventure Came to an End

An excerpt:

One of the main reasons for the low price was the neighborhood: It wasn’t just a low income area — it was one of the lowest income areas in the entire city. The units rented for an average of $450/month, which included all utilities.

Contrasting it to the Ivory Coast

The tenants in my 6 unit apartment building in Yopougon, in Ivory Coast’s commercial capital Abidjan, pay 15,000 CFA Francs, or 29.33 USD per month.  So, disregarding the water and electricity bills  which are not included in Yopougon, that’s a developed – developing world difference of a factor 15x  (450/29.3).

In the Merits of Meritocracy post I speculated that there would be more problems with tenants in poor neighborhoods in rich countries than in poor countries. The story from Indianapolis does give some anecdotal support to the first half of this theory:

Economically depressed neighborhoods bring plenty of unexpected issues for first-time real estate investors. I had factored in a higher vacancy rate and knew the average tenant would be more transient than normal. However, I hadn’t accounted for the emotional impact of dealing with issues like drug addictions or existing racial tensions.

One of the three paying tenants when we took over was named…Amber (at least that’s what we’ll call her here).

Amber had at least two, completely opposite personalities. The first was of a stereotypical southern belle. She’d greet me with a warm smile, invite me inside, and offer me something to drink or eat. She’d say things like, “I hope you have a Jesus day,” whenever I’d leave. The first three times we met, I assumed she was the best tenant of the whole building.

Unfortunately, Amber’s second personality was less friendly. It involved ranting, screaming, and at least three explicit words per sentence. She’d call and leave 17 voicemails within a hour, each one more incoherent than the last. At times it was so bizarre I felt like pinching myself to be sure I was conscious.

The final straw came one day when we were having a company install new furnaces in the building. Amber intentionally waited until the crew was almost done with the job and dialed the fire department. She claimed that the HVAC company was trying to kill her by piping gas straight into her apartment through the air ducts. As you would expect (and appreciate), the fire department takes any calls of gas leaks very seriously.

Within ten minutes, there were three fire trucks parked outside of the building.  While examining Amber’s unit, she also took the liberty of informing the firemen that the HVAC crew had molested her cat. The biggest problem with her story was…she didn’t even have a cat.

So I hope there are no Ambers among my tenants in Yopougon, but we’ll see!   My guess is that there won’t be people with this type of issues among the tenants, not only due to the screening, but also due to the fact that they tend to be taken care of within extended families in Africa. And if they are not taken care of by a family they are unlikely to have a regular income and being able to pay a deposit.   That’s what happens when there is no all-covering national social welfare.

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

Continue reading “Risks – part 2”

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

Continue reading “Risks – part 1”

Fundamentals of the property market: Construction

Regarding construction, or the supply side of the property market, I can’t really say I have any special knowledge, so I’ll stick with publicly available sources, but one can find plenty of interesting stuff out there.

One such example is the 29 March – 5 April issue of the Ivorian magazine Journal de l’Economie (h/t John James) that has an article entitled “Business du Batiment: Un Succes qui derange”. (I’m assuming here that readers who are interested in this can read French – let me know if I’m wrong!)

“Le domaine de batiment est l’un des secteurs d’activite qui a connu un essor spectaculaire durant la crise ivoirienne

Avec ses 3% de contribution au Produit Brut Interieur (PIB) ivoirien et de besoins en logement sans cesse croissants (plus de 50,000 demandes) le secteur du Batiment et du Travaux Publics draine dans son sillage un nombre si important qu’heteroclite d’acteurs. Si la demande atteint les cimes, l’offre elle, va decroissante passant de 8,000 a 4,000 logement par an. […]”

While interesting, I have quite a few remarks about these first few lines of the article. First of all, where do the numbers come from? I have seen a figure of 4.4% for the size of the Construction sector as part of GDP in the World Bank Doing Business report. -It could be that the World Bank definition of Construction isnt exactly matching “Batiment et Travaux Publics” above, but my guess is that the margin of error for economic figures relating to the Ivory Coast is pretty large, (and rarely recongised).

Then we have the “50,000 demandes”, where it seems to be a bit of a mystery what they are or how they are measured. I agree that the need for housing is increasing all the time, but need only turns into demand when people have the means to actually buy what they need.

The article says that the supply has decreased from 8,000 to 4,000 “logements” per year, but if that’s the case it would be difficult to say that “le domaine de batiment est l’un des secteurs d’activite qui a connu un essor spectaculaire“.  To have an essor spectaculaire I’d say both demand and supply need to increase substantially, and that’s what I think has happened in the Ivory Coast over the last 6-7 years.

In the latest African Economic Outlook report for the Ivory Coast I found a text more in line with an essor spectaculaire:

Real growth in construction was very strong in 2008 (9.3 per cent), as in 2007 (9.8 per cent), owing in particular to the resumption of housing construction under the stimulus of strong demand, especially in Abidjan. From 2002 to 2008, real value added in the construction sector rose by almost 133 per cent, despite the crisis

And at Wolfram Alpha – unclear what the underlying source is – there is this graph of value added in the Ivorian construction sector:

Source: Wolfram Alpha http://www.wolframalpha.com/input/?i=construction+ivory+coast

Assuming that these figures are reasonably correct, I would really like to see a breakdown of the new construction that has taken place: Where has it occurred? What was built (residential/commercial/other)? Who built it? (big construction companies/small investors)?

There’s got to be a few people at the United Nations/World Bank/IMF or at the Ivorian Ministry of Construction Urbanism and Habitat that have tried to compile numbers for the construction and should be able to  give good estimates to the questions above.

What the big construction companies such as BATIM, SIPIM, Sicogi  etc, are buildling should be relatively public.  For small  builders in the informal sector, however, it’s more difficult. Even if they don’t pay any taxes, the land should be in the land registry, but not necessarily with any information of construction. The question is how big part of the construction is in the informal sector and how accurately one can estimate its size.

The Journal de l’Economie article says that while activity has calmed down a bit among big construction companies and government building works, individuals and small enterprise are getting more active. Maybe wisely, no figures are provided.

Conclusion

I have heard and read on several occasions that demand for property in the Ivory Coast is far greater than the supply, but now after reading what I could find on the topic, I’m starting to doubt that this is the case. It could be that the perception of demand outstripping supply comes from confusing need with demand and, on top of that, an underestimation of the informal sector. This doesn’t mean that property in the Ivory Coast is a bad investment though, on the contrary, my conclusion from this series of posts is that it is a good investment if things don’t get much better in the Ivory Coast, and a great investment if the economy continues to improve, and especially if tourism resumes.

Fundamentals of the Property Market: Population and Economic growth

Population growth

Population statistics for the Ivory Coast should be reasonably accurate I believe. The World Bank shows figures up to 2008 as per below and gives a population figure of 20,591,302 for 2008. I kind of think they should round it to the last 1,000 or 10,000 even – there’s got to be migration, births and deaths that are unaccounted for, and the population changes continuously, so the number has to be an estimate to some degree. However, for the impact on the property market, I’m more interested in the trend and for that it’s enough if the  error in the population figure isn’t moving around too much from year to year.

Source: World Bank http://datafinder.worldbank.org/chart

Looking at the figures behind the table above, I calculate an average yearly population increase of 2.217% based on the 2003-2008 period. With increased wealth, increased use of birth control, and decreased reliance on children for economic support, the population growth should eventually abate, but the Ivory Coast isnt really there yet, and I would extrapolate the current trend at least 10 years into the future.

Extrapolating the 2003-2008 trend gives a population of 21.5 million for 2010 and 26.8 million in 2020. In their medium variant projection from 2008 the UN projects (source:  World Population Prospects) the following for the Ivory Coast:

2020: 26.95M

2030: 32.55M

2040: 38.13M

Looking at Abidjan separately, due to urbanisation it can be expected that the growth rate of Abidjan will be greater than that of the country as a whole. Looking at urban population growth data from Gapminder for the Ivory Coast, the growth rate seem to have been in the 2.5% to 2.9% range  for the last decade.

So in conclusion it is almost certain that the population of the Ivory Coast will continue to grow quite dramatically, and that of Abidjan will grow even more so, boding well for the demand of properties.

Economic growth

For the demand of properties the population growth is an important factor, but the purchase power of the population is possibly even more important. To get an idea of the purchase power I’m looking at data of the Gross National Income (GNI) per capita provided by the World Bank:

Source: World Bank http://datafinder.worldbank.org/chart

GNI data is less accurate than population data (estimating the informal sector must be tricky) and also much less predictable.  In the graph above one can see the peak in the early 1980s due to high commodity prices, and then basically two lost decades including a drop due to the political turmoil starting with the coup in 1999.

Even if the real GNI per capita stays flat – meaning essentially that the Ivory Coast stays poor – with the population increase it would still mean an increased demand for property.  I see a flat GNI per capita as a bad case scenario, and think the GNI per capita can increase quite a lot, as it seems to have done since 2003, even without significant improvements in governance, rule of law or business climate.

The Ivory Coast, just like the rest of the developing world, benefits greatly from ideas and technology transfer coming from scientific and  technology progress made in the whole world – cellphones being one example of such transfer.  Also, there has been a relatively strong ecenomic growth trend in the whole of Africa since year 2000 (I’d speculate one of many causes is reduced influence of inefficient and corrupt state monopolies controlling many sectors of the economy) and the Ivory Coast just need to catch up with the trend, if politics stop sabotaging the economic development.

The World Bank’s Ivory Coast country briefing has a quite optimistic take on future economic growth:

Real GDP growth is estimated to reach 4.1% in 2010 and to average 5.3% from 2011 to 2014, assuming continued progress with political normalization and security. Inflation is estimated to be between 2.5% and 3% over the same five-year period.

Other more specific  factors affecting purchase power and/or the demand for properties worth mentioning include:

-Extraxtion of oil off the coast of the Ivory Coast.

-Potential relocation of the African Development Bank and other international structures back to Abidjan.

-Infrastructure that must have been quite fine in the 80s but which is in a state of disrepair and continues to get worse.

-Electricity dropping out – a problem which very recently has gotten worse

-World market prices for Ivory Coast’s main exported commodities; Cocoa and Coffee

-The availability of mortgages

-And as mentioned previously, a potential influx of tourists with high purchase power.

Fundamentals of the property market: Politics

On a couple of occasions I have sat down with a few friends that share my somewhat geeky interest in the Ivory Coast, and tried to predict what would happen next in Ivorian politics, or at least to try to draw up scenarios.  It’s been very, very difficult, but the safest bet has usually been (at least during the last six years) that not much is going to change and Gbagbo is going to stay in power. One model for prediction regarding Gbagbo that seems to be working is that given alternative courses of action, Gbagbo will pick the one is most likely to allow him to stay in power or consolidate his power. Beyond that it’s just very unpredictable.

The way I see it is that events in the political realm in the last 10 years have had an unusually negative impact – even with West African standards – on the economy and on property market prices.  While things can clearly get worse I think the upside is greater than the downside. The upcoming elections, whenever they will take place, are likely to cause some sort of civil strife, but for the economy to get even worse than the current situation, more than that is required such as sustained violence in Abidjan over a longer period of time, or outright war reaching Abidjan.

I think people are pretty tired of conflict and also out of pure reversal to the mean, my main scenario is that the economy will get better.  If the threat of violence and especially against westerners as in 2004 (which is not good for property prices in attractive locations to put it mildly) is reduced and the visa regime relaxed, then tourism could pick up again and that’s one big upside.

I am currently in France, and today I went to a travel agent and asked for voyages to the Ivory Coast. As expected they only offered (expensive) flights and no package tours. But when package tours (along with cheap flight seats) will be offered in French-speaking parts of Europe – as they were before the crisis – it will do wonders for the property market in attractive and touristy areas of the Ivory Coast.

When buying property in these parts of the Ivory Coast it’s like you get a free out of the money call option on tourism to resume.

Fundamentals of the property market

I think there are four main factors that affect the property market in the Ivory Coast:

1) Population growth and 2) economic growth in the Ivory Coast affecting the demand side

3) New construction – the supply side

4) Politics affecting both supply and demand

I’ll write a post about each of these factors, but first a comment on not including global economic up- and downturns  in the main factors.

If there was more tourism, if the financial sector was more integrated with the rest of the world, if more people took mortgages and if the Ivory Coast exported more value added products – essentially if things were better – then the recent global recession would have had a greater impact on the Ivory Coast and its property market. As it is, the global recession did have an impact on the property market, but the local factors dominate, making the Ivory Coast property market quite uncorrelated to the rest of the world.

With correlations among asset classes increasing all across the world, I think real estate in the Ivory Coast and West Africa would be quite attractive to international funds and large investors. It’s just that it is difficult to invest in it without actually going to the Ivory Coast and buy stuff.  They may exist, but I have not yet seen a mutual fund, ETF (Exchange Traded Fund) or REIT (Real Estate Investment Trust) aimed at West African real estate.

So, well, that’s a business idea for the taking, to make West African real estate more available on financial markets. When my micro-business gets larger I might look into it.

Further thoughts on Estate Agents

Given that there is a pool of buyers/prospective tenants that do not use the internet, the estate agents in Abidjan do actually add value to the sellers/landlords by providing access to these non-internet savvy buyers. They also add value to the seller by the traditional estate agent tasks of managing communications with all incoming prospective buyers/tenants and showing  the property.

For internet-using buyers such as myself it can be a bit annoying that it is the buyer that pays the estate agent. However, one way of looking at it, is that the fee to the agent is like a tax on a transaction akin to VAT, where the actual cost is shared by buyer and seller regardless of who pays the tax. In a low trust environment it might make sense that it is the party that has to bring up cash anyway that pays the agent.

Estate agents

In Europe estate agents generally work for the landlord/seller. Agents that work for the buyer exist but are rare, and they generally work in the upscale part of the market for wealthy buyers (not prospective tenants) that have more money than time. It makes sense that it is the owner that use the services of an estate agent as selling is a business activity that brings in money whereas buying is not.

In the age of the internet when a property owner can both find potential buyers, and get a reasonable overview of market prices online, I’d say the value of the services provided by estate agents has been reduced significantly and possibly become  nonexistent in many cases. Services provided by chartered surveyors and notaries on the other hand, should not have been affected in the same way.

In Abidjan, interestingly, from what I have seen, estate agents are paid for by the buyer, but seem to be working for themselves more than for the buyer or the seller.  When I rented a (surprisingly nice) short term accomodation in Zone 4 for 30,000 CFA per day last year, the only really useful thing the agent did was to drive me to the place in question. The agent said that the price was 40,000 and that the absolutely lowest possible price was 35,000. When I arrived, I negotiated with the owner directly and got a better price. After that I held the opinion that it would make sense to pay the agent the equivalent of a taxi ride, but to avoid too much trouble I think at the end I paid the agent 10,000.

When I let the Cocody house I bypassed the agents completely and even put in “no middleman” as a selling point in the ad. It worked perfectly fine, and I don’t quite understand why not more people bypass the agents. Well, on a second thought, from a sellers perspective it does make more sense to bypass the agents in Europe than in Abidjan as it is the buyers that pay for it.

As a prospective tenant, if you do not know your way around Abidjan, paying for an agent could maybe make sense, but then you want them to really work for you. Currently their incentives are just close the deal regardless of the price, and hence they won’t negotiate as hard with the owner as the prospective tenant would. Also, the default price charged by agents seem to be one month’s rent which is really high, and for shorter lets the price is unclear which the agents take advantage of by not mentioning it until the deal has been done. Maybe, as a prospective tenant, one should tell them upfront that they will be paid more the better deal they manage to find in specific terms, possibly as a function of lowest price for a set quality level.

One downside with bypassing the agents as a seller could be that it angers them – in hindsight putting  “no middleman” in the ad was maybe a bit too provocative.

Online property ads

In many countries online property ads are dominated by a single website. This is due to network effects. Advertisers want to be on the site that has most viewers, and buyers want to look at the site with most ads, creating a winner takes it all situation.

Interestingly enough, in Ivory Coast there seem to be a two horse race between the property ad section at the main online portal for Ivory Coast www.abidjan.net ,  and the dedicated property ad site http://www.abidjan-maison.com/

Abidjan.net is clearly the larger site in terms of number of ads, but it’s not a 99% to 1% relation,  it looks more like  80% – 20% .  The reason for AbidjanMaison still being a contender is I believe that the site has a superior design, interface and ease of use compared to abidjan.net’s property ad section.


However, there seems to be very few new ads on AbidjanMaison since January – it is possible that the site has some problems or is closing down.  I am going to email the contact person for AbidjanMaison to see what’s going on and report back on the blog if I get a reply.     I used AbidjanMaison a few years ago, but I cant remember my username.  So today I tried to register again, but I never got a confirmation email – so something is not working.

One striking thing with AbidjanMaison is the use of images of wooden houses in a green grass setting looking very un-African. Guess there is some aspirational thing they are playing. Does the whole world aspire to live in McMansions on green grass fields?

I have looked for a third property ad site, but only found international sites with a handful of Ivory Coast ads, and http://immo.atoo.ci/ which has very little activity.

Regarding non-online property advertisment opportunities I have noticed that there are public noticeboards in connection to supermarkets and malls in Abidjan which appear to be widely used for all kinds of ads. Then there are also ad sections in the Ivorian newspapers.  I would be interested to hear ideas from readers regarding online and offline advertisments in Abidjan!

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Due diligence

I am looking to possibly buy a studio apartment in the Port Bouet area of Abidjan to let on a daily basis. It is close to one of France’s largest military bases in Africa, making it a good place to stay for westerners concerned about safety and political turmoil. Or at least that’s the idea and how it worked out during the anti-French riots in 2004.

It is however difficult to foresee exactly how things will work out in the future, so investment decisions will have to be taken at some degree of uncertainty. Clearly not thinking through or not reasearching an investment properly is a danger, but trying to answer every single “what if” can be a waste of resources and time, especially in a not so stable and fast changing business environment.

If I get a good price on the Port Bouet studio I’ll go for it, given that it passes a few due diligence checks. One of which is to check that the lady who is selling it to me is really the owner, and to do this:

(1)  the title document provided by the seller needs to be checked against the land registry and
(2) a photo id of the seller should match the seller in person, and the name on the photo id should match the land registry

That’s how it is to make business in a low trust environment. The extra checks are actually not that costly or complicated, but they take a little time though, as they can’t be done by phone or email.  One needs to to go to the ministry of construction where the land registry is located and queue there until one gets access to the requested information.

The daily rental mystery

To sum up the previous post, I think it can be a very good business to be in the quartier populaire part of the market with a trusted local partner. I don’t exactly know what problems can arise or how big they will be, but I’ll try it with the piece of land in Yopougon and see what happens.

Another thing that looks promising, but which I haven’t tried yet is to rent per day to temporary visitors.  This doesn’t sound too much like passive income, but an employee can be hired to manage it, and there are management companies that do this kind of work.

Rentals made on a daily basis seem to only exist in the nicer part of Abidjan, and prices are in the 25 – 60 EUR per day range including the cheapest hotels. It doesn’t seem possible to find per day accommodation cheaper than 15 EUR, and even if there are no backpackers to speak of, I still think there is a demand for 10 EUR per day accommodation. I’d really like to know why it isnt offered on the market.  My theories on it:

(1) Letting accomodation per day is essentially being in the hotel business, and there could be so many rules and regulations and taxes making it unprofitable to rent at 10 EUR per day.  However, if this was the case there should have been people offering cheap daily rentals in the informal sector, and I have not seen that.

(2) There really is no demand, people who can afford to travel and rent on a daily basis, want to pay more for a nice place to stay.  On the other hand, I stayed for a while in a building where the apartment next to mine was rented daily at about 30 EUR/day, and there were frequently groups of people of 5 or 6 or so staying in apartment next door sharing the rent and filling up the floor with mattresses.

(3) Nobody wants to stay in a poor neighbourhood, and if you offer a daily rental in a well-off neighbourhood you have no reason to offer a lower price as there will be sufficient demand at a higher price.  Well, there are greyzones between well-off and not so well-off areas where a lower price should make sense.

(4) Nobody has thought about making more money by offering lower daily rents yet. After all, it took a while before low cost airlines emerged.

If point (4) is the case it would be nice to rock the market by offering low cost daily accommodations, but I am thinking it might be a combination between (1) tax/regulations (2) limited demand and (3) too small/few not-rich not-poor greyzone areas.

No Grunge

Residential real estate prices in Abidjan range from extremely low in the slums or “quartier precaires” as they are called, to several million Euros for luxury villas for an elite comprising of maybe 0.5% of the population.  In between there is a middle class comprising maybe 5%-15% of the population that have formal jobs, are successful small scale entrepreneurs – often in the informal sector – or have relatives in a developed country sending money, and can afford rents in the 80 – 500 Euro range.

Quartier precaire in Abidjan

Below the middle class, there’s the majority of the city’s population living in “quartier populaires” They make a living in the informal sector or have low level formal jobs, often living in walled courts with with one-story buildings that cater for the extended family and not uncommonly animals.

Additionally, there are areas where many Europeans (mostly French) live such as Zone 4/Bietry, which are in the gap between the middle class and the super-rich.

As a buy to let investor the question is which part of the market to aim for.

The slums can probably be excluded as the dwellings there are commonly not set up legally, and risk being torn down by the authorities. I may be wrong, but I don’t think the inhabitants of the slums pay any rents.

The super luxury part of the market will have to be excluded as well, at least at this time.  I don’t have the funds to buy here, and maybe one could buy land and have a luxury villa built but even that is too expensive I believe. Either way, people who can afford a luxury villa usually own it instead of renting it, so the rental market is limited. However, there could be exceptions such as foreign ambassador’s residences. I know a guy who owns a nice villa in Conakry, the Capital of Guinea, and rents it to the ambassador of a Scandinavian country. Conakry is a very different place compared to Abidjan though, and I think I’ll stay out of the super-luxury segment.

The building is an upper range hotel in a nice part of Abidjan

My first house is in a middle class area and the gross rental return is 12% which is not bad.  Returns could be a bit lower today as prices have gone up more than rents. One advantage of the middle class segment is that tenants often get their income from Europe in Euro, making the rents and value of properties a bit more shielded against a devaluation of the local currency the CFA Franc.  The CFA Franc has a fixed peg to the Euro at 655.9 : 1. In 1994 it was devalued by 50% and that might happen again.

A rule of thumb is that wealthier tenants are more likely to pay the rent and not to cause trouble. Because of this landlords demand higher risk premiums in poorer areas and consequently returns in the quartier populaires is higher than in the middle class areas. A higher devaluation premium also plays in.  Still, I don’t think these two factors explain the whole difference in returns. I speculate that there is some sort of behavioural bias going on. Ivorians who are wealthy enough to invest in real estate have, I think, often a desire put a barrier between themselves and poverty and prefer to deal with better off areas if they can. Coming in from a northern developed country, African poverty seems pretty alien and nothing that could happen to you, but for the local residents it’s another story.  An example of the same bias is that Africans who can afford to dress well, also do dress very well with very few exceptions – the way you dress becomes a status/class marker in a country where not everybody can afford nice clothes.  Grunge was never a hit in West Africa.  It’s the same thing in the real estate market, locals who can buy property in nice neighbourhoods, prefer not to deal with poor neighbourhoods.

This would seem like a good opportunity for westerners to invest in the quartier populaires, but alas, that is very difficult to do as the asking price would shoot up dramatically when the seller sees that the buyer has white skin and is presumably very rich and has poor knowledge of the neighbourhood. These areas are a bit like many small villages next to each other, and it is difficult to do business there unless you have some connection to the people living there, and it is even more difficult if you are a white European or North American.

The piece of land mentioned in the previous post is in a quartier populaire area, and I intend to let my local partner deal with it entirely.