The emergence of developing countries on the global economic landscape has led to a property boom.
Real estate investors are quickly realizing that markets in developed countries have become saturated, leading to a shift to the huge and growing markets in developing countries.
Ghana, especially its capital, Accra, has equally benefited from this phenomenon. From the Accra Mall to Stanbic Heights, Devtraco Courts to CPL’s Garden Estate, the nation’s capital has become one of the most iconic centers for real estate investment in Africa. The tricky part has to do with foreign exchange volatility.
The world is increasingly becoming a global marketplace and this has been enhanced further with the advent of new technology such as E-commerce. As such, currencies are trading against one another more than ever, meaning a focus on the foreign exchange market has become a priority.
The cedi over the past few years has weakened against most of the world’s trading currencies; the hitch being that the country has become over dependent on foreign currencies such as the US Dollar.
Currency trading is largely influenced by export and import factors. Basically, the more you export the more foreign exchange you earn and vice versa when you import. Ghana’s challenge involves adding the needed value to its raw commodities to earn more foreign exchange. Include the fact that the country’s import far outstrips its export to a tune of $4 billion and you realize the seriousness of the situation.
An economic analyst at Databank, Courage Martey said that the cedi experiences cyclical changes each year. According to him, the first half of the year is characterized by depreciation while the second half tends to enjoy relative stability. Mr Martey explained that the first half experiences a surge in depreciation due to a growing demand for foreign currencies to pay for items bought during the yuletide. Foreign exchange inflows tend to be weak around this time as well because the country’s major exporter, COCOBOD usually pays back its loans. This has given rise to local speculation affecting demand, with most individuals involved in panic buying to hedge against the possibility of a lower supply of foreign exchange.
FX volatility on real estate
The real estate industry, like many sectors of the Ghanaian economy is highly sensitive to FX volatility. This has resulted in most developers valuing their properties in foreign currencies. It would be overly simplistic to suggest that real estate developers should value their properties in cedis rather than in foreign currencies. In a report published by real estate expert Lamudi, the Executive Director of the Ghana Real Estate Developers Association (GREDA) Sammy Amegayibor said that about about 70 percent of building materials are imported. Materials such as iron rods, finishings and components that make up cement and paints are a few of the many items imported. These materials are not only affected by FX volatility, but the change in tax rates. It then becomes difficult to begrudge developers over their decision to maintain their property value in foreign currencies.
News of the cedi’s brief appreciation against the major trading currencies widely came as a welcoming relief for many in the country. This was especially the case for mortgage borrowers who would have benefitted from lower payments. However the brief appreciation was quickly followed by depreciation in the following weeks, making mortgage borrowers’ desire a distant dream.
Mr Amegayibor said that the cedi’s appreciation had little influence on sales of properties. “In relation to the cedi’s appreciation on real estate, I am yet to see any significant change. There hasn’t been that much activity to suggest that the local currency’s strength has increased demand for real estate,” he said.
Ghana’s real estate is one of the major determinants of inflation in the country. Currency fluctuations mean that prices adjust accordingly and could lead to an increase in the cost of production. With its sensitivity to FX volatility, there is the need to put in place measures that would stabilize the cedi. A few of these would be providing substitutes for imported products, adding further value to exported raw items and a reduction in government spending to curtail excess money supply. A shift to local construction materials will also reduce the demand for foreign currencies.