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.
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 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.
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
Good news are that the construction of the Yopougon studios is progressing fine, with no setbacks at all. The builders are a family my partner has known for decades where funnily enough all family members are in the building business, each with different specialisations. We think they are pretty honest, but nevertheless decided that paying them the full amount at the start of the construction was not a good idea. What we have done on multiple occasions is to go with them where they purchase building materials and pay the purchases directly.
I’m losing my fear of managing (small scale) building projects in Abidjan, which means I can start looking at buying plots of land. Looking at the numbers, buying land and building on it – quite unsurprisingly – seems to generally give better returns than buying a houses directly.
The slightly less good news is that I have decided not to buy the studio in Port Bouet. I intended to let it on per day basis, and put out a few ads for it during a three week period to check the demand, but got no responses. It’s not high season at the moment, but I think that the main problem is the location, people who look for a reasonably nice place for a short stay in Abidjan prefer other areas.
On a per month basis it would have given an ok, but not great gross return of maybe 9-10% which would have been reduced on a net basis by the cost of getting to Port Bouet and collecting the rent. It was such a small investment that the transport cost would have mattered.
I’m still interested in letting something by the day, so I’ll keep on looking. I also really need to learn more of how letting by day works, so next time I’m in Abidjan I plan to stay in a number of let-by-day accommodations and talk to the agents and the owners to get a feeling for the market. In the meantime online ads provide quite a lot of information.
The table below is from an ad for a studio and for a three room apartment in the Cocody Danga area, from someone who seems to know the property market in Abidjan quite well:
| Period | Length of stay |
3-room apartment |
Studio |
Electricity included | |
| High Season | July and August |
Per Month | 500 000 | 450 000 | 150 KW |
| Per Week | 190 000 | 175 000 | 40 KW | ||
| Per Day | 30 000 | 30 000 | 7 KW | ||
| Per Day beyond 1 month | 20 000 | 20 000 | 7 KW | ||
| Mid Season |
December, January, June, September | Per Month | 450 000 | 400 000 | 150 KW |
| Per Week | 165 000 | 150 000 | 40 KW | ||
| Per Day | 25 000 | 22 000 | 7 KW | ||
| Per Day beyond 1 month | 15 000 | 15 000 | 7 KW | ||
| Low Season | February, Mars, April, May, October, November | Per Month | 400 000 | 350 000 | 150 KW |
| Per Week | 150 000 | 125 000 | 40 KW | ||
| Per Day | 15 000 | 15 000 | 7 KW | ||
| Per Day beyond 1 month | 10 000 | 10 000 | 7 KW | ||
100 F CFA will be charged for each KW consumed beyond the included amount.
A reimbursable deposit of 75 000 F CFA will be charged at the beginning of the stay.
Interesting here are the seasonal price differences (guess the French holidays have a big impact), the way to handle the electricity (aside the fact that it has to be KWh instead of KW), and the overall quite low prices for an attractive area. I may be wrong, but looking at the let-by-day offers online, I have the feeling that there are more offers now, than say six months ago, and that prices have gone down.
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.
The piece of land in Yopougon (in Abidjan, Ivory Coast) is now a construction site. I got a price I deemed reasonable from the builder and pulled the trigger. As usual the bulk of the cost comes from the construction material, not the labour. Anything that’s imported gets a surcharge coming mostly from bribes and customs paid to get through the port of Abidjan. I’m not sure where the construction material comes from actually – some of it at least has to be locally produced in the Ivory Coast . Ok, that’s yet another thing to find out.
That’s one good thing with the real estate business and one reason why I chose it – that you don’t have to worry about the complex bureaucracy of getting things into the country through the airport or the port, meaning that basically a corrupt customs agent has the power of putting you out of business.
This can be seen in the prices of consumer electronics such cellphones, laptops,and tvs which cost about 20% more in Abidjan than in western Europe.
Anyhow, when the construction is finished in a month or so, I expect each of the six units to rent for an amount that would result in a gross return of over 35% assuming all six units will be let, and not including the cost of the land. Nevertheless it is quite a fantastic return.
The downsides that I can see are that in the case of a devaluation of the CFA Franc this property will offer no protection, as I don’t think the tenants ability to pay will go up in CFA terms. Also, due to the piece of land not being in a well-off area I expect more problems with tenants falling behind in rents. There’s already been problems with people putting trash in the empty piece of land, but that should go away once people start moving in.
On the other hand, I think this property is better protected from civil strife and socioeconic crisis, which casues europeans to leave the country, middle class ivorians to revert back to poverty and to some extent the super rich elite to get even further ahead. During the last major crisis in 2002/2003 Abidjan saw an influx of people fleeing wars in the rest of the country increasing the demand for cheap rented accomodation. I would much prefer to benefit from an increasing middle class, than from increased poverty, but investments in cheap accomodation are clearly good for the Ivory Coast:
for the tenants that get a better deal than they would have found if it wasn’t built
for the builders who get work,
and for the employee I will hire to manage it.
One thing I wonder is whether people that rent for 30 EUR a month can be reached via ads on the internet. They should be able to afford internet access at internet cafes, but there could be other hurdles such as literacy and lack of computer experience. Well, I’ll try to put an ad and see, but I’ll also look for tenants with more traditional word of mouth methods.
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.
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.
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.
The residential real estate market in sub-Saharan West Africa in general and in the Ivory Coast in particular, have some key features that are quite different from developed countries, namely:
Few mortgages – Most houses are bought outright with 100% equity. One model is that the buyer pays the developer in instalments over a multi-year period while the house is being built. Mortgages do exist but are rare. I checked with a local bank and the interest rates were in the 13%-15% range reflecting a high risk premium due to I’d say ultimately weak rule of law and possibly the probability of devaluation of the currency, the CFA Franc which has a fixed peg to the Euro.
High rental returns (on paper at least) – Gross annual rents are in the range of 10% – 15% of the purchase price. The worse the neighbourhood the higher the return it seems.
Low salaries – People can be employed for 100 Euro a month which is great for passive income, but maybe less great for the country. Nevertheless I don’t think one should be ashamed of investing in Africa and hiring people for 100 Euro a month – it really helps economic growth and doesn’t twist incentives as aid money has a tendency to do.
Tax – There is a tax on real estate ownership, and on lettings – all pedagogically explained in a video clip at website of the Ivorian Tax Authority (http://www.dgici.com/). It’s basically 4% of the gross annual market rent for owner occupied properties, and 15% of the gross annual rent for lettings. However, in practice, very few people pay this tax and enforcement is a bit tricky as people are likely to protest or even riot against any attempt to collect the tax. It is perceived – correctly I’d say – that very little of the tax money comes back in form services to the people and that the bulk of it will end up in the pockets of tax officers and politicians. I think most of the Ivory Coast’s tax revenue come from custom duties – just as was the case for Western countries up until the beginning of the 20th century (US tax revenues graph) – and I’d say a not insignificant part of the tax revenues and benefits from government privileges/monopolies go to the luxury consumption of an elite group of politicians, public officers and well connected businessmen.
Weak Rule of Law – There is a land registry that seems to work reasonably well. It might have happened, I have never heard of cases in which a property has been stolen by the fraudulent change of ownership in the land registry. However, I have heard of several cases where the same property has been sold to multiple buyers, and of terrains where the ownership I disputed. The problem is so bad that property ads for land sometimes include “non-disputed” as a selling point. In any case, in a dispute with a tenant, seller or developer, what the law says matters, but unfortunately bribes and political connections do also matter. Worse, if the local municipality decides to mess with you (charge arbitrary taxes, demand bribes, require permissions for this and that) there is not much one can do unless one has political connections. Hence business discussions/disputes – I have seen this a few times – can morph from discussing who is right to who knows the most powerful politician. I have known an Italian lady who ran a hotel and a restaurant on an island which is part of Senegal’s capital Dakar. She had two local authorities, each claiming she should pay tax to them and not to the other. She said that she in total paid more in bribes/tax than she would have paid tax in Italy and that difference between a bribe and tax was pretty nebulous. She had registered the restaurant business, but never managed to register the hotel business due to complex bureaucracy and seemingly never ending demands for bribes.
Hotel Ivory 