When driving around parts of Accra, casual observation of multiple “To let” or “For sale” signs could easily be interpreted as an oversupply of housing stock or an impending property bubble in the Accra real estate market. Sometimes our general observations seem to counter what we usually read in the papers regarding a 1.7m housing deficit and growing homelessness. There seems to be a co-existence of oversupply with undersupply in Accra’s housing market. Whilst our heading may seem strange and provocative, especially coming from a developer, we hope that `some of our insights will trigger previous personal experiences and observations which help our reader to answer the question posed above.
A housing bubble can be defined by increasing property prices fuelled by demand, speculation and exuberance creating a cycle where more speculators enter the market, further driving demand. At some point, demand decreases or stagnates at the same time supply increases, resulting in a sharp drop in prices — and the bubble bursts. From my basic understanding of historical property market crashes, speculation is often always supported by leverage (debt and mortgages). These have been the core factors driving international property price crashes. Real estate bubbles are invariably followed by severe price decreases (also known as a house price crash) that can result in many owners holding mortgages that exceed the value of their homes. In the USA for example, over 11.1 million residential properties, or 23.1% of all U.S. homes, were in negative equity at Dec. 31, 2010. I believe public discourse around a pending real estate market crash in Accra stems from the application of some of these historical financial market crashes in more developed markets. Whilst the Ghana property market has seen some speculation in land and property, the lack of leveraged financing and institutional investors have not created the same adjustment mechanisms one would find in more sophisticated markets.
Firstly, in the segment we operate in, (middle to high income or $75,000 to $250,000 price bracket), we find that mortgage buyers constitute less than 10% of home buyers. The point here is that debt has been key in fuelling property price bubbles across the world. In Ghana, mortgages are growing from a very low base and constitute a small proportion of buyers. In addition, Ghanaians seem to more averse to sell anything property culturally: the same forces that push people to sell in Europe or America are not always at play in our local market. The lack of mortgage buyer’s means many landlords are sitting on pure equity on their properties. In the absence of the financial pressure of mortgage interest and bailiffs, less savvy Ghanaian landlords would rather leave properties empty. It usually takes force majeure or sudden life events to persuade landlords to reduce prices to get a quick sale. As developers, we believe these factors have made certain real estate investors not as disciplined as they would typically be in other markets. Real estate should be based on fundaments like rental yield and the life cycle of the properties.
Conversations on Ghana real estate are all frequently centred on questions about the lack of demand. We often forget how difficult it actually is to bring supply onto the market. Starting fromland issues, bureaucracy at the ports to a lack of construction financing, there are multiple factors which actually make it difficult to bring supply onto the market. Ghanaians can all attest to the slow pace of construction and delays associated with some local real estate projects.
When looking at the supply side, we also need to ask, are we actually building the right kind of supply. Outside of a few public sector initiatives post Ghana’s Independence like State Housing Corporation and TDC Housing projects, the Ghana real estate market is less than 20 years old. Early small scale private developers who built apartments in central parts of Accra from the early 2000’s, mainly built large but not always functional 3 bedroom apartments. These same apartments now constitute a disproportionally large share of the accommodation stock in central Accra.
They are also in direct competition with townhouses for tenants and often lose out. To compound the problem, these developments have not always been maintained to a level able to compete with new stock and landlords have sometimes failed to invest in interior design and furniture to attract tenants. The point here is that paradoxically we seem to have an oversupply of older and not always well maintained apartments and an undersupply of functional and modern apartments that are within the budget/price range of the ever changing pool of potential renters. The new pool of renters now includes returnees seeking central locations at decent price points or expats.
We are increasingly seeing a growing number of mid-level managers who need a lockup- and-go as they are usually travelling across West Africa in search of other opportunities and using Ghana as their base. The oversupply in certain segments seems to be driven by a mismatch between what the pool of prospective home buyers and tenants want versus what a number of private developers are building.
I would also like to see conversations around supply delving also into issues on quality. By quality I mean best practice or international level quality. If we asked the question, “do you believe there is an oversupply of international quality housing in Ghana?” the answer would invariably be a “No”. The oversupply debate could quickly turn into a severe shortage if we went further and asked about the supply of quality yet “reasonably priced” and value for money accommodation in Accra.
The juxtaposition of empty developments together with high occupancy developments confirms our view that the market is highly heterogeneous and should not be painted with the same brush. Despite the challenging economic environment in 2016, our most recent development, Beaufort Ridge, was still able to achieve over 90% occupancy levels and double digit rental yields for homeowners. This demonstrates that there is gradual flight to quality in a market that has an ever increasing mix of accommodation types and standards.
In light of the question posed above, whilst opportunities may exist for investors to identify distressed real estate assets, there is unlikely to be a general correction in the wider market due to the issues highlighted above. The lack of debt in our market means most market corrections will be via rent or occupancy levels rather than through house prices. Nevertheless, savvy investors focusing on return on investment should invest in property that best matches the needs of the new pool of prospective tenants and in property stock that generates the best yield over the longest property cycle.