Rent Price, Building Numbers Go Symmetrically Up

Addis Abeba's constantly changing skyline gives testimony to the rapid growth of commercial buildings, in which rents rise constantly. What contributes to these rents, how businesses that operate in them are affected and the prices patrons shopping in these buildings pay, is what TESFA MOGESSIE, FORTUNE STAFF WRITER, explores in this piece.

Jemila Mohammed was busy packing her items, mainly accessories and the clothing of Muslim women, hijabs, on her display shelves on the morning of hours June 12, 2016. She, along with other shopkeepers, was busy setting up her display in an attractive manner she thought would grab the attention of her targets.

But for Jemila it is not an exciting day as she is preparing to say goodbye to her work place of the last three years. What is pushing her out is the unexpected increase in the rental price six months ago. For her four square metre store, she was asked to pay 7,000 Br, double of what she had paid for the past two and half years.

“This is a non-starter for me,” she said. “Everything remains constant including competitors who are operating in Arkebe suqs (a name used to refer to streetside shops made of corrugated metal sheets).

It was in one of these Arkebe suqs that Jemila started her business in the same vicinity of Merkato, Addis Ketema District. Then she used to pay 1,500 Br a month for rent. However, three years earlier, she and her close to 100 fellow shop owners, were informed by District authorities that the shops would be demolished as they were not part of the Master Plan’s designated purpose. That area was designated for buildings with a minimum of a seven stories.

The future is for multi-purpose buildings, Jemila assumed and decided to move into one of the big buildings – the Yirga Haile complex, rather close to the main road in the same area, Merkato. She took that as a leap to her business and therefore decided to pay the big jump in rent, which was more than double at the time.

The business survived but did not thrive as her competitors that still operated in the Arkebe suqs, which, in that area, are still waiting to be demolished.

What she could afford in the building, was 3,500 Br for her small shop on the third floor. At any lower level, the rent hiked accordingly. The third floor had its own costs. Though the elevator service was what held hope of bringing buyers without inconvenience, it was not fully functional.

“There are times that passed without a single buyer coming up on the floor, as there were days where the area was without power,” she said.

For management to provide a generator service that could carry the load of having all the elevators running was out of question.

It was not the bumpy road that pushed her to leave the building, but the price increase.

She, along with four other renters, has given the building manager notice to terminate their contracts within one month.

Building managers are not really concerned by tenants who decide to terminate their contracts as there are thousands of Arkebe suqs that are being demolished or whose operators have already been given notice.

It was a few months ago that the Addis Abeba City Administration made its policy to do away with these kinds of shops and transform the business owners into middle level small and microfinance groups.

Some demolition has taken place in several districts, mainly in Arada and Yeka. It is these businesses and others that can afford higher rents that the building managers anticipate will come soon.

And there are some others, like Semira Yusuf, a tenant on the ground floor of Yirga Haile, that can fend off the turmoil.

Semira used to pay double of what Jemila pays on the third floor. Her retail item was the mobile phone apparatuses, which required more capital for start-up and which saw better daily transactions.

Space above the fourth floor is all quiet, with no shops, but offices. The rent too, is relatively lower, ranging from 1,500 Br to 2,500 Br per square metre.

Unlike owners of the third-floor shops, Semira never misses a day without selling her pieces of apparatus.

With close to a 10,000 Br sales daily, she makes 12,500 Br -25,000 Br gross profit a month. A good half of her average income, though, goes to the landlord.

“Despite the huge rent price, moving out of this building and away from this area would be a high risk to the business,” she argues. “This is the niche market for the mobile apparatus in town.”

She refers not only to retail sales but a close circuit of wholesalers, maintenance shops and illegal imports too.

With regard to occupancy, of the whole ground floor, close to 20 shops sell mobile apparatuses and accessories.

Experts agree on the concept of niche market – a smaller curve in a bigger market space where a specific product is focused. It defines the product features aimed at satisfying specific market needs, as well as the price range, production and quality.

“It is right to follow the assumption that buyers prefer the convenience of finding wider options of the item that they are looking for, in hope of benefiting from the competition between many sellers on the same corner,” said Alazar Ahmed, a private marketing consultant, with over a decade experience in teaching and practice of market studies in the city.

Studies indicate that there is a danger in such thinking. Once there is a niche there is the danger of a saturated market, leading to increased competition that ends up reducing the slice of pie available to each competitor.

When such a phenomenon takes place it evolves into other spots , ‘undiscovered‘ spots in still profitable locations.

The scientific deduction explains the mushrooming of commercial buildings African Avenue in Bole District.

“This is the new spot, a major competing alternative, particularly for the well to do society,” the owner of one of the big multi-purpose complexes told Fortune.

It is one of the areas where the dominant assumption is that it is an area preferred by those who can afford.

Traders too follow the assumption of the owner and the scientific deduction. It is common to see shops – branches of shops in Merkato in the commercial buildings in Bole. They have the same products, same name, but relatively higher prices.

The average rent in these buildings is 1,800 Br.

These areas also generate significant sums in tax revenue.

Over the last nine months, the District’s Customs Revenue Bureau collected 249 million Br up by 16pc from the total sum recorded last year. Exactly, two years ago, the revenue from rent stood at only 193 million Br. The increment of revenue is partly due to the increasing price for rent in this area.

Merkato is the main business spot in Addis Ketema District and location of what is thought to be Africa’s largest outdoor market.

The volume Addis Ketema collects has also shown a slight increment. Over the last nine months, the District collected 15.6 million Br in revenue for rent tax from commercial buildings. Last year somewhat lower sum was 11.5 million Br.

The increase in rent tax revenue is indicative of the price as well as the number of commercial business centres. The minimum rent income subject to rent tax of 10pc is 1,801 Br and the ceiling is 60,000 Br on which a 35pc tax is levied.

This too contributes to the high rents.

“What determines rent price is not only dependent on supply and demand,” Elfinesh Temesegn, building manager of Addis Abeba Shopping Center S.C. explained. “Management costs such as tax, salary of personnel, bills, maintenance and initial investment all factor in determining the price.”

With ever improving road infrastructure, more people converge on shopping areas, building owers take advantage of increased sales to rents.

Piassa, the former city centre in Arada District, supports Elfinesh’s claim of changing dynamics. Piassa is the area that has seen little change in infrastructure. Here things are stable and rents too are much more stable than the Merkato and Bole areas.

In this District, rents tend to increase at a lower rate. The amount of tax collected from rent has therefore not shown significant increase, with growth of a marginal three per cent.

Despite the many factors colliding, and overlapping – leading to a complex formula of feasibility the number of multi-purpose commercial buildings continues to grow in an unprecedented manner.

In the past nine months only, the City Administration issued licences for the construction of 4,300 three-storey and above buildings with a height of seven metres. The number shows a 60pc increase compared to the same time last year.

On Sierra Leone Street, from Agonna Cinema to Mesqel Square extending on approximately four kilometres, a total of 21 buildings are available with six more under construction. Of the 21 that are already functional, around five of them have big, bold “to let” signs positioned so they can be seen from the main road.

The expert sees a volatile market calculation in this trend of investing in buildings.

“For the time being, owning a building has a dual advantage – the returns are good and buildings are considered permanent assets by commercial banks. They can easily pass to be collateral for other loans.” Alazar explained.

Such a scenario may not be the rule as the country’s economy, which is in transition, stabilises and diversifies with manufacturing taking the lead as planned, he added.

The Commercial Bank of Ethiopia (CBE) said in the last five years it has prioritised manufacturing, exports and agriculture. But it rarely provides loans for commercial buildings considering the profitability of the projects. Last year a mere nine per cent of the 75.4 billion Br disbursed loans by commercial banks were given for construction projects.

But the case is different for other banks. About 10pc – 15pc of the Bank of Abyissinia’s (BOA) loans were for commercial buildings. Building licences, Bills of Quantity, feasibility studies, investment licences, 30pc completion, and background of the customer are requirements that must be met by loan applicants.

“We tend to lower loans for such kinds of sector [construction of commercial buildings],” said a person from the Bank who requested that his name be withheld. “The long-term nature of such kinds of loans make it hard to reinvest the money,” he added.

Customers of Dashen Bank must complete 60pc of the building to get the loan.

According to the 2014/15 NBE report 13pc of four billion Br investment capital went to real estate, rents and business activities.

The country’s real estate development and renting activities grew by four per cent in 2014/15 compared to same period the previous year. The revenue collected from both real estate and rent tax which contributed 51.5 billion Br to the GDP, declined by half from 105 billion Br in 2012/13.


Published on Jun 21,2016 [ Vol 17 ,No 842]



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