4 July 2017

Ethiopia: Unravelling Access Real Estate

Audit report finalised last week established that the company is solvent but Ermias mismanaged it

Shewaferaw Girma, 67, a retired civil engineer, remembered how he was persuaded by a relative who worked for Access Real Estate as a sales agent. The company, originally promoted by a parent firm and four individuals, was at the height of its place in the market pledging to revolutionize the fledging but archaic real estate business in Ethiopia.

He recalled how he was rushed in choosing a site near Ayat neighbourhood over a project located across the street from the CMC residential complex. Shewaferaw, a father of two, was told the latter would be priced steep - at 700,000 Br - for the kind of flat he had in mind. He settled to buy a two-bedroom unit in an apartment planned to be constructed on a plot leased by Pacific Link Real Estate Plc, near Ayat.

The cost was a little over half of the one in front of CMC; he paid upfront 470,000 Br for a flat with a 72sqm size. But he had to raise the money selling his Toyota lift-bag for 100,000 Br, and the balance borrowed from his friends.

This was not to be his first private residence. He had wanted a better place than his current residence, with advanced amenities and location for a price 60pc lower than what other real estate companies used to ask. Just as sales agents hired by Access had promised.

"I pondered on the money I spent to buy a house as I was thinking to have medical treatment in Bangkok with my wife and return healthy," Shewaferaw recalled.

He was convinced of the commercial advertisements by Access Real Estate. They were creative, persuasive and forcefully visual. Even more, the real estate company had reassured buyers like Shewaferaw that should it fail to deliver their homes within a year, it would pay them 5,000 Br in monthly rent until such time it hands over the flats. Those who may want to reclaim their advances, the company would pay back the full amount with 15pc interest.

Too good to be ignored.

Nonetheless, there were troubling signs from the start. When Shewaferaw was about to sign the agreement, he found out that he was going to ink the deal on a paper bearing the names of Pacific Link. It is another real estate company in which Access has acquired substantial shares.

There were other such companies with similar arrangements. Under the chairmanship and management of Ermias T. Amelga, one of the five founding shareholders when the company was registered in 2008, the real estate firm had adopted a radical approach. Unlike other competing real estates at the time, Access avoided leasing plots directly from the city administration but cajoled those who did for joint development.

"I looked around to find out that most of the real estate companies were into building high-cost villas in the suburbs," Ermias told Fortune. "I wondered why no one was thinking about the rising middle class in town and build apartments within the ring road."

It was the time Ermias was riding high having a backdrop of success in establishing Zemen Bank and Access Capital Services S.C., the latter a parent company with holding interests with no less than 10 companies in manufacturing. It is an equity firm established in May 2007, by 34 shareholders, with a registered capital of 9.3 million Br. Ermias controlled 60.5pc, controlling shares in the company.

Motivated by the absence of offers to the middle class, Ermias moved into forming a new real estate firm, which was first registered with a 50,000 Br capital by Access Capital Services and four individuals: Ermias, his partner Haileluel Tamiru, his lawyer Amsalu Bayu and his advisor Tekle Alemneh.

A subsequent public offering brought in 634 shareholders who raised 34 million Br in equity to what was to be known as Access Real Estate. Immediately, the company moved in acquiring shares in companies with leased plots in the capital, including Meri, Pacific Link and Tulu Dimtu real estate companies.

"I knew that Access was selling me the flat," said Shewaferaw. "But while signing the contract, I was told that Access was a partner of this company, and not the owner of the land."

He was not to be the only one to have entered such a precarious deal with a company whose existence was proven to be complex as it was webbed. No less than 2,042 other buyers have paid more than one billion Birr to a real estate firm which has yet to deliver one single unit of housing or flat from the 19 projects it had launched.

So much happened in between, including the self-exile of the man who masterminded the complex business model; his return to Addis Abeba and his subsequent arrest; the formation of state-sanctioned committees - main and technical - to search for solutions and the commissioning of investigative audit to find out the hole in the company.

Conducted by the state-owned Audit Services Corporation (ASC), the findings were completed last week, and sent over to the Auditor General's Office and the Minister of Trade, Bekele Bulado (PhD), who also chairs the main committee, for a final decision.

Anticipating the release of the audit findings, Ermias came out of his shell to appeal to the Minister and publicly pledged to the shareholders and homebuyers that given a second chance, he has the key to untangle the Access mystery. It was not an appeal without a challenge. A joint committee comprising the current board of directors and homebuyers representatives shot back the following week, holding Ermias for all that was wrong and urging the Minister to stay away from him.

Both sides have high hopes in finding something in the audit report that may suit their respective positions.

Leaders of the joint committee want to see the government follow a policy of letting homebuyers take over the projects to complete unfinished ones and start those that are on a drawing board. They seem to be inspired by the track record of the city government where two decades ago homebuyers, failed by a private real estate firm, JAKROS, were given a plot leased by the company to construct on their own.

The audit report, however, found that Access Real Estate remains solvent but suffers from a liquidity crunch. No less has it been mismanaged by its founding chairman and Chief Executive Officer (CEO), the audit report revealed, according to a person who has access to audit findings.

"The findings of the audit doesn't share the rumours bowling up in the air. It doesn't seem like the company is bankrupt and would not sustain as a business," this person told Fortune.

The major findings of the audit also include that the assets of the company are more than its liability; the company has massive funds in receivable; and its crises are solvent even if Ermias mishandled it and will be accountable for that.

Ermias accepts fault. Clad in his signature Kurta suit, he appeared calm and collected last week, far from projecting himself as a man who is responsible for dashing the hopes of thousands of people such as Shewaferaw. Neither was he a person with a sense of indispensability that he once appeared to be.

"One of my regrets is my mismanagement of the company," Ermias told Fortune last week. "I repent this most."

His slippery slope began when he decided to adopt a technology new to the country but promoted by managers of Living Steel Plc. Against the strongest objections of his partner Haileleul, and his contractor for the two original sites near Nyala Motors, Biniam Mebratu and Ermias went on making a deal with Living Steel to import and build the apartments with steel structure.

Biniam, major shareholder and general manager of Gabby Investment Plc, knew what it would take to build complex apartments after he took over the sites adjacent to Nyala Motors. Jointly developed with Laura Trade & Industrial Plc and Me'eraf Real Estate Plc, these are today the only projects whose structures are completed but remain to have finishing works. Contracted for over 300 million Br for the two projects, with a built up area of 40,000sqm, the contractor has won court battles all the way to the Supreme Court, claiming unsettled invoices worth 72 million Br but later on settled for 43 million Br.

From its eight locations, 525 homebuyers, accounting for 26pc of the total, bought houses from Access; 1,204 from the four plots where Access joint-ventured with its partners; and the remaining 314 bought homes from its additional two sites at Sunrise and Union Tower, in Megenagna. To acquire shares at the five real estate companies, Access Real Estate spent 173.6 million Br.

Ermias was, however, made to believe that adopting steel structure, although the cost is not far off from the traditional brick and mortar, would have given him advantage over delivery time. Thus he made an advance of close to 158.3 million Br to Living Steel Construction Plc and its sister company, YBEL Industries Plc, hoping that the sites near CMC and Ayat would be completed long before the deadline he committed Access Real Estate to homebuyers.

That was not to be the case.

The two companies he had believed would deliver in time only accomplished less than 10pc of the works they were paid for, according to the audit report of the company conducted in 2012. It got worse when a sudden freeze on the plot near CMC was imposed by the city administration, which brought the first knock on Ermias' and thousands of his clients' dream.

"I believed in what people told me and trusted their promises," Ermias said.

Such unprecedented trust had seen no boundary. Ermias actually signed dozens of blank cheques and left it to his staff in finance to issue them whenever buyers came claiming for refunds. Over 75 million Br was paid both in monthly rents and refund as the contract Access Real Estate made with its clients.

"Regrettably, my staff issued these cheques of more than what our cash flow at the time permitted," Ermias told Fortune.

A bounced cheque issued to an individual homebuyer led to Ermias' brief custody by the police in February 2003, and his subsequent flight from the country. He left behind a complex web of business and relationships unable to unravel by various committees formed since then.

Aklog Seyoum chairs the homebuyers committee, while the main committee formed under insistence by homebuyers is chaired by the Minister of Trade. A technical committee comprising homebuyers and the board of directors from Access Real Estate is chaired by Nuredin Mohamed, a former senior official at the Ministry of Trade, and reports to the Ministry.

A board of directors, under the chair of Mebrat W. Tinsaye, runs the affairs of the real estate firm which is believed to own no less than 19 plots with a 335,433sqm size. Acquired for 753 million Br, these plots are found all across Addis Abeba, making Access Real Estate the only company, next to MIDROC, having a hold on the most prized assets of Africa's diplomatic and political capital.

Ermias claimed to have been pressured by the depreciation of the Birr and galloping inflation in the late 2000s to get into the assets acquisition binge using homebuyers' money that was piled up in the company's accounts. Access had spent 664.68 million Br in acquiring 43 properties, such as Imperial Hotel and Safari Lodge in Adama (Nazareth) before it resold 24 plots and the Imperial Hotel.

More though was the 148 million Br he made the real estate firm advance in the form of loans to the subsidiary companies under its principal shareholder, Access Capital Services Plc. This was seen by some as a dubious move on Ermias' behalf.

"I regret not to sue him for the illegitimate moves he was making at the time," says Bezawork Shimelse, a shareholder of Access Real Estate. "Had I done that early on, all this turmoil would not have happened."

The frustration of shareholders, homebuyers, contractors, and employees over the company's failure to deliver homes culminated in many people taking matters into their own hands, including taking their cases to court. There are no less than 81 files in different benches of the courts; some have won their cases and wait for enforcement, while others remain under litigation. In all the cases, Ermias is a defendant or a co-defendant.

"I sleep like a baby," Ermias told Fortune. "And a full eight hours."

Lured to return to Ethiopia two years ago, Ermias failed to work with the board of directors elected during his years in self-exile, including Amsalu, his once close confidant and legal counsel. The board, in coalition with the homebuyers committee, accused Ermias two weeks ago for stripping the company of cash where there was only 129 Br in its account. The money collected from homebuyers and raised from shareholders was advanced to other companies Ermias formed, as well as to him and acquaintances for personal use.

"These were illegal transactions and procedures," the board and the committee said in their joint statement.

None of the other board of directors, elected by shareholders to be responsible for the governance of the company, were mentioned though. Up until the rapture of the Access Real Estate crisis in 2013, Tigist Negede, Tamrat Eshetu, Tesfaye Legesse and Amsalu had served as directors under the chairmanship of Ermias in Access Real Estate Board.

It was during this period Access made a total investment of 1.26 billion Br, paid contractors 498 million Br, and ordered a shipment of prefab steel estimated to be worth 30 million Br believed to have rotted inside the ports in Djibouti.

Despite a guarantee by authorities from the federal government to suspend his cases in courts and a one year period for him to fix all the mess, sharp differences between him and the board led to his four-month arrest while under investigation. He was not believed on his claim that he had on board a "credible" foreign investor interested in putting 100 million dollars in acquiring majority shares with Access Real Estate.

"I brought a potential company which could have invested," Ermias told Fortune. "But the homebuyers committee and the board of directors could not agree with my solutions."

Ermias has made original letters of expression of interest from Chinese and European companies issued in different times to Fortune's view. He also has in his possession another letter of interest from a domestic insurance company, which agrees to provide an advance payment guarantee bond to any homebuyer who would like to do business with Access Real Estate.

There is close to half a billion Birr Access Real Estate expects to collect from homebuyers, of which half is claimed from four sites it has developed in joint venture with Tulu Dimtu, Pacific, Meri, Laura and Me'eraf.

His opponents would want to hear none of these proposals. They want to organise themselves as a cooperative and pursue their way in building the homes by their respective selves. Ermias believes this approach is fateful and doomed to fail from the start.

He argues that his business model was not built on the viability of an individual unit but moves on as a whole. There are loss-making sites among the 19 projects while others are designed to have high-profit margins. He would want to see the projects cross-subsidize each other and describes the option of cooperative development as a "tragic mistake".

The committee and the current board accept that Ermias left behind a "complex" and "complicated" web of businesses they are convinced is "sinister." Ermias sees it differently; it is deliberately designed to gain competitive advantage in the real estate market, moving supply in mass and making profits from wholesale lower margins.

Nevertheless, Access Real Estate, whether under the thump of Ermias or his rivals, has never registered profit. But Ermias remains upbeat that he has now the magic potion to resurrect the company.

He put his faith on the current market value of 4,000 to 5,000 units of homes in stock he wants to sell eventually, estimated to be worth 5.8 billion Br. Half this value is to be gained from the development of four sites in Lebu (43,000sqm), Ayat (50,000sqm), CMC (8,233sqm), and Kara Qore (125,000sqm). This is against a liability of the company at 200 million Br and a 1.2 billion Br injection as equity investment. It is this potential to generate revenues in billions he believes attracts foreign investors who would want to develop close to 20 plots all kept under the city administration's land bank until the company's dust is cleared.

It is a distant dream for Ermias. No doubt, time, cash and credibility are the three most vexing challenges Ermias has faced in his bid for a return to the limelight. Shewaferaw believes the problem of Access is unsolvable. But he has convinced himself that despite his money being wasted, he remains an optimist for miracles to happen to let him get his home delivered.

The homebuyers committee and the board of directors are, however, demanding the interventions of the federal government in resolving the case. Aklog, chairman of the homebuyers committee, argues this proposal should not be acceptable citing the failures of the previous proposals which he claims were similar to the current one.

"He has been saying this for the past six years," said Aklog. "We don't have a ground to trust him this time around."

"The committees have no clue on how to solve the problem as they do not have an idea," Ermias said. "They don't understand whether the game is football or basketball. I need one more chance to be re-elected as a board chairman of the company to resolve the issue."

Not all the shareholders believe the crisis could be resolved by the involvement of the state rather than by Ermias himself. Yosef Asrat, who owns 250,000 Br in shares with Access Real Estate, is one of these. He believes Ermias is the right person to solve the mess he himself created.

"Despite his problem of mismanagement, I don't think anyone else is capable enough to understand and fix the problem in the company," he told Fortune. "I would have no problem to vote in reinstating Ermias as a chairman of the company."

Samson Berhane has contributed to this story.

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