A massive real estate development is gradually changing the landscape of Mogadishu and its outskirts. This is attributed to the increasing population of Mogadishu as a result of many Somali diasporas returning to the country, improving the security situation and growing middle-class families. The growth of the real estate industry helped the country to recover from the tragedies brought by political unrest and civil wars that lasted more than two decades. Among the advantages associated with the real estate sector include the beautification of the city due to new houses with unique designs and improved cash flows for the investors because they have diversified their income sources. On the other hand, the sector is less profitable considering the low return on investment and at the same time does not provide more employment opportunities for the population since it is less labor intensive after its construction.
Advantages
Firstly, the real estate sector has the highest cash flow generated these days because it has monthly -cash flow that can be reinvested into other projects or even can be used to pay the loan of the investment. As such, it has a significant return on investment as compared to other businesses that can be ventured in the region.
Secondly, operational risks of the real estate are not quite more as there are no inventories, other expensive items, or losing key staff that will have a significant impact on organizations but this industry does not have those challenges. Besides, that the investor is assured of business continuity so long as there is peace and stability in the country.
Thirdly, the real estate industry has fewer operation activities thereby making it easy to manage the daily operations as compared to merchandise companies. One needs to hire a manager and ensure there is adequate security for its tenants and this would be enough.
Fourthly, the increasing development in Mogadishu’s real estate sector would increase the city’s aesthetic value and ensure adequate housing units. This would attract more people into the city which would make the city a business hub in the region. In the end, the city would be a critical part of the country’s economic development.
Finally, the real estate sector acts as an important backup for businesses. Working capital of business is combination of both current and non-current assets. In this case, the non-current asset can be utilized as a backup for the business especially when there is a loss in the current assets.
Disadvantages
First, there is less opportunity to dispose of in the real estate sector. In this case, one of the major factors of investing is the disposal option of the project, in other words, it is the exit option. Selling land is not easy although it can be manageable, but selling a building is a bit tough, as it is difficult to get someone who needs this type of building. Factors that have influence are the design, materials used, and the number of floors of the building.
Secondly, the design may outdated. Technology in architecture is also booming and new designs are coming day after day and this makes old for current buildings. Also, materials are changing especially finishing ones which means that the investor should make a significant investment to produce structures that meet the needs of the customers in the market for coming decades.
Furthermore, there is an overvalued price in the real estate sector. These days the real-estate business is booming and a lot of investors are coming so the demand is high and prices are also high and it is easy to sell for this demanding season. Further, investors are crying foul of the uncertainty in the market owing to the economic crisis that occurred in 2007/08 which affected the operations of many financial institutions in world. It means therefore that the overvaluation of lands and the increasing Murabaha financing in the real estate sector can cause a serious financial crisis in the country.
Nonetheless, the Profitability and returns in real estate are less compared to other sectors. The biggest point that I am looking to display is the profitability of renting the real state sector. As discussed in benefits the cash flow of this industry is good but cash is different from profit. The investors of this sector expect ten years of payback although they have not considered the time value of money. Even though prices to rent are high but the rate of return is almost 10% on total investment (cost of land plus building costs) while the range of return on investment in Mogadishu businesses is (30% To 20%) as indicated by investors in stocks and merchandise sectors. It also important to note that the wear and tear costs were not considered.
Finally, there is a lack of employment for your community in the sector. Investments create opportunities for youth but the real-estate business is not required a labor force to operate except in the construction stage. This will not help the economy of the country if most capital goes to this industry unemployment would be growing up. It means that it would affect the overall economic performance of the country if it remains the main economic activity in the region.
Conclusion
The real estate sector has been flourishing in the recent past in Mogadishu. Investing real-estate can’t be primary option for the nation because it has less profitability and it didn’t create jobs for the youth and the risks associating in financing real-estate is also high, as there is no exit option or disposal of assets. Considering all above, the real estate industry is not for everyone. As such, those who venture into the sector should consider the following recommendations:
- The sector is ideal for those who are diaspora and those committed to their employment. It is so because this type of investment does not involve more operations and it is not complex to manage. As such, it can be easy to manage them even when living in a diaspora.
- The real estate sector is an appropriate investment for those who have surplus cash flows and are willing to diversify their source of income.
- The potential investors can build low-cost houses (Avoidable houses) and sell them to potential buyers. This will improve the number of houses in the city thereby lowering its demand and consequently reducing the prices of the houses. This business has more profitability than renting but i the huge capital outlay required is more.
Abdullahi Tahlil Adan Researcher
