Belated Real Estate Law Finally Appears Before Parliament

Draft sets 50-unit minimum for developers

Long overdue federal legislation to regulate the booming real estate industry has finally made it to Parliament this week, nearly a full decade after it was first proposed.

The ‘Real Estate and Development and Real Property Marketing and Valuation Proclamation’ proposes to put in place several new requirements that would significantly change how developers business.

If it is ratified, developers would need to erect and transfer a minimum of 50 housing units to be eligible for a real estate license. Developers looking to secure land from the government will be obliged to deliver between 500 and 5,000 units depending on demand. The draft stipulates that 40 percent of these units will have to be affordable housing.

Developers in Addis Ababa will need to commit to delivering no less than 5,000 units to receive land allocation from the government. In industrial parks and towns with substantial demand, the requirement is 1,000 units, while it is 500 elsewhere.

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Developers who are able to import construction materials through Franco Valuta and are able to bring in their own forex are also eligible for land allocation. The same goes for those with the capacity to set up a domestic construction materials manufacturing business.

The draft also includes a provision that would see the government, through the National Bank of Ethiopia (NBE), provide guarantees for developers looking to access credit from foreign financial institutions.

The bill proposes to put in place a range of measures to protect homebuyers in an industry often characterized as predatory, with several high-profile disputes between buyers and developers over things like ownership, unfinished units, and financial disagreements ending up in courts over the years.

Among the disputes brought about due to a lack of legislation is the Access Real Estate controversy, which ended badly for more than 2,700 buyers who had paid a reported 1.4 billion birr to the developer. Another notable incident involved Tsehay Real Estate, which saw heated disputes over the developer’s use of title deeds as collateral for bank credit without the consent of homebuyers.

If the draft is ratified, developers will be barred from transferring a unit that is less than 80 percent complete to a homebuyer. The developer will also be unable to hold the deed to a property.

The proclamation states that developers will be unable to register clients or collect advance payments before receiving a certificate of land ownership and a building permit. Local developers will be required to deposit advance payments collected from buyers into a closed bank account, access to which will be determined by future regulations, according to the draft.

Biruk Shimelis, deputy general manager of development at Flintstone Homes, a leading developer, has mixed views about the legislation.

“Generally speaking, the proclamation is good but there are a few issues,” he said.

Biruk observes the draft has been in the pipeline for over a decade and says he participated in several rounds of consultations with the experts who drew it up, but some of the recommendations from him and other developers have not made it into the final document.

“I wonder why the proclamation has been delayed for the last 10-plus years and why it was introduced to Parliament this week. We’ve been pleading with the government to introduce the legislation for over a decade and establish a regulatory body,” said Biruk.

Among his key criticisms is the clause dealing with transactions and advance payments.

“The draft recommends joint account management. This means when a real estate company raises money from homebuyers, the money will be put in a closed account. I don’t believe this should be part of the proclamation. If the government is going to be involved in managing these accounts, it will create a hectic bureaucracy,” said Biruk. “We know what happens when the government gets involved in a private company’s operations.”

He also sees the draft’s definition of real estate as problematic. The proclamation confers the  designation of ‘real estate firm’ to a company developing a housing project consisting of a minimum of 50 units. Biruk argues this is too high a bar for many in the industry.

“This is very difficult. There are several real estate companies developing less than 50 units. There are even some with just one-unit projects,” he said.

Biruk argues it would be unjust to revoke permits and licenses for not meeting the 50-unit minimum.

“This is a crucial part of the proclamation. This is a big gap,” he said.

The proclamation also aims at introducing a property valuation system, the absence of which has long haunted the market. Valuations will be conducted for property tax assessment, sale and purchase transactions, bank loan collateral arrangements, court disputes, inheritance and compensation claims, insurance purposes, rental services, and other related issues, according to the proclamation.

The draft proposes valuations will be conducted by professionals holding certification and licensing. To date, valuation has been carried out through estimation or referencing market price trends.

Biruk foresees professional valuation practices will be a net positive for the industry.

“The way the government conducts valuation now is very tricky. They say it is market estimation but there is no such thing. There is only professional valuation when it comes to the property market,” he said.

Biruk observes a common practice of government valuators referring to brokers and intermediaries when determining the value of a property.

“They also take the average price of selected real estate companies. Such estimation is being used for compensation payments for development projects, for tax purposes, and others. The valuation system currently being used by the government is not scientific,” he said.