NB: This is an opinion article published in the latest Somali Business Review (SBR) edition by Dr. Amina Sheikh Omar Mohamud and Ismail Ibrahim Abdullahi
Roads are one of the most important economic infrastructures in every country and play a key role in everyday economic activities by linking producers and consumers to markets, workers to jobs, and students to schools. Developing roads and making constant maintenances every year is vital to any development plan because they make an important and crucial contribution to economic development, growth and bring important social benefits (Glossop, 2008).
Glossop (2008) also believes that infrastructure developments in general directly influence real estate markets by increasing prices. Improvements to the physical infrastructure of cities, especially improving roads, can be important to supporting city competitiveness. Poorly managed infrastructures often lead to a lower price in its properties in that area, as Hills (2007) argues that lower demand areas are often poorly served by public services and likely to face a general infrastructure shortfall, including weak public transportation services. This can limit access to nearby employment centers for the residents, discourage or restrict inward investments and limit business growth.
Economic Factors Affecting Real Estate Markets
“The value of a property depends on the overall economy in that area” this is a general phenomenon in the real estate market. Research conducted by Tse, Ho & Gansesan (1999) states that the variation of the housing prices has significant impacts on the economic conditions of the society. According to this phenomenon, if the demand for housing is increasing in the market, the housing price is expected to rise due to the imbalance between buyers and sellers. Consequently, when there are more buyers than sellers in the market, the housing price will increase. This can cause a self-fulfilling speculative price bubble (Levin & Wright, 1997).
In addition to supply and demand, inflation also contributes to a major economic factor that drives real estate market price fluctuations. Almost every study showed the strong and long-lasting relationship between inflation and property prices. Zhu (2004) believes that is because during inflation, most things in the economy will increase their price, so the cost of the raw materials for building a house will also increase.
Gross Domestic Product (GDP) and interest rates are also two economic factors that affect real estate market prices. The GDP is considered a popular indicator of the property price, because of the relationship between macroeconomic activities and the housing price (Wheeler & Chowdhury, 1993). Giussani, Hsia & Tsolocas (1992) found that GDP per capita effect on property prices to be positive and significant, while inflation is believed to have a negative effect.
Economic Infrastructure Development and Property Prices
Apart from the overall economy in a country and its factors, property value, in general, depends on many characteristics associated with it, such as physical characteristics of the property and location of the site in relation to employment centers, trading zones, and other recreational facilities. In addition to this, the socioeconomic characteristics of the neighborhood are important to define the value of the property, including the presence of hospitals, parks, schools, and community services (Romkaew, 2000).
Infrastructure developments encourage investments in general. And it is also an attractive factor for real estate investment, as they contribute to increasing demand for it. In Kenya, for example, a study conducted by Gatauwa and Murungi (2015), found that the real estate prices have risen rapidly in recent years after the government made improvements in the infrastructure, with home prices increasing sharply when compared to prices of goods and services in the other industries. They also argue that improved transport networks, social facilities development, expanded educational institutions and commercial centers are all factors that lead to high prices in the real estate sector (Gatauwa & Murungi, 2015).
Findings and Analysis
Many residents’ livelihood in the Afgoi district rely on Mogadishu, as they work there, and travel every day to the capital city. Not only workers and business owners travel to Mogadishu every day, but also, there are a lot of students who use this road every day, those who are engaged in the educational institutions in Mogadishu. To travel between Mogadishu and Afgoi every day is not an easy task, as the road is mainly destructed. It is not strange to see some of those people consider moving to Mogadishu because of the safety issues and the cost of traveling. Even some may consider selling their houses in Afgoi and buy others in Mogadishu or its outskirts. And this leads to a devaluation (or a depreciation) in house and land prices in the Afgoi district.
Property Prices in Afgoi in the last 10 Years
Residential land and house prices in the Afgoi district were quietly constant before 2007, as normal growth wasn’t more than 2% annually. Annual increase prices in the real estate market began after 2007, because of the conflicts and political unrest in the capital city, Mogadishu, when a large number of its residents moved to the Afgoi district and its suburbs. The hefty increase in prices of the property continued year after year until late 2011 when most of the displaced people moved back to Mogadishu after the political situation became more stable. After 2012, the annual increase of the property prices in Afgoi began taking almost a constant shape, with a slow increase rate annually.
House prices, in general, depend on many factors, not only in the Afgoi district but in all parts of Somalia. Apart from the economic factors in the whole country, such as inflation and the GDP, the three main factors that affect house prices in the Afgoi district are (1) type of the house, (2) its quality, and (3) the place (e.g. the village) the house locates. According to this, while house prices vary from one to another in general, this study focuses on mainly analyzing the prices of residential lands. The study found that the average annual growth rate (percentage of the annual price increase) of the residential land in Afgoi is 3.93% in the last 10 years.
What to expect in the Real Estate Market in the Afgoi district?
From the literature reviewed in this study, most studies found that infrastructure developments significantly boost the real estate market, with both house prices and residential land prices normally rise. So, do we expect a price-rise in house and residential land prices in the Afgoi district after the completion of the Mogadishu- Afgoi main road?
There are several possible factors that could affect house and land prices in Afgoi after the construction of the main Mogadishu-Afgoi road. These factors include:
Travel Time Effects
The study found that public transportation drivers spend an average of 59.3 minutes traveling between Mogadishu and Afgoi, with the fastest one travels about 50 minutes in terms of normal traffic and checkpoint delays situations. They also expect to travel just an average of 26.7 minutes between the two cities after the construction of the main Mogadishu- Afgoi road, with the slowest one expected to travel about 35 minutes. This shows that there will be an average of 32.6 minutes drop time in traveling between the two cities after the completion of the road construction. This indicates that there will be a travel time saving of 54.9%.
In order to eliminate response bias, the study deployed only the weakest values (unfavorable values). According to the findings from the study, the fastest driver travels about 50 minutes between Mogadishu and Afgoi, while the slowest driver expects to spend 35 minutes travelling between the two cities after the construction of the road. And this tells that there will be drop travel time of at least 15 minutes, which means there will be at least 30% of drop time when travelling between Mogadishu and Afgoi after the construction of the main road.
Transportation Costs vs. Fuel Consumption Effects
Assuming that both traffic and load situations are normal, the study found the average fuel consumption for one trip from Afgoi to Mogadishu is 5.7 litres, while it is expected to lower that amount to 4.1 litres after the construction of the road. This means there will be a drop fuel consumption of 28.1%.
This decrease in fuel consumption will lead a lower transportation cost, and this may encourage other high or even some middle income individuals to consider buying cars rather than using public transportation services. From this point, those who intended to sell their houses in order to move to Mogadishu may rethink and stay, as the newly developed road costly.
Cost of Traveling vs. Cost of Renting House in Mogadishu
The cost of renting houses in Mogadishu differs from a place to another. The two key factors contributing those variety of house renting costs in Mogadishu are; the quality of the house and the place the house locates. Recent years, a number of Afgoi district residents moved to Mogadishu because of the road safety issues and the difficulties of travelling between Mogadishu and Afgoi every day, as the road is mainly destroyed.
After the completion of the construction of this road, it is expected to be more safety and less costly in terms of traveling between the two cities. Using public transportation services, the cost of traveling between Mogadishu and Afgoi was approximately 2.5 dollars for “forth and back”. And it is expected to lower this cost to at least 1.5 dollars. This means the cost of traveling between Mogadishu and Afgoi will be no more than 45 dollars per month.
In terms of house renting costs, the study conducted an interview with 30 respondents from middle and low-income employees in Mogadishu, the average renting cost they incur monthly was 209 dollars. Assuming those employees were residents in Afgoi and moved to Mogadishu, it means they would have saved 164 dollars every month if they had stayed in Afgoi and use safe public transportation services. It is clear that this affects directly those who moved to Mogadishu and pay rents instead of staying in their houses in Afgoi and incur only 45 dollars of traveling costs. This means the opportunity cost of moving to Mogadishu is saving 164 dollars each month. And this is a huge amount of money according to a low and middle-income employee.
From the data analyzed in this study, the three factors will contribute to the increase of the property prices in Afgoi by increasing 30%, 28.1%, and 52.9% respectively to the normal annual growth rate of 3.93%. Using equations 4 or 5, there will be an expected 8.3% increase in the future prices of the properties in the real estate market in the Afgoi district after the completion of the main road construction between Mogadishu and Afgoi.
Roads are one of the most important economic infrastructures in every country, and play a key role in everyday economic activities. It is widely accepted those infrastructure developments, such as building roads, boost the overall economy, and likely affect real estate market prices. The purpose of this study was to examine what to expect in the real estate market in the Afgoi district after the construction of the main road between Mogadishu and Afgoi. The study found that three factors may contribute to the increase of property prices in the Afgoi district after the completion of the main road construction between the two cities. These factors are (1) travel time saving between Mogadishu and Afgoi, (2) transportation cost decrease, and (3) the high opportunity cost of moving to Mogadishu. And it’s expected an increase from 3.93% in the last 10 years on average to at least 8.3% in the next few years after the completion of the main road construction. The study also predicts that this increase will not and unlikely to cause a real estate bubble.
The study recommends the following:
- There is likely to be an increase in the property prices in Afgoi and its suburbs after the completion of the main road between Mogadishu and Afgoi. So, it will be a better opportunity to invest in this sector in Afgoi.
- The study also encourages investors to make real estate investments in the areas between Afgoi and Mogadishu, around the main road. As there is also an expectation of establishing new business ventures around the main road.
- The newly developed road will boost the transportation system between the two cities, traveling will be safer than it was, the life span of the vehicles will improve and transportation costs will reduce. So, this will be another opportunity of investing in the transportation service industry between Mogadishu and Afgoi. VIP transportation services are a good opportunity for investment.