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Building on sand?

Despite oil revenues, Ghana's economy is in dire straits but you would not guess this from the volume of construction going on in the major cities. Developers are pumping in vast sums into prestige projects but who will occupy all the new buildings now going up? Eric Kwame Amesimeku writes that those who need housing cannot afford it and those who can are too few in number to support the building boom.

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"If there is one thing I've learnt from my 40 years working in the city, it is that house prices can never keep rising," an investment banker character in popular British TV satirical show, Bremner, Bird and Fortune says with heavy irony. "Except this time, we thought it would," comes the punch line shortly afterwards. Though that particular tongue in cheek observation was in relation to the sub-prime antics that ultimately led to the financial catastrophe of 2008, he may well have been commenting about the Ghanaian housing market.

As a newish member of the lower-middle-income class, buoyed largely by activities in the extractive and, to a lesser extent, financial and other services, Ghana is a classic example of that oft-quoted phenomenon --the paradox of plenty.

While many speak of a rising middle class, the truth is that it is a narrow demographic. While ostentatious from their consumption habits, their numbers --or the lack of it--limit their power. So while the raw data may give an impression of growing wealth, in reality it is concentrated in a few hands. Not all of which are indigenous hands.

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For developers in Ghana's frenetic real estate sector, much weight has been given to the raw data. In the wake of the country's discovery of oil in commercial quantities, much was made of the coming boom. Wealth was expected to be made and displayed by indigenes and expatriates alike. Naturally, investment flowed into projects to meet the demands of the newly minted. They would need places of leisure, places to conduct their high-value businesses from and of course, places of residence to match their new affluence.

In fact, Ghana's real estate sector's affinity to high-end projects predates its status as an oil exporter. In a sector in which the public has all but deserted its role, the private sector has found itself nearly completely in charge. While this role can be lucrative, it is not without its challenges. Land is expensive and fraught with acquisition complications.

Finance is even more difficult to obtain. When it is available, interest is high and patience is low. For many developers, thus, high-end projects are the best way to justify the costs and recoup their monies quickly enough to pay back financiers and invest in new projects. To such developers, the promise of new, oil-backed wealth must have seemed a god-send.

Another group of people that was excited by the coming joys was the landowners. In Accra, the capital, players in the sector spoke of 1:1--a million dollars for an acre of land in the prime areas. While more cautious minds might find this extraordinarily high for a developing country, developers, some backed and/led by foreign interests from countries like Nigeria, felt that it was worth it to get in ahead of others.

In Takoradi, capital of the Western Region on the shores of which the oil discovery had been made, landlords were also taking note. Long-term tenants suddenly found themselves unable to get renewal on their leases; even institutional tenants were sent packing as landlords readied themselves--and their properties --for more liquid suitors.

The good times were here. And luckily for landlords, they have lasted, more or less.

Excessively optimistic?

Even though the market is thought to have slowed post-2008, prices have largely held. Landlords have not had to take much of a cut and investors and developers have continued to pursue high-end projects. Kwaa-si Djin, a lawyer in Accra who often represents investors in land purchases, thinks that the market is only responding to the forces. "Interest in land, especially in the prime areas in Accra, is still quite high," he says.

But not everyone is enthused.

Michael Agyekum, a sales and letting agent also in Accra, is concerned that developers may be overestimating the scale of demand. "Demand is not what it used to be. Many of the high-end properties have less than optimum occupancy. There are too many providers crammed into that space, attempting to provide for, if you really think about it, a very small group of potential buyers," he says.

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Not that those developers have noticed. Building in Accra is robust and incessant. From residential, leisure, business to mixed-use projects, no part of the city is without cranes and earth-moving equipment. Given that not a day goes by without a gloomy projection on the Ghanaian economy, it is not easy to decipher the source of confidence in the sector. "Many are looking to the long term. Developers take the view that the value of the projects will appreciate and the economy will somehow make a turnaround and catch up," Agyekum thinks.

But that could be an optimistic projection. Without a robust mortgage market, the Ghanaian housing market is especially vulnerable. While some banks now offer loans for buying and building, most people still fund house purchases out of their range. Indeed, this leaves expatriates and Ghanaian diasporeans over-represented among buyers. And there are only so many of them.

The upshot, however, is that, should it come apart, it is likely to be only the investors and developers who are left exposed. Damage to the financial sector would be contained. Confidence might seep away from the economy generally, but is not likely to leave lasting damage.

Djin thinks that the market will eventually correct itself. "If the current prices are not a true reflection of the value of these properties, they can only go on for so long. Otherwise, it might be that those concerns are so much worry over nothing." Agyekem is less optimistic about the situation. "I'd give it no more than five years before everyone realises what is going on. The prices are not realistic. They will have to come down."

The overconfidence in the market has seen some major marquee projects. Some developers have taken on the task of building entire cities, raising the unwelcome prospects of ghost cities that have plagued some of the Asian economies. Big-ticket investments of that nature are the next frontier and new money is flowing that way, often backed by foreign interests. It is unclear what the motive is. Even gated communities in the city are yet to reach full occupancy. Whatever it is, the indications are that exposure could be spreading.

Given that a price correction might not have sudden and catastrophic effect, should government be concerned?

Many think not. After all, these are investors who have chosen to pump money on a hunch and would, should it go wrong, only be reaping the whirlwind they sowed. That is, however, a short-sighted opinion. Misplaced investment should be of great concern to any policy maker, especially in a country that requires so much of it.

Redirect investment flow

Ghana's huge housing deficit is concentrated at the lower end of the market. The challenge for policy makers would be to move and incentivise some of the investment into that end of the market. By reforming its land tenure system, government could also reduce some of the risk in the market, thereby reducing prices and, in turn, strain on investors and developers.

Of course, all this could be a bit alarmist. Even though the Jubilee Fields have not yielded the boom in prosperity that many predicted, there are prospects for more discoveries both on and offshore; some new mineral discovery or even an explosion in services could fuel real demand for housing.

The developers may well find buyers coming in even larger numbers after they have built the houses. It always helps, however, to prepare for worse than you hope for. As that investment banker from Bremner, Bird and Fortune will probably tell you, "If there is one thing that you should always remember about property prices ..."
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Title Annotation:COUNTRYFILE: Ghana
Author:Amesimeku, Eric Kwame
Publication:African Business
Geographic Code:6GHAN
Date:Jul 1, 2014
Words:1362
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