Inside the Booming Real Estate in Mogadishu: things you should know?

Although Mogadishu has experienced a lot of tragedies and destructions, in recent years there has been an escalation in Real estate construction and development which has encouraged real estate investments. A massive real estate development is changing the landscape on the outskirts of Mogadishu. This project encourages the Somali diaspora to invest in the country. Real estate has always been an important part of a typical investment portfolio (Galaty, F.W; et. al.; 2015). Specifically, residential real estate has been considered for the world’s best investment opportunities, it plays a key role for economic growth and accelerates urbanization. Therefore, this paper demonstrates the outcomes that will have this growth on real estate buildings by addressing both progressive and regressive aspects. The study will also investigate the residential apartment’s price fairness.

Economic Growth 

A real estate market can have a major impact on the economy and the collapse of the real estate market is a decisive factor for many economic crises (Li & Chen, 2015; Zhao, Zhan, Jiang, & Pan, 2017). The housing market is an important part of the real estate market; some previous studies have investigated the relationship between the volatility of the economy and the real estate market, while many other studies have explored this relationship with the housing market (representing the real estate market). Evidence shows that from the beginning of the 17th century to the 19th century, there were 42 major financial crises in the world, of which 21 crises related to the uncertainty of the housing market; this proves that there is a strong correlation between the housing market and macroeconomic indicators (Zhang, Li, Hui, & Li, 2016).

Real estate industry will find itself at the center of rapid economic and social change which is transforming the built environment and has increasingly been considered a contributor to economic growth. It finds that investment in housing affects economic development through its impact on employment, savings, total investment and labor productivity.

In reality, economic growth is an indicator that reflects the state of the economy, and it can affect the value of wealth in general (Bouchouicha & Ftiti, 2012). As the economy improves, national incomes improve, and the demand for real estate in the economy increases, which has a positive impact on the real estate market.

It is important to note and know the relationship between real estate and the economy. In developing countries, ownership of land and real estate is more concentrated than ownership of other assets and growth in the real estate sector share in the national income has important implications for the overall concentration of wealth, though real estate values might increase the wealth gap between homeowners and renters.

Real estate receives increasing attention as an asset class. For investors that can cope with illiquidity, global real estate still offers the desired investment characteristics: a steady, long-term income, the potential for capital appreciation, and significant diversification benefits. This has especially been the case in most Asian countries where structural, long-term, and sustainable economic growth has been persistent over the recent years. In fact, as GDP growth is the main driver of real estate prices and rents, real estate investments provide a direct way to participate in the strong growth of these economies.

Investment Opportunities

Real estate is one of the most immobile, highly profitable and secure forms of investment, The market demand for real estate in the city is very high as Locals, diaspora returnees and those still abroad are increasingly turning to real estate, in their quest for a more stable and financially secure life, a booming real estate market and a friendly market for investors are some of the reasons why Somalia has become a top real estate investment destination.

There are different options for investing in real estate in Somalia. They include Buy-to-Let properties, residential and retail property development, REITs, house flipping, buying and selling houses, land flipping,

In Somalia, there are several opportunities for investing in real estate. Buy-to-Let properties, residential and retail property development, REITs, home flipping, buying and selling houses, and land flipping are among them.

Buy-to-Let/Rent Properties

As the name suggests, is when a property specifically for the purpose of rent or lease lets it out and charges rental payments, in order to make a profit, which should be higher than the cost of maintenance to pay the monthly mortgage payment (if applicable). These types of properties are usually managed by facility managers who take care of marketing, maintenance and sales. This type of property investment exemplifies the phrase, let your money work for you.

Buying and Selling (House Flipping)

This is straightforward. Investors buy properties at a lower cost, renovate them and resell them at a higher cost to cover for the new upgrades. Renovating houses to increase their value is called flipping. So essentially, investors flip houses to increase their value and make a profit after selling them.

 There are some challenges facing the investors that need to be addressed in order to improve them such as: Land Acquisition Problems, lack of Appropriate Rule, Unlicensed Evaluation Plans, Inadequate housing investment, Lack of adequate and well-trained staff to manage the Department.

Urbanization 

The increase in residential real estate contributes to the city’s overpopulation since people are moving from rural areas to the extent of urban areas which results in growth in size of urban population. This subsidizes social dynamics of urban growth and is impacted by profound systemic challenges, including: Unstable security, mismatch of population and employment opportunities, environmental degradation, air pollution and hilarious traffic congestion. 

The Unstable security cases that may arise are violent crimes, gang activities, illicit trafficking, links to transnational organized criminal syndicates, and political instability. The latest cases were the devastating cases of mobile phones being robbed by robbers. These cases and other similar ones are the most common cases in the city that can be caused by congestion and over population in the city. 

The stretch on urban opportunities due to heavy incursion of job seekers, mostly youth, renders many of them unemployed. Unemployment is very high in all urban areas, and the main reason is because of the high entry of migrants from the rural areas to urban areas which have limited job opportunities and few other international migrants from other countries that come to look for jobs. In recent days, there has been an increase in the number of foreign workers in the city, regardless of whether they are unskilled or skilled workers. 

Environmental Damages

The change of land surface to urban become one of the most irreversible human impacts on the global biosphere, people who live in urban areas have very different consumption patterns then residents in rural areas. Despite the fact that they use much more food, water, energy and durable goods than rural residents they also face some environmental problems related to their consumption; the most emerging issues are: climate change, poor air water quality and inadequate availability, west disposal complications, deforestation, Industrial pollution and high energy consumption. Unfortunately, minimizing these problems and ameliorating their effects on the urban population is very expensive.

As we can see now the climate change is already happening in Mogadishu: temperatures are increasing, rainfall patterns are shifting, rising sea level, cold and frost like never before. The fact is that we are not aware of the changes that are taking place in our climate and we are not reacting but it is a red flag that needs to be considered and set a long-term plan for a lasting solution.  Already the heavy rains of the past few days have destroyed the roads and other buildings and resulted in traffic jams to the city because of having no drainage system.

Due to high population density and expensive lifestyle the rate of use of natural resources is high in urban areas. There is also misuse of natural resources whose immediate compensation becomes difficult, scarcity of drinking water specially ground water and organic products due to excessive use. All of the issues raised above contribute to the devastation of ecosystems and global warming. 

Pricing 

Residential real estate is not fairly priced in Mogadishu, the standard rents of the city are too costly against strained income of the average income population, The high cost of rental housing is due to the high demand for tenants due to an overcrowded city, which has made homeowners to raise the price and become price makers by taking advantage of the fact that there is security issues and there no law to regulate rents.

The overall real estate pricing problems have accumulated to create an unrealistic life cycle to the tenants where the shelter is so expensive which in turn affects the livelihoods of many tenants. The current situation of pricing directly affects the financial growth of the person by affecting the savings of the average tenant which can be the base of long-standing poverty to the person. Meanwhile, tenants also have difficulty finding rental houses because homeowners do not prefer to rent houses to the large and medium sized families, they choose small sized families instead. From an economic point of view if rents continue to take off, it could be bad news for those seeking housing and for the nation’s inflation outlook which will affect homeowners as well. All these issues of inflated prices and housing scarcities might be the result of the rapid flow of rural population into urban areas.  

Conclusion

Real estate industry participates in increasing the value of wealth and productivity which raises the GDP per capita of the country, so the real estate sector has a direct impact on the economic growth and overall well being of the society. Although urbanization sometimes contributes to the city’s economic growth, it also poses a number of challenges, including environmental damages and every corner of our planet is currently struggling with climate change effects. As there are no policies to guide homeowners and tenants and price controls which are effective on a short term basis, homeowners are getting advantage from dictating prices since the demand is higher than the supply of the housing which may be able to inflate prices to boost their profits. This would need government intervention to crush the monopolies that exploit the consumers.  

Lastly, Mogadishu is a growing city. If not considered to be a smart city it can lead to many lasting challenges and discourage many investors who are willing to invest in the real estate market. So, here we recommend some points to improve the future of real estate development and investments.

• Establishing effective and perfect monitoring mechanisms towards prices of real estate by controlling the inflow of credit funds into real estate field setup.
•  Early warning mechanisms for real estate enterprises to invest in the real estate markets and reducing house rental costs and reforming the fiscal and taxation system.
• Setting up building codes and standards to design, construction, amendments and maintenance of structures which specify a minimum level of requirements to protect the society from risks posed by erroneously constructed buildings and get extensive well-being as they relate to the occupancy of skyscrapers and structures. 
•   To repatriate immigrants for reducing the environmental effects of urbanization and encouraging the productivity of the country on which these people depend.

Zainab Mohamud Mohamed is Real Estate Banker at Dahabshiil International Bank.