GREDA developers mainly build-to-sell. Why?

GREDA developers mainly build-to-sell. Why?
Source: Kwadwo Owusu-Darko | owudarko@gmail.com
Date: 14-02-2019 Time: 12:02:58:pm
Studies also suggest developers profit margins may be too high and hence needs to be reduced.

Have you stopped to ask yourself –Why do properties developers in Ghana only build to sell? This is a question I would like you to explore with me. No doubt residential real estate developers’ ultimate aim is to maximise their profits.

This is the norm for every business and therefore one cannot chastise them for doing that. But then is outright sale of completed property the only way for maximising profits? One sometimes wonders why the real estate Senior Executives are not trying the different strategic options and business models learnt from their University of Hard Knocks or Business School MBA programmes. Is there only one business model that works in the real estate sector? Many years of academic research and studies indicate other business models can be used to develop or grow a real estate business. What is a Business Model?

In simple terms, a business model is a framework that shows how a company creates its value. It tells everybody why the company exists, and provides a framework for success and overcoming challenges. It captures the fundamental assumptions underpinning the company’s operations, core values, target customers, key resources, and revenue streams.

The importance of a business model, therefore, cannot be overstated. As one writer puts it, it is the DNA of the company’s strategy and sets the direction for success. The business model forces company executives to reflect on their company’s financial viability and to make tough decisions. Once again one is tempted to ask - Are top executives and members of the Ghana Real Estate Developers Association (GREDA) making the tough decisions? Why do I ask? It is because the recent collapse of a number of local banks is linked to real estate investment fiasco. 

Real Estate investment is a capital intensive venture. Therefore any delays and inability to complete a project ends up locking funds in a Non-Performing Asset. Look around and you will notice of one of Ghana Government’s biggest headaches is “locked-up” funds in uncompleted projects. Our political leaders can’t resist the temptation of signing new contracts or photo opportunity of a new project in the newspaper or TV. However, Governments hardly go broke even as they allow billions of dollars’ worth of real estate and projects sit idle. However, one mishap as a property developer could make the company bankrupt, land you on the brink of insolvency or totally wipe you out.

In today’s business environment those who survive are those who can easily and quickly adapt or change. Real estate businesses can’t respond to short term changes quickly. Hence, they need to innovate and explore different business models such as those listed below - Franchise model, Subscription model, Agency-Based, Pay-as-you-go model (PAYG),

Premium model, eCommerce, Retailer, Distributor etc. This article is saying different business models can be used to expand the market and invigorate the real estate business sector. Both economic indicators and international news media suggest Ghana’s economy is growing and one of the best places to invest. However, the locals don’t feel the same. The reason can be attributed to high unemployment, low productivity and overpriced residential properties in relation to median income. Businesses need Ghanaians to patronise their products and services, however, they can only do so if they have permanent jobs and earn decent wages. 

The amount households spend on accommodation is too much in relation to income - creating a two-tier society (i.e. the Have and Have Nots). There are various strategies that can help solve this dilemma such as reducing interest rates on Construction loans and longer-term mortgages. Example the difference in payments between the same loan of say 100,000 amortized over 15 years (180 months) in Ghana at say 12.5% and the USA at interest rate of 4.0%, are: Ghana - GHS1,233 per month & US$740 per month! Time would not permit a discussion on why interest rates in Ghana are higher than in America where per capital income is higher.

Property developers can help change these dynamics. Studies also suggest developers profit margins may be too high and hence needs to be reduced. The microfinance sector has shown that the poor and modest are often more credit worthy than their flashy show-off cousins, and that given the right terms and conditions the poor can meet their financial obligations. Yet our real estate sector businesses are not developing affordable products for even the average income earner. 

Ghana’s property market is currently stagnated and though government intervention can help, a change in GREDA Developers business practices can make a difference. Ultimately the real estate sector needs to reform and improve their cashflow by offering alternatives to the customers not catered for. Developers need to expand their customer base by providing other affordable schemes. Changing the business model require much broader analysis.  Real Estate businesses need to understand micro and macro-economic factors impact on their business. Developers should subject their business to more rigorous scrutiny using external Consultants who understand their business and the sector.

The Businesses should measure themselves against international key performance indicators to improve their performance. They must begin to overhaul their business models, long term strategies and innovate to transform their business and the sector. In the absence of longer term mortgage products Build-to-Sell cannot be the only offering on the property market. After 30 years of operations GREDA can and should lead the crusade to REFORM Ghana’s real estate sector.

Profile: Kwadwo Owusu-Darko is an architect and specialises in Housing. He has over 20yrs experience in real estate development, regeneration and housing management in the UK. He was a Director and Chairman of two Housing Associations. Currently working towards setting up a think tank to support Housing development in Ghana. Email: owudarko@gmail.com   Post Comments @Blog: https://owudarko.wixsite.com/website