Professional Documents
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Real Estate
Real Estate
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1. INTRODUCTION
A notable feature of Ethiopia's has land mass is the diversity of its natural resources. A
wide range of climates, permit the production of both temperature and tropical crops.
However, the immense natural potential the country is endowed with has not been fully
utilized.
Ethiopia is the roof of Africa, five, times the size of the United Kingdom , it is
strategically located with in the Horn of Africa. It cover a land area of over 1.14 million
squire kilometers encompassing hage erugged mountains and flat-topped plateau marked
by deep gorges and rivers. It has a population of about 70 million people speaking 80
different languages. Even though the national language is Amharic, other languages such
as Afan Oromo, TIgrigna, Somalign, English, Arabic language and the like are spoken
broadly and most of these languages are working and teaching languages in offices and
schools.
Ethiopia's climate varies from clod to temperate and from sub tropical to tropical.
Addis Ababa, with about 4 million people , is the capital of Ethiopia. It is the seat of the
African union (Au), the economic commission for Africa (ECA) and other international
institutions. Lying at an altitude of 2400 meters, the average temperature in Addis Ababa
is 16 0c
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1.1 The Government of Ethiopia
The new Democratic Government came into force in 1991. Soon after coming into
power, the new government adopted the market oriented Economic policy in 1992.
The Federal Democratic Republic of Ethiopia (FDRE) was set up under a new
constitution in 1995. The FDRE has a bicameral parliament, with the council of people's
Representative being the highest authority of the Federal Government, while the Federal
council represent the common interests of the nations, nationalities and peoples of the
state, members of both councils are democratically elected for five years.
A bout 15% of GDP comes from the Industrial sector supplying important consumer
goods to the domestic and international markets. The main manufactured export products
include textiles, food stuffs, tobacco, beverages, cement, leather and leather products,
wood metallic and non-metallic products, paper, plastic export products include leather
and leather products, canned and frozen meat, sugar and molasses oil cakes and
petroleum products.
Although less than one percent to GDP currently comes from the mining sector, there are
proven reserves of mineral such as gold, platinum, nickel, iron ore, coal, marble, potash,
copper, silica, limestone, diatomite ,etc, as well as oil and natural gas, awaiting
exploitation.
Since the new market oriented Economic policy adopted in 1992, a number of policy
measures and reforms have been undertaken to change the structure of the economy and
encourage rapid economic growth and development. The reforms include, among others,
the following short-term economic stabilization and structural adjustment measures:
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Promulgation of a liberalized investment law ( the promotion and both foreign
and local)
Issuance of a new labour law
Liberalization of foreign exchange regime
Ethiopia has enacted a liberal Investment code. This encourages both domestic and
foreign investors to play a prominent role in the economic development of the country.
The code provides a wide of incentives including tax holidays, duty exemptions, and free
remittance of founds and retention of foreign exchange earning.
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which invest in signatory countries. Ethiopia is at any time ready to conclude bilateral
Investment promotion and protection treaties with any country and is in fact currently
concluding such agreements with a number of developed countries.
Ethiopia has also signed the World Bank Treaty " The Convention on settlement of
Investment disputes between States and nationals of other States (ICSID)". Investors
are protected against expropriation and nationalization. Ethiopia has ratified the
convention establishing the multilateral Investment guaranteed Agency (MIGA) . It
has also signed bilateral investment promotion and protection agreements with a
number of OECD countries.
The Investment offices serves as a one -stop shop for foreign investors securing
investment certificates, company registration certificates, and operating licenses.
To encourage private investments and promote the inflow of foreign capital and
technology into Ethiopia, the following incentives are granted to investors(both
domestic and foreign) engaged in new enterprises and expansion in areas qualified for
investment incentives.
One hundred percent form the percent of import customs duties such as plant,
machinery, equipment, etc, plus spare parts worth up to 15% of the value of
the imported investment capital goods.
Investment capital goods imported may be transferred to another investor
enjoying similar privileges.
The duty drawback scheme applies to all taxes at the time of importation, and
those paid on local purchases.
Ethiopian products (except coffee) and services destined for export, are exempted from
the payment of any export of any export tax other taxes levied on export.
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In addition to the above the government has taken up the challenges of policy support and
hurdle facilitation in terms of the daily operational requirements of the sector. For
example the system to import chemicals and fertilizers is being made easier as products
approved in other East African countries will get fast truck approval for accrediation to
allow faster import. Exporters that do not import raw material for export i.e packaging
material will still benefit from voucher schemes that ease the burden of cash flow
constraints that exist with the duty drew back system. Ethiopia Airlines has been
encouraged to respond to these and other incentives of financing support from the
government bank's to come up with a " no offload policy" whilst remaining at
competitive rates.
It is widely known that the ancient country of Ethiopia underwent a period of turmoil,
economic stagnation and famine during the 1970s and 1980s. What is less well known is
that since the demise of the military dicatorship of Mengistu Haile-Mariam in 1991, a
new Ethiopia has emerged which is politically stable and making good economic
progress.
In just half a decade, it has established an impressive record of economic recovery and
growth in an extremely stable macro economic climate. In the five years to 1997, the
economy grew at an annual average rate of 6% inflation declined to an average rate of
less than 7% , having peaked at 20% in the early 1990s. The exchange rate , massively
devalued towards the end of 1992, has remained stable magnetizations of budgetary
deficit came to an end in the fiscal year 1994/95.
The achievements of this rapid economic turnaround rest on solid foundations of political
and economic reform, sound management of the economy and an ongoing partnership
with external donor and investors. Ethiopia has been at peace with itself since the
establishment of a federal system of government and parliamentary democracy.
Simultaneously, it has firmly moved from a command to a market economy.
Macro economic stability has been secured by careful sequencing of economic reforms,
coupled with tight fiscal and monetary policy. The progress on policy reform to date has
secured the foundations for future growth, creating a favorable climate for foreign and
Local investment in Ethiopia. This will be further enhanced by the consolidation of
continuous market reforms and investment code reforms.
In addition, its wealth of unique tourist sites, un propelled scenic beauty and the
authorities commitment to up grade infrastructure, all under lined the country’s
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determination and potential to work with private investors. A fuller appreciation of the
improved environment can be gained by looking at four factors.
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2. THE PROJECT UNDER STUDY
The pace of urbanization in Ethiopia shows a faster growth in the number of urban
inhabitants than the provision of basic services and facilities to the dwellers. The rapid
growth of population is expected to deepen the crisis and is challenging various
institutions in the social, economic and political sphere. Even at present pace of
urbanization, the crisis is highly visible in most of the cities and towns, of the country. In
most of the cities and towns, a large proportion of the population lives and also conduct
business in squalid urban slums with few or non essential infrastructures and services, be
it in terms of housing, education, health , water, sanitation, transport or catering service.
The purpose of this document is not however to investigate the social and economic
problems of urban centers in the country. It is rather to provide background in in
formation for an investment decision in real estate develpment project in Oromia
Regional State, West shewa Zone, Welmera Wereda at Adjacent of Tatek Industrial zone
by macro General Contractor.
Basically urban housing service in Ethiopia is provided in two main forms. One is own
house construction and the other is rental houses. Rental houses have been provided from
three sources. Municipalities, Agency for Administration of Rental houses and
individuals. Those under municipalities are whose monthly rent is below Birr 100 and are
managed by kebele Administrations. These are mostly for residential purposes. Rental
houses under the Agency, on the other hand, are those rented for Birr 100 and above per
month and the Agency provides houses both for residential and business functions,
individually owned rental houses, which is estimated to account for more than half of the
supply of rental house are provided for all functions at higher and market determined
prices than government houses rented at prices set by the suppliers.
The supply of rental houses from the government is far from adequate to satisfy the
demand, particularly, the kebele administered rental houses supply is fixed. The
remaining supply from the Agency covers only a fraction of the demand with all the
difficulties of getting them. Therefore, if the housing supply condition of the country is
to improve in any way, the greatest hope lies in the individuals /private sector
construction of houses and private sector provision of rental houses.
Not all urban dwellers are economically capable of building their own houses or they
may not want to build houses for the reason that they stay for certain duration only.
Hence, the demand for housing by resident, business persons, government residence,
shops, stores, offices, etc had to be met by the provision from the private sector.
Thus , given the limited supply of rental houses from the government, the increasing
devolution and decentralization of administrative power to regional and local
governments that takes down all the necessary initiations to regional and local urban
centers and the merearing private business activities following the new economic policy
and other private sector encouraging policy measures, there will be increasing pressure
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on the demand for housing in major towns of the country like Addis Ababa and
surroundings.
On the basis of financial projections made the project is found to be viable financially.
The demand for rental building is rated as highly promising. The location of the project is
also good for the proposed purpose.
The project area Tatek (Siga meda) is located at about 15 kms from the Capital Addis
Ababa or at about 7 kms from Ring road(at Kolfe) on the main Asphalt road which is
under construction to connect Addis Ababa to Western parts of the country.
3.2 INFRASTRUCTURE
A) ROAD
The main Asphalt road which is under construction passes through the project site. It
connects Addis Ababa(the ring road at Kolfe) and other Western parts of the country .
Access road in the town ship shall be built by the company own budget.
B) ELECTRICITY
Electric power is also passes through the site. It could be secured from EECO with in
short period.
C) TELEPHONE
The telephone line will be connected to each houses on agreement with Ethiopian
Telecommunication corporation.
D) WATER SUPPLY
The area is at near distance to Addis Ababa, Tatek Industrial Zone and same other towns
such as Burayu. therefore , water can be supplied from these area to the site.
4. THE PROJECT
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4.1 Project Description
The project under study planned to construct Residential Houses for different income
groups. The houses to be constructed of conventional materials. All walls to be brick and
roofs to be of corrugated iron even though redesigned based on clients interest and other
factors such as existence of construction materials, demand and benefit obtained from the
project.
The interior of the houses will consists of one or two or three or even more bed rooms
(after assessing clients interest and purchasing power), a bath room with toilet and
shower, kitchen-longe open plan with wash through, steel windows and door frames, and
the like, Houses are built in such a way they can be extended at any stage and up graded
internally. All together the project under study planned to construct 400 houses of
different design and standard.
To develop 400 houses with necessary community facilities such as shopping center,
schools, parking area , Office Buildings, bar and restaurant with out-door services,
apartment with adequate parking area including green area and the like, the project
require developable land of 100ha.
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Table 1 Land Use plan of the project
5. MARKET
5.1 MARKET ASSESSMENT
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The natural growth rate coupled with rural to urban migration has escalated the housing
problem in most of the towns.
Studies connected pertaining to urban housing problem have emphasized on the gap
between the housing stock and housing requirement. Some even have concluded that the
requirement is the demand. Such an approach is useful and very essenital for non-profit
making like the central government, local governments, municipalities, non-
governmental organization and international development agencies dealing with the
alleviation of urban poverty.
The overcrowding of major towns of like Addis Ababa and that fact the majority of urban
population live inslums manifests the housing problem. However, it is important to
different or need from the demand for residential requirement on commercial building.
Demand always implies price and when one talks about the demand for housing be it
residential or commercial it automatically means at a given price. The price of a building
among other things, is determined by the cost of acquiring the land, the cost of building
materials transportation cost, labour cost, and the cost incurred to get professional
services like engineering and architectural design costs and constancy fees. For real estate
developers, like Macro General contractors whose main objectives is making profit, it
might be helpful to assess the housing requirement before making investment decision,
for it might be correlated with the demand for housing the outcome of the investment
could be financial bankruptcy. Land is the most important component of housing
development. In pre-1975 Ethiopia significant proportion of the urban land was in the
hands of private individuals. The private sector was the principal actor in the
construction. However, the activities of the private sectors at this time were ill-
coordinated and influenced by indivual predisposition rather than the vision of
consciously targeted personal and social promotion. The government which ought to have
taken corrective measures were just indifferent.
The 1975 nationalization of urban land and extra houses proclamation No 45/1975 made
renting by the public sector and owner occupation the only two tenure systems. During
the few years following the proclamation access to urban land for house construction had
improved , self-help and housing cooperatives had flourished and considerable number of
urban dwellers also become beneficiary of a new credit policy designed to this end.
However, the proclamation outlawed all private investors and property developers
oriented to profit making.
This denied the housing sector investment that could increase the housing stock and
improve its quality. Individuals were not even allowed to rent rooms or partitions of their
own premises and the government was the sole palyer in the housing market.
For a very long period of time the housing policy was not in favor of resolving the
housing problem in all urban centers in Ethiopia. Instead it accentuated the problem by
further widening the gap between the housing need or requirement and housing supply.
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In 1993 the Ministry of works and urban Development had conducted a study pertaining
to the promotion of housing estate venture and accordingly, aside from the deficiency of
the housing policy the major problems hindering urban development are:
The poverty of the Majority of the urban population and lack of other sources of finance
to alleviate the housing problem.
The shortage and the high cost of both imported and locally produced construction
materials.
The insignificant of investment in the housing sector and in fact its declining trend from
time to time. From 1965-1973 the national investment for urban housing development
was only 13 percent of the investment in the construction sector. and this amounted to 8
percent of the total gross fixed capital formation. For the period 1974-1980 the
investment in the housing sector was only 10 percent of the investment in the
construction sector, 4 percent of the total gross fixed capital formation and only 0.4
percent of the gross domestic product.
Lack of clearly defined housing development policy and programs and the difficulty of
acquiring urban land.
In general the housing stock in major towns like Addis Ababa is very poor in quantity
and quality mainly due to inadequate housing policy, very low fixed capital formation
which implies poor standard of living of the majority of its dwellers high cost of building
materials and the difficulty of acquiring land.
The kind of housing dominantly required in major town of Ethiopia according to the
study conducted by the Ministry of work and urban development is predominantly low
cost houses, for simple reason that the great majority of urban dwellers are the low
income category.
Still housing is one of the basic needs and one of the most essential of human beings. The
quality of house would , therefore greatly influences our mental health. The consumption
of this product /service has direct link with size and growth rate of Addis Ababa and
surrounding population and their purchasing power, prevailing peace and stability in the
city as well as the change in the life style of the growing population.
5.2Marketing strategy
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As indicated earlier although the availability of market can not be a problem,
formulating appropriate marketing strategy will enable the promoter to establish its
image and with stand competition that may be feced in the future. Hence, the
expected comptetion from the existing enterprise and those that may emerge in the
future are critically analyzed and appropriate marketing mechanisms are also
indicated as discussed below.
As per the estimation of exports in the fields of Real Estate Development, the existing
enterprise couldn’t able to satisfy the demand for the out put. The enterprise are
expected to significantly increase their capacity to cover the existing demand but not
satisfy at all.
Almost all of the existing enterprise especially kebele house are old that have mostly
completed their service life under normal depreciation rate. However, this old fleets
are still in operation and expected to continue through maintenance.
Hence considering the quality, life span and the management efficiency of the
existing enterprises as well as the existence of huge unsatisfied demand, the expected
competition can’t be stiff. However, if more and more investors are attracted to the
sector, the competition could take a leap. Hence devising appropriate marketing
strategy based on situational analysis becomes takes that can not be over looked.
5.2.2 Advertisement
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publication, Internet and other means for diaspora living indifferent parts of the
world.
In this regard, the owner should learn from the drawbacks of the existing enterprise.
Developing better fleets, adherence to schedule, maintaining clients interest, etc are
absolutely essential to provide competitive service.
Follow-up should be made to check and changes that may be introduced by other
firms engaged in similar business so as to take timely action and avert the
repercussion of their action.
The project is to be managed and supervised by the manager of the company , who have
long year experience in different business activities in general, and in constriction works
in particular. The structure of the organization consists of three developments headed by
a general manager. The main departments are:
- Technical
- Administrative and Finance
- Maintenance and workshop
The Administration and Finance Department will be responsible for personnel and
Financial management.
The technical Department will be responsible for the technical activities and other related
activities of the project.
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The maintenance and work shop department will give maintenance services for the
projects machinery, equipments, vehicles and buildings.
In general, the establishment of the envisaged project will create permanent job
opportunity for about 60 employee.
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7. FINANCIAL ANALYSIS
7.1 CAPITAL EXPENDITURE
These capital expenditures are constituted of fixed investment costs and initial
working capital.
Fixed Investment costs are expenditures on the required fixed assets. The major
component of fixed costs are constituted of expenditures on machinery and
equipment. The rest will go to construction of civil works and the acquisition of
office facilities. According to estimates made by this project, the total fixed cost
will be Bir. 65,470,000.00
Working capital is part of annual operating costs and is required to make the
project operational. Except for some operational costs whose yearly expense were
taken as they are, some limited months expanses were taken to forecast the
working capital requirement of the project. According to the forecast made in
detail, the amount of initial working capital is found to be 1,497,000 Birr.
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The above forecasted project capital is planned to be raised from two sources.
These two sources are the promoter's equity contribution and loans from one of
local banks. The promoter of the project plans to raise 30% of the total capital
while the remaining 70% is assumed to be obtained from one of the local banks.
In summary, the promoter's contribution and bank loan will be :
1. Equity capital = 20,090,000.00 Birr
2. Bank Loan = 46,877,000.00 Birr
Total = 66,967,000.00 Birr
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7.6 PROJECT INCOME
The project earns its revenue by selling the proposed product (Garment products).
To be competitive in the market, the selling price of the project's out puts are
determined in the such a way that it does not impose higher prices on clients
consumers. Accordingly, the project expects a total revenue of 80,000,000.00 Birr
per year when it start operate at full capacity.
Here, project revenue and production costs(operating costs, depreciation costs and
Bank interest) are listed and compared to see whether the project generates profit
or lose. According to the forecasted income statement table, the project is found
profitable throughout its life. The amount of the net profit to generated by the
project varies from 17,062,000.00 Birr at the end of the first year to
32,132,000.00 Birr at the end of the tenth year. (net profit decrease at 10 th year
because of profit tax payment (40%) from year 6th on words)
7.7.2 CASH FLOW ANALYSIS
The liquidity position of the project can be seen from the project cash flow
statement. According to this projection, the project will have a healthy financial
position to repay all its debts. This is because the analysis shows that the project
will have positive cash in flow throughout the anticipated life. The amount of this
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positive cash inflow is estimated to be 10,812,000 Birr at the end of the first year
and will reach 32,579,000 Birr at the end of the tenth year. When seen from its
cumulative sum the project is found to yield a cash balance of 237,105,000 Birr at
the end of 105h year.
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Table 3 Fixed Investment of the project
Quanti Total Cost
No Description Unit Unit cost
ty (000Br)
I Building and civil works
1 Residential house constriction (for sale) No 400 150,000 60,000,000
2 Other facilities construction No 20 50,000 1,000,000
S. Total - - - 61,000,000
II Machinery and Equipments
1 Generator No 2 60,000 120,000
2 Pump “ 2 30,000 60,000
3 Fuel Tanker " 4 10,000 40,000
4 Water Tanker “ 4 10,000 40,000
5 Work shop equipment Set - - 50,000
6 Mixer No 3 150,000 450,000
7 Dump Truck " 3 600,000 1,800,000
8 Loader " 2 500,000 1,000,0000
9 Pick -up (4WD) " 2 180,000 360,000
10 Service Bus " 2 200,000 400,000
S.Total 4,320,000
III Office Equipments Set - - 150,000
G.Total (I-III) 65,470,000
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Table 3: Summary of operating costs (000Br)
No Description Year
1 2 3 4 5
Capacity 60% 70% 80% 90% 100%
1 Salary and wage 239 279 318 358 398
2 Fuel, oil and lubricant(for 35 41 47 53 59
Administrative work)
3 Other operating cost 632 738 843 949 1,054
4 Constriction materials 40% of 14,640 17,080 19,520 21,960 24,400
constriction costs
Total 15,600 18,200 20,800 23,400 26,000
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Table 4: Working capital Determination (000Br)
No Description Year
Duration 1 2 3 4 5-10
1 Salary and wage 6months 40 46 53 59 66
2 Fuel, oil and lubricant (for 3 months 9 11 12 14 15
Administrative work)
3 Other operating cost 4months 211 246 281 316 351
4 Constriction materials 40% 12 months 1220 1423 1626 1830 2033
of constriction costs
Total 1497 1726 1972 2219 2465
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No Position Quantity salary salary
1 Project manager 1 3,000 36,000
2 Secretary 1 1,000 12,000
3 Technical Department Head 1 2,500 30,000
4 Administrative and finance head 1 2,000 24,000
5 Maintenance and workshop Head 1 2,000 24,000
6 Accountant 1 1,500 18,000
7 Purchaser 1 500 6,000
8 Store keeper 2 500 12,000
9 Cashier 1 500 6,000
10 Drivers 12 400 57,600
11 Operators 10 400 48,000
12 Mechanic 2 1000 24,000
13 Electrician 2 1000 24,000
14 Carpenter 2 1000 24,000
15 Cleaner 6 200 14,400
16 Guards 6 200 14,400
17 Other workers 10 200 24,000
Total 60 33,200 398,400
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Total 447
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Table 9 Assumptions for some operating costs of the Project (000 Br)
No Description Annual Cost Assumptions Used
(000 Br)
1 Property insurance 45 1 % of machinery and equipment
Cost
2 Repair and maintenance 45 1 % of machinery and equipment
Cost
3 Land Lease 700 1000 ha.x7000 Br/ha.
4 Working clothes 40 10% of annual salary
5 Travel and expenses 40 10% of annual salary
6 Medical expense 40 10% of annual salary
7 Telephone, Postage and Fax 24 2000 Br/month
8 Utilities (water and Electricity) 60 5000 Br/month
9 Audit, legal and license fee 12 1,000 Br/month
10 Advertisement expense 20 20,000 Br/year
11 Stationery 6 500 Br/month
12 Miscellaneous expense 24 2,000 Br/month
Total Cost 1,054
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Table 10 Planned out put/service of the project
No Description Unit Project Years
1 2 3 4 5-10
1 Residential houses No 240 280 320 360 400
Total 240 280 320 360 400
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Table 13: Loan Repayment schedules (‘000 Br)
Year ending
Years Disbursement Principal balance Interest rate
Repayment
0 46,877 - 46,877
1 6697 40,180 3516
2 6697 33,484 3014
3 6697 26,786 2511
4 6697 20,089 2009
5 6697 13,392 1507
6 6697 6,695 1004
7 6695 - 502
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Table 14: Income statement of the project (000 Br)
Y e a r
Description 1 2 3 4 5 6 7 8-10
Project Revenue 48,000 56,000 64,000 72,000 80,000 80,000 80,000 80,000
Less Operating Cost 15,600 18,200 20,800 23,400 26,000 26,000 26,000 26,000
Operating profit 32,400 37,800 43,200 48,600 54,000 54,000 54,000 54,000
Less Depreciation 447 447 447 447 447 447 447 447
Less Bank interest 3,516 3014 2,511 2,009 1,507 1,004 502 -
Profit before tax 28,437 34,339 40,242 46,144 52,046 52,549 53,051 53,553
Less: income tax 40% 11,375 13,736 16,097 18,458 20,818 21,020 21,220 21,421
Net Profit 17,062 20,603 24,145 27,686 31,228 31,529 31,831 32,132
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Table 15 Cash flow statement of the project (000 Birr)
No Description YEARS
0 1 2 3 4 5 6 7 8 9 10
1 Cash inflow
promoter's contribution 20090
Bank Loan 46877
Net profit 17062 20603 24145 27686 31228 31529 31831 32132 32132 32132
Depreciation - 447 447 447 447 447 447 447 447 447 447
Total inflow 66967 17,509 21050 24592 28133 31675 31976 32278 32579 32579 32579
2 Cash out flow
Fixed investment 65470
Working capital 1497
Increase in W.C - 229 246 247 246
Loan Repayment 6697 6697 6697 6697 6697 6697 6697
Total out flow 66967 6697 6926 6943 6944 6943 6697 6695
Net inflow 10812 14124 17649 21189 24732 25279 25583 32579 32579 32579
Cumulative Balance 10812 24936 42585 63774 88506 113785 139368 171947 204526 237105
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AND TRADING PLC
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