Appraisal Process Modeling Using IDEF0 Method Case Study of Sudanese Real Estate Bank

Transcription

1 Department of Building & Real Estate Economics Institute of Infrastructure, Royal Institute of Technology (KTH), Stockholm, Sweden Master of Science Thesis No. (342 ) Appraisal Process Modeling Using IDEF0 Method Case Study of Sudanese Real Estate Bank Author Abdelbasit Yousif Abdelmagid Supervisor Berndt Lundgren Stockholm, June 2006

2 Table of Contents Dedication.. Acknowledgement... Abstract... Methodology. Chapter (1) General Background about Sudan" Ethnic, Culture, Politics and Economic overview 1.1 Background. 1.2 Ethnic, Religion & Culture Climate Economy Overview Economy Performance The Ills of Sudan Economy Sudan Civil War The War in the Southern Sudan War Impacts 1.10 Further Conflicts Chapter (2) Sudanese Economy Performance Analysis 2.1 Introduction Economy performance Analysis Inflation rate GDP Manufacturing and Mining Sector Construction Sector. 36 2

3 Chapter (3) Sudanese Real Estate Market 3.1 Introduction. 3.2 Real Estate Market in Sudan Demand Polices made by the Central Bank (Bank of Sudan). 3.5 Economy Performance Oil Production Types of Buildings Sudanese Real Estate Bank (SREB) The main objectives of SREB SREB Organizational Structure Management Board SREB general manger Engineering Department Banking Department Management Department Financial Department Law Affairs Consultancy Planning Department Chapter (4) The Appraisal Process 4.1 Definitions Task Process Appraisal

4 4.1.4 Appraiser Appraisal Approaches Income Approach Cost Approach Comparable Sales Approach Depreciation. 4.4 Appraisal process. 4.5 Appraisal Process at the SREB 4.6 Execution Procedure. 4.7 Getting started. 4.8 Appraisal Fees Final Fees Exceptional Case Final Fees outside Khartoum... Chapter (5) Integration Definition for Function Modeling (IDEF0) 5.1 Overview. 5.2 IDEF0 Concepts Cell Modeling Graphic Representation Rigor and Precision Methodology Strengths and Weaknesses of IDEF0.... Chapter (6) IDEF0 Models for the Theoretic Appraisal Process 6.1 Developed IDEF0 Models for the Theoretic Appraisal Process Chapter (7) IDEF0 Model for The Appraisal Process at SREB 4

5 7.1 Analysis of SREB IDEF0 Appraisal Process Model 7.2 General Recommendations Appendices. References List of Figures: Fig Title Page Fig(1) Map of Sudan 15 Fig(2) Inflation Rates ( ). 31 Fig(3) GDP in Amounts ( ). 32 Fig(4) GDP Growth ( ) 32 Fig(5) Manufacturing & Mining Sector amounts Share in GDP ( ). 35 Fig(6) Manufacturing & Mining Sector (%) Share in GDP ( ).. 36 Fig(7) Construction Sector Share in amount in GDP ( ) Fig(8) Construction Sector (%) Share in GDP ( ).. 37 Fig(9) SREB Organization Structure Fig(10) IDEF0 Components Diagram.. 65 Fig(11) The Main Components of IDEF0 and the Concept of Top Level Diagram Decomposition. 66 Fig(12) IDEF0 Diagram A-0" Estimate a Market Value of A property" Theoretic Appraisal Model Fig(13) IDEF0 Diagram A0" Estimate a Market Value of A property" Theoretic Appraisal Model.. 73 Fig(14) IDEF0 Diagram A1 "Identify The Valuation Task" Theoretic Appraisal Model 74 Fig(15) IDEF0 Diagram A2 "Plan Appraisal Task" Theoretic Appraisal Model Fig(16) IDEF0 Diagram A3 "Collect The Data" Theoretic Appraisal Model.. 76 Fig(17) IDEF0 Diagram A4 "Analyze The Data" Theoretic Appraisal Model. 77 Fig(18) IDEF0 Diagram A5 "Apply The Valuation Task" Theoretic Appraisal Model 78 Fig(19) IDEF0 Model A-0 "Estimate Market Value of a Property" 82 Fig(20) IDEF0 Model A0 "Estimate Market Value of a Property". 83 Fig(21) IDEF0 Model A1 "Identify The Valuation Task.. 84 Fig(22) IDEF0 Model A2 "Plan The Appraisal Task " 85 Fig(23) IDEF0 Model A3 "Collect The Data ". 86 Fig(24) IDEF0 Model A4 "Analyze the Data".. 87 Fig(25) IDEF0 Model A5 "Apply The Valuation Techniques"

6 List of Tables Page Table(1) Inflation Rates 30 Table(2) Sectors Performance in the Sudanese Economy Table(3) Appraisal Process. 55 Table(4) Appraisal Fees for a Vacant Land.. 60 Table(5) Appraisal Fees Estimation.. 61 List of Appendices Page Appendix I Official Ownership Certificate Issued by Land Registrar Authority (In Arabic) 94 Appendix II Official Valuation Certificate issued by SREB.. 95 Appendix III Client Undertaken Letter Appendix IV Client Undertaken Letter in Arabic List of Abbreviations OPEC IMF CPA MFC SPLA IGAD SPLM MoF CBS SREB IDEF0 ICOMs Organization of Petroleum Exporting International Monetary Fund Central Planning Agency Mechanized Farming Corporation Sudanese People Liberation Army Intergovernmental Authority on Development Sudanese People Liberation Movement Ministry of Finance Central Bank of Sudan Sudanese Real Estate Bank Integration Definition for Function Modeling First letters of :Inputs,Outputs, Controls, and Mechanism 6

7 Dedication To, My Dear Father My Beloved Mother My Brothers and Sisters My Sincerely Friends I Dedicate This Effort Abdelbasit 7

8 Acknowledgements The person whose name on the front of the documentation can rarely take all the credit, this project is definitely not an exceptional one. Acknowledgment must go to the gracious help, collegial cooperation, and very hard work of many people whose combined effort has made this project possible. Allah for giving me the patience and strenghts to complete this work. My supervisor, Berndt Lungren, I greatly apperciate the support, guidance and support throughout my research. A gratitude is owed to the staff at SREB, for providing me with the useful knowledge, information and ideas throughout my research. Special thanks go to Peter Brokking my program coordinator for his continously help during my study at KHT. I would like to express my thankfullness to my friend Akram for his help,support guidance and his time. Futhermore,I would like to thank my family,my perants,sister,and brothers for their encuragment.special thanks to my brothers Ahmed and Omar for facilitating my study there in Sweden and ensured a comfortable enviornment, I would never complete this job without their support and help. Abdelbasit Abdelmagid June 2006 Stockholm, Sweden 8

9 Master of Science Thesis Title Author Appraisal Process Modeling Using IDEF0 Method Case Study of Sudanese Real Estate Bank Abdelbasit Yousif Abdelmagid Department Building & Real Estate Economics Institute of Infrastructure, Royal Institute of Technology (KTH), Stockholm, Sweden Report Reference Master of Science Thesis No. (342 ) Supervisor Key words Berndt Lundgren Appraisal, Process, IDEF0 Method, Sudanese Real Estate Bank, Sudan and Valuation Abstract In this study I tried to focus on real estate market in Sudan as general and the experiment of Sudanese Real Estate Bank as a case study. I went through an overview about Sudan, geography, climate, culture, politics, Sudanese economy performance and the real estate market. I discussed the role of the Sudanese Real Estate Bank in the field of real estate as general and the appraisal process in specific. The objective of this study is to develop an IDEFO model to be applicable in SREB appraisal process. The IDEF0 model is to facilitate the appraisal task by breaking down the task in to further steps each of which has its detailed steps that make the task easier to follow, analyze and to get the correct outputs. The proposed IDEF0 model for SREB appraisal assignment is compared to a theoretical IDEF0 model which is developed in a previous research based on the literature to find out the possible deviations. The study came out with recommendations to improve SREB appraisal process by developing annual statistical analysis for the appraisal tasks done by SREB to analyze the relationship between the real estate 9

10 market as general in Sudan and the appraisal process. Moreover, the study recommends SREB to build real estate information system to provide all needed information concerning real estate in Sudan, so the study highly recommends SREB to create a professional real estate data base to facilitate the appraisal process and improve real estate sector in Sudan. Purpose of Study This thesis done as a complementary part of M.Sc program in Real Estate Management at Royal Institute of Technology (KTH) Stockholm, Sweden. Real estate appraisal is an important major and developing of this major will reflect on the whole real estate sector as a growing sector in Sudan, there fore, this study has been achieved. Moreover, research and studies will help putting the real estate appraisal in the right professional track. The theoretical approaches in the Real Estate Valuation Course that I took at KTH guided me to understand, analyze and come out with this study. Methodology This thesis is based on information and data collected from literature books, reports, and scientific papers. I employed data from the Central Bank of Sudan reports and Ministry of Finance reports to analyze the Sudanese economy performance to link the real estate market in Sudan with the other sectors in the Sudanese economy. Data about appraisal, process, Idef0 method and appraisal assignment at SREB is collected from literature books, researches and websites. Moreover, analysis of the abovementioned data is also based on interviews with some of the SREB staff and actors in the Sudanese real estate market. Platinum BPwin software and MS Excel are used to develop diagrams and models to make the concepts and ideas clear and understandable. 10

11 Chapter (1) General Background about Sudan Ethnic, Culture, Politics and Economic overview 11

12 Chapter (1) General Background about Sudan Ethnic, Culture, Politics and Economic overview 1.1 Background The Republic of the Sudan is the largest country in Africa, embracing 2,505,813 square kilometers of northeast and central Africa. The area represents more than 8% of Africa, 2% of the world s total area and slightly more than one quarter of the size of the US. Land represents about 95% of the total area million sq km; the rest (5% with million sq km) is water. The geographic coordinates are N, E. Sudan bordered on the north by Egypt; on the east by the Red Sea, Eritrea, and Ethiopia; on the south by Kenya, Uganda, and the Democratic Republic of the Congo; and on the west by the Central African Republic, Chad, and Libya. Khartoum is the capital and largest city, located in the northern half of the country at the junction of the Blue and the White Nile Rivers (fig 1). Sudan is mainly composed of vast plains that are drained by the middle and upper Nile River and its tributaries. The river styslem runs from south to North across the entire length of the East Central part of the country. The immense plains of which Sudan is composed is bounded on the West by the Nile Congo water shed and the high lands of Darfur and on the East by the Ethiopian Plateau and the Red Sea Hills. 1.2 Ethnic, Religion & Culture Sudan is divided on ethnic, religious and ideological grounds into a large number of groups resulting in a wide range of diversification. Sudan has two distinct major cultures--arab and Black African--with hundreds of ethnic and tribal divisions and 12

13 language groups. Blacks (52%), Arabs (39%) and Beja (2%) are the main ethnical groups forming the Sudanese society; a mix of other different groups represents only 1% of the ethnical structure. The northern states cover most of the Sudan and include most of the urban centers. Muslims (70%) are the majority of religious groups concentrated in the North, Indigenous believes represent 25% of the total population, Christianity (5%) is a religious belief mainly followed in Southern Sudan and its capital Khartoum. Arabic is the official language, but some other local languages do exist as well (i.e Nubian, Nilotic etc). Most of the 22 million Sudanese who live in this region are Arabic speaking, though the majority also uses a traditional non-arabic mother tongue (i.e., Nubian, Beja, Fur, Nuban, Ingessana, etc.) 1 English is the main language of instruction in most of the Sudanese Universities. Most of the private sector companies rely on English language as a mean of communication. 1.3 Climate Sudan is situated in a tropical region; accordingly its climate ranges from equatorial in the Southern part, Savanna in the middle to Continental in the Northern part. The Eastern boarder is distinguished by Mediterranean climate with rainful winter l. Temperatures do not vary greatly with the season at any location; the most significant climatic variables are rainfall and the length of the dry season. Variations in the length of the dry season depend on which of two air flows predominates; dry northeasterly winds from the Arabian Peninsula or moist southwesterly winds from the Congo River basin. From January to March, the country is under the influence of the dry 1 Main Sudanese Tribes 13

14 northeasterlies. There is practically no rainfall countrywide except for a small area in northwestern Sudan in where the winds have passed over the Mediterranean bringing occasional light rains. Khartoum has a three-month rainy season (July-September) with an annual average rainfall of 161 millimeters. The warmest months in Khartoum are May and June, when average highs are 41 C and temperatures can reach 48 C. Northern Sudan, with its short rainy season, has hot daytime temperatures year round, except for winter months in the northwest where there is precipitation from the Mediterranean in January and February. Conditions in highland areas are generally cooler, and the hot daytime temperatures during the dry season throughout central and northern Sudan fall rapidly after sunset. Lows in Khartoum average 15 C in January and have dropped as low as 6 C after the passing of a cool front in winter. 14

15 Fig (1): Map of Sudan 1.4 Economy Overview Sudan's primary resources are agricultural, but oil production and export are taking on greater importance since October Although the country is trying to diversify its cash crops, cotton and gum Arabic remain its major agricultural exports. Grain sorghum (dura) is the principal food crop, and wheat is grown for domestic consumption. Sesame seeds and peanuts are cultivated for domestic consumption and increasingly for export. Livestock production has vast potential, and many animals, particularly camels and sheep, are exported to Egypt, Saudi Arabia, and other Arab countries. However, Sudan remains a net importer of food. Problems of irrigation and transportation remain the greatest constraints to a more dynamic agricultural economy. 15

16 The country s transportation facilities consist of 4,800- kilometer (2,748-mi.) single-track railroad with a feeder line, supplemented by limited river steamers, Sudan airways, and about 1,900 km. (1,200 mi.) of paved and gravel road primarily in greater Khartoum, Port Sudan, and the north. Some north-south roads that serve the oil fields of central/south Sudan have been built; and a 1,400 km. (840 mi.) oil pipeline goes from the oil fields via the Nuba Mountains and Khartoum to the oil export terminal in Port Sudan on the red Sea. Sudan s limited industrial development consists of agricultural processing and various light industries located in Khartoum North. In recent years, the GIAD 1 industrial complex introduced the assembly of small autos and trucks, and some heavy military equipment such as armored personnel carriers and the proposed Bashir main battle tank. Although Sudan is reputed to have great mineral resources, exploration has been quite limited, and the country s real potential is unknown. Small quantities of asbestos, chromium, and mica are exploited commercially. Extensive petroleum exploration began in the mid-1970s and might produce all of Sudan s needs. Significant finds were made in the Upper Nile region and commercial quantities of oil began to be exported in October 2000, reducing Sudan s outflow of foreign exchange for imported petroleum products. There are indications of significant potential reserves of oil and natural gas in southern Sudan, the Kordofan region and the Red Sea province. Historically, the U.S., the Netherlands, Italy, Germany, Saudi Arabia, Kuwait, and other OPEC 2 members national traditionally have supplied most of Sudan s economic assistance. Sudan s role as an economic link between Arab and African countries is 1 The biggest industrial complex in Sudan, established in 1993, located in Algezira State in an area of 15 square kilometers. 2 Organization of Petroleum Exporting Countries 16

17 reflected by the presence in Khartoum of the Arab Bank for African development. The World Bank had been the largest source of development loans. Sudan will require extraordinary levels of program assistance and debt relief to manage a foreign debt which exceeds US $17 billion as at 2004/2005, more than the country s entire annual GDP, and one of the world's largest foreign debts. During the late 1970s and 1980s, the IMF 1, World Bank, and key donors worked closely to promote reforms to counter the effect of inefficient economic policies and practices. By 1984, a combination of factors, including drought, inflation, and confused application of Islamic law, reduced donor disbursements and capital flight led to a serious foreign-exchange crisis and increased shortages of imported inputs and commodities. More significantly, the 1989 revolution caused many donors in Europe, the U.S., and Canada to suspend official development assistance, but not humanitarian aid. However, as Sudan became the world s largest debtor to the World Bank and IMF by 1993, its relationship with the international financial institutions soured in the mid-1990s and has yet to be fully rehabilitated. The government fell out of compliance with an IMF standby program and accumulated substantial arrearages on repurchase obligations. A 4-year economic reform plan was announced in 1988 but was not pursued. An economic reform plan was announced in 1989 and began implementing a 3-year economic restructuring program designed to reduce the public sector deficit, end subsidies, privatize state enterprises, and encourage new foreign and domestic investment. In 1993, the IMF suspended Sudan s voting rights and the World Bank suspended 1 International Monetary Fund 17

18 Sudan s right to make withdrawals under effective and fully disbursed loans and credits. As a result of oil export earnings around $500 million in , Sudan s current account entered surplus for the first time since independence. In 1993, currency controls were imposed, making it illegal to possess foreign exchange without approval. In 1999, liberalization of foreign exchange markets ameliorated this constraint somewhat. Exports other than oil are largely stagnant. The small industrial sector remains in the doldrums, spending for the war continues to preempt other social investments, and Sudan s inadequate and declining infrastructure inhibits economic growth. 1.5 Economy Performance Instability is the characteristic that dominate the performance of the Sudanese Economy. Since independence and till now, a number of plans were put under application, most of these plans weren t carried out properly and hadn t follow the time schedule set for the plans. The political instability was the main reason behind the failure in the application of different economical plans. The following part will show main plans set for the Sudanese Economy. After the World II War, two development programs -actually lists of proposed investments- were drawn up for the periods and These plans appear to have been a belated effort to broaden the country's economic base in preparation for eventual Sudanese independence 1. Both programs were seriously hampered by a lack of experienced personnel and materials and had little real impact. 1 Sudan Got its independence from the British Colony on 1/1/

19 Not until 1960 did the government attempt to prepare a national development plan. Since that time, three plans have been formulated, none of which has been carried through to completion. Work on the first of these, the Ten-Year Plan of Economic and Social Development, for the fiscal years (FY) , began in late 1960, but the plan was not formally adopted until September 1962, well over a year after its scheduled starting date. The plan as prepared was not adhered to, and implementation was actually carried out through investment programs that were drawn up annually and funded through the development budget. Projects not in the original plan were frequently included. Investment was at a high rate in the first years, well beyond projections, and a number of major undertakings had been completed by midplan As the 1960s progressed, a lack of funds threatened the continuation of development activities. Government current expenditure had increased much faster than receipts, in part because of the intensification of the civil war in the south, and government surpluses to finance development vanished. At the same time, there was a shortfall in foreign investment capital. The substantial foreign reserves held at the beginning of the plan period were depleted, and the government resorted to deficit financing and foreign borrowing. The situation had so deteriorated by 1967 that implementation of the Ten-Year Plan was abandoned. Sudan's international credit worthiness became open to question. Late in the 1960s, the government prepared a new plan covering FY 1968 to FY This plan was discarded after the military 19

20 coup led by Nimeiri 1 in May Instead, the government adopted a Five-Year Plan of Economic and Social Development, This plan, prepared with the assistance of Soviet planning personnel, sought to achieve the major goals of the May revolution (creation of an independent national economy; steady growth of prosperity; and further development of cultural, education, and health services) through socialist development. During the plan's first two years, expenditures remained low, affected largely by uncertainties that stemmed from the civil war. After the war ceased in early 1972, the government felt that the plan failed to provide for transportation improvements and large-scale productive projects. Therefore, in 1973 the government established the Interim Action Program, which extended the original plan period through FY New objectives included the removal of transportation bottlenecks, attainment of self-sufficiency in the production of several agricultural and industrial consumer items, and an increase in agricultural exports. The denationalizations since 1972 resulted in increased private foreign investment in development. The final investment total during the first five years was considerably above the original plan projection. The plan failed to achieve its goal of a 7.6 percent annual growth rate in gross domestic product (GDP), however, and was extended to In early 1977, the government published the successor Six- Year Plan of Economic and Social Development, Its goals and projections also appeared optimistic because of the worsening domestic economic situation, which was marked by 1 Sudanese President May 1969-April

21 growing inflation. The inflation stemmed in large part from deficit development financing (printing money), increasing development costs because of worldwide price rises, and rising costs for external capital. During the plan's second year, FY 1978, there was no economic growth as the deficit development financing in the mid- and late 1970s led the Sudan into a deepening economic crisis. At the same time, external debt pressures mounted, and Sudan failed to meet its scheduled payments. A substantial cutback in further development expenditures became unavoidable. The result was an abandonment of Six-Year Plan projections, a restriction of expenditures generally to the completion of projects under way, improvement of the performance of existing operational projects, elimination of transport constraints, and a series of short-term "rolling" programs that particularly emphasized exports. In October 1983, the government announced a three-year public investment program, but efforts to Islamize the economy in 1984 impeded its implementation. In August 1987, an economic recovery program was initiated. This program was followed, beginning in October 1988, by a three-year recovery program to reform trade policy and regulate the exchange rate, reduce the budget deficit and subsidies, and encourage exports and privatization. By 1989, there was little possibility for early economic recovery offered by the government. The government's economic policies proposed to Islamize the banking system, but foreign business interests viewed this measure as a disincentive to do business in Sudan, because no interest would be paid on new loans. 21

22 1.6 The Ills of Sudan Economy Between 1978 and 1985, agricultural and industrial production had declined in per capita terms. Two reasons for this decline were the droughts and accompanying famine occurring in the 1980s and 1991, and the influx of more than 1 million refugees from Eritrea, Ethiopia, Chad, and Uganda, in addition to the persons displaced by the continuing war in southern Sudan who were estimated to number between 1.5 million and 3.5 million. Nevertheless, the decline in Sudan's agricultural and industrial production had begun before these calamities. Few development projects were completed on time and those that were failed to achieve projected production. After 1978 the GDP steadily fell so that the vast sums of money borrowed could not be repaid by increased productivity. Sudan found itself in a cycle of increasing debt and declining production. These economic problems had two fundamental causes. First, in planning little thought was given to the impact of any one project on the whole economy and even less to the burden such huge projects would place on a fragile infrastructure. Some ministries undertook projects by unilaterally negotiating loans without reference to the CPA 1. Second, remittances by Sudanese laborers in the Persian Gulf (thousands of workers were based in Kuwait and Iraq, until many of them were expelled) placed a stress on Sudan's economy, because the government was forced to relax its stringent currency controls to induce these workers to repatriate their earnings. Such funds were largely invested in consumer goods and housing, rather than in development projects. 1 Central Planning Agency 22

23 Although always present, corruption never had been a major characteristic of the Sudanese economic scene. This corruption fell into three principal categories: embezzlement of public funds, most of which left the country, agricultural acquisition schemes, and investment in the mercantile sphere. The most common ways of embezzling public funds were acquiring liquid assets from banks or government agencies, selling the state's assets, selling state land, and smuggling. The siphoning off of liquid assets usually required the connivance of a high government official. Between 1975 and 1982, more than 800 cases were reported of embezzlement of, on the average, more than Sd1,000. In one case, principal bank officials embezzled Sd3 million; another bank made a loan of Sd200 million to a businessman whose business was fictitious. State property sold by embezzlers included gasoline and medicines. State officials also sold real estate in residential areas at below the market price. An impressive residence would then be built on the property for rental to diplomatic officials or executives of multinational companies. Another highly profitable form of corruption was the selling of state farmlands, each about 30,000 feddans 1. MFC 2 officials sold large numbers of feddans at low prices to senior officials in Khartoum; many of the latter exploited the land for profit at the expense of the peasantry and caused profound ecological deterioration 1.7 Sudan Civil War As mentioned in the introduction, Sudan has two distinct major cultures-arab and Black African-with hundreds of ethnic and tribal divisions and language groups, which makes effective 1 One feddan is equivalent to 0.42 hectares 2 Mechanized Farming Corporation 23

24 collaboration among them a major problem. Conflicts were inevitable results of this wide range of ethnical diversification. The war in Southern Sudan was the most critical to the Sudanese society socially, economically and politically. 1.8 The War in the Southern Sudan The Sudanese conflict predates the birth of modern Sudan in In February 1953, the United Kingdom and Egypt concluded an agreement providing for Sudanese self-government and selfdetermination. The transitional period toward independence began with the inauguration of the first parliament in With the consent of the British and Egyptian Governments, Sudan achieved independence on January 1, 1956, under a provisional constitution. The United States was among the first foreign powers to recognize the new state. However, in the run-up to the granting of Sudan's independence, the civil service and administration were placed increasingly in Northern Sudanese hands - largely excising the Southern Sudanese from the government. The British failure to ensure equity for both the north and the south has had lasting effects. The Northern Khartoum government reneged on promises to southerners to create a federal system, which led to a mutiny by Southern troops in the Equatoria Province. Feeling disenfranchised and cheated, these separatist Southerners, under the leadership of the rapidly expanding Anyanya 1 Forces, began an initially lowintensity civil war aimed at establishing an independent South. This war would last seventeen years, from 1955 to 1972 when the war ended with an agreement signed in Addis Ababa. The Agreement granted the South qualified autonomy, far less than parity within a federal structure demanded by the South. 1 First Rebels Group in Southern Sudan 24

25 In September 1983, as part of an Islamicization campaign, President Nimeiri announced his decision to incorporate traditional Islamic punishments drawn from Shari a 1 into the penal code. Southerners and other non-muslims living in the north were also subjected to these punishments. Moreover, the break-up and transfer of ex-anyanya units out of the South and President Nimeri's decision to divide the government of the South into three regional government units were resisted by Southern officers and prompted a mutiny in Bor 2 in These events, and other longstanding grievances, in part led to a resumption of the civil war that was held in abeyance since 1972, and the war continues until today. The SPLA 3 was formed out of officers from the Mutiny in Bor. In 1989 a coup brought into power a military regime which intensified the war against the SPLA. Internationally sponsored attempts to negotiate a peace settlement between the two sides, such as the IGAD 4 sponsored negotiations made little progress until June 2002, although the Government, and the SPLM/A 5 agreed in 1997 on a Declaration of Principles (DoP). The DoP held that the unity of the Sudan should be given priority, provided that the social and political system was secular and democratic and that resources be equitably shared. In the absence of these principles, the South would have the right to self-determination through a referendum. In May 2004, after two years of negotiations (starting with the July 2002 Machakos 6 Protocol), the government and SPLA reached agreement on several major issues -- sharing of oil revenues (50/50), the application of 1 Islamic Law 2 A city in Southern Sudan 3 Sudanese People Liberation Army 4 Intergovernmental Authority on Development 5 Sudanese People Liberation Movement 6 A city in Kenya where peace talks between Sudanese government and SPLA took place 25

26 Islamic religious law (will not be applied in the South), selfdetermination for the southern Sudan (a referendum on secession will be held after a transitional period of six years), etc. A final resolution of Sudan's civil war could greatly help the country's economy, lead to the lifting of various sanctions against the country, and encourage investment by foreign companies (including oil companies 1.9 War Impacts Sudan's costly, bloody 21-year internal conflict with the SPLA and other rebel movements has, over the past two decades, claimed (directly or indirectly through famine) as many as two million Sudanese lives The southern region has a population of around 6 million and a predominantly rural, subsistence economy. This region has been negatively affected by war for all but 10 years of the independence period (1956), resulting in serious neglect, lack of infrastructure development, and major destruction and displacement. More than 2 million people have died, and more than 4 million are internally displaced or become refugees as a result of the civil war and war-related impacts. Due to this war, developmental projects were suspended every now an then, some projects have started long time ago without been finished yet. Construction projects suffer from the war as many other developmental projects (i.e. Jonglei canal) 1. Moreover, a great portion of the economy out put was devoted towards the military work and the war shifted most of the funds for assigned for developmental and constructional projects to the war. The shifting of funds towards war has had its impacts on all markets 1 It is estimated that water worth over $1 million to agricultural production is lost annually, through spreading, evaporation, and seepage, in Africa's Sudd swamp. In 1974, Egypt and the Sudan agreed upon the construction of a canal - the Jonglei Canal - that would partially drain the Sudd, minimize the water losses, and provide Egypt with water needed during the arid season. This project will study the impact the Jonglei Canal might have on the inhabitants of the region. The work in this project has stopped since

27 in Sudan. Real Estate market as a growing market suffered from the war severely. The equilibrium between demand and supply was not subject to market forces; instead it was at the mercy of the war and the resources available after covering the war costs. The market was reluctant to respond to the gap between demand and supply. The migration was inevitable due to the war; migration wasn t organized by the government. As a normal result for unorganized migration, demand and supply were unpredictable making it difficult to create a well organized and planned market for real estate and its submarkets. As a result, investing in real estate was characterized as risky investment. Therefore, the role of the private sector in the real estate market was unrealizable Further Conflicts A new crisis in the western Sudanese region of Darfur has killed 10,000-30,000 people created nearly a million refugees in recent months. The conflict in Darfur 1 has complicated attempts at ending the country's larger civil war. The International community is looking forward to resuming the conflict in Western Sudan sooner. Great efforts have been carried out by the Sudanese government and neighbor countries to end the new civil war in Sudan to avoid any of the results of the war in Southern Sudan. Optimistic points of view consider the situation as less critical than the previous war. No doubt, if this war continues, it will cost the Sudanese Economy as similar as the war in the South did. Sudan is in need of any resources including human resources in order to recover its economy; such wars devote all the resources towards military work instead of development projects. 1 A region In Western Sudan 27

28 Chapter (2) Sudanese Economy Performance Analysis 28

29 Chapter (2) Sudanese Economy Performance Analysis 2.1 Introduction The following chapter describes the general characteristics of the Sudanese Real Estate Market. A general analysis for the Sudanese Economy performance has been carried out in order to highlight the link between the economy and the demand for real estate and construction in Sudan. The Economy played a great role on the demand and supply sides of the market through the past decades in Sudan. The analysis is based on statistical records obtained from the Ministry of Finance (MoF) and the Central Bank of Sudan (CBS). The second part of this chapter identifies the characteristics of the real estate market in Sudan, by giving an overview to the market. The third part highlights the role of the Sudanese Real Estate bank in the market. An introduction to the bank, its history, performance, and capital is made in this chapter. 2.2 Economy performance Analysis No doubt that the performance of all the markets in real estate is subject to the goodness or badness of the general economy performance in that market boundaries. The following part shows the link between the main economy indicators and the construction as an indicator for the real estate market in Sudan. 2.3 Inflation rate Sudan, as many developing countries, suffers high inflation rates and instable inflation records. Inflation rate wasn t stable or even change in a predictable manner during the 1990s for many reasons; 29

30 The lack of clear and efficient economical plans Changing economical policies from time to time Money supply was higher than the real growth. In the year 1998 dramatic decrease in inflation rate took place; inflation rate decreased from 46.5% in 1997 to 17.7% in 1998 (Table (1) & (fig 2). Following the year 1998, inflation rate started to decrease steadily. Governmental policies and strategies (i.e., private sector investments) contribute to stabilization of inflation rate. Economic performance shows stability for the last six years. Inflation during Year Rate Table (1): Inflation rates,

31 Inflation Rates ( ) Inflation Rate Year Fig (2): Inflation rates, GDP The GPD starts to increase steadily since 1997; the main reason behind the growth was the increasing productivity of the agricultural sector. The GDP growth rate stabilized during the followings two years before it fluctuates after 2000 despite the increase in the total productivity of economy. The main reasons those justify the increase of the economy productivity were; Privatization policies Resuming some of the economical problems (i.e., high inflation rates) Diversification of manufacturing sector Encouraging the private sector to invest in national projects resulting in higher GDP Oil production on large scale. The growth rate of total productivity for the years 2002 and 2003 decreased from 12.9% to 6.3% respectively. Decrease in the share of the agricultural sector stands as a reason behind the reduction of the total economy productivity growth. Generally, 31

32 oil sector was a major contributor that made obvious changes in the Sudanese economic map. See Table (2) GDP In amounts (year prices as base year) Amounts Years Fig (3): GDP In amounts (Year prices as base year) GDP growth 14.0% Growth percentage 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% years Fig (4): GDP Growth (Year prices as base year) 32

33 Sectors Shares in Constant Prices year 1981/1982 Sector Agriculture Manufacturing and Mining Electricity and water Construction Governmental services Other services GDP at Constant Prices year 81/ Sectors Shares (%) in Constant Prices year 1981/1982 Sector Agriculture 43.0% 45.0% 47.6% 48.7% 49.8% 46.4% 45.6% 43.4% 42.9% Manufacturing and Mining 6.7% 7.4% 8.3% 8.1% 9.2% 15.0% 16.5% 21.8% 22.7% Electricity and water 1.9% 1.9% 1.9% 1.8% 1.8% 1.7% 1.7% 1.6% 1.5% Construction 5.5% 5.2% 4.9% 5.1% 4.9% 4.7% 4.5% 4.2% 4.4% Governmental services 8.4% 7.5% 5.9% 6.5% 6.2% 5.8% 6.0% 5.5% 5.4% Other services 34.5% 33.1% 31.3% 29.7% 28.2% 26.4% 25.6% 23.6% 23.0% GDP at Constant Prices year 81/ % 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Productivity Growth In Different Sectors Sector Agriculture - 9.6% 12.4% 8.3% 8.5% 0.8% 4.7% 7.3% 5.2% Manufacturing and Mining % 19.4% 3.6% 19.2% 77.4% 17.3% 48.9% 10.6% 33

34 Electricity and water - 3.1% 4.0% 3.9% 1.9% 5.9% 5.2% 3.7% 5.1% Construction % 0.4% 10.0% 2.4% 3.3% 3.5% 4.0% 12.0% Governmental services % -15.6% 16.6% 0.0% 2.0% 9.8% 4.0% 4.0% Other services - 0.5% 0.5% 0.5% 0.5% 1.5% 3.0% 4.0% 4.0% GDP at Constant Prices year 81/82-4.7% 6.1% 6.0% 6.0% 8.3% 6.4% 12.9% 6.3% Table (2): Sectors Performance in the Sudanese Economy

35 2.5 Manufacturing and Mining Sector Manufacturing and Mining Sector is one of the most important sectors in the Sudanese economic components. Generally this sector share increased rapidly during the last 10 years. Between 1995and1997 the share of this sector to GDP increases because the Strategic economical plan had fix and maintained main national factories like sugar manufacturing and cement factories. More over the economic strategy of this period subsidized this field and the privatization policy made some firms more profitable than when they were governmental ones. The economical policies also reduce taxes, customs and production fees. Since 1999 the oil production started to make boom in the GDP and the whole economy Manufacturing&Mining Sector shares in amount in GDP( prices as base year) Amount Year Fig (5): Manufacturing & Mining Sector (%) share in GDP During (Year prices as base year) 35

36 Manufacturing &MiningSector (%)share in GDP(prices of year as base 25.0% Percentage Shares 20.0% 15.0% 10.0% 5.0% 0.0% Years Fig (6): Manufacturing & Mining Sector (%) share in GDP During (Year prices as base year) 2.6 Construction Sector The real growth of this sector was negative till the mid 1990s, it became positive in The shift from negative to positive growth was result of the national development projects those were going on that time such as national roads, bridges housing projects and redeveloping of some projects and infrastructure. Moreover government start to built oil infrastructure in 1998, when it was finished the construction share decreased from 10%in 1998 to 2.4% in 1999 because of finishing the oil infrastructure. After 2000 the amount spent on construction continues to increase because of the entry of foreign companies and investors. Despite the growth that the construction sector enjoyed during the , the share of this sector to GDP shows a decreasing pattern. The contribution of other growing sectors to GDP was greater than the construction sector did. The oil sector share to GDP was relatively high 36

37 resulting in the reduction of other sectors shares. The increase in the amount spent on construction was caused by oil production; setting the infrastructure for oil production. ConstructionSector Shares in Amount in GDP In Prices( )as base year Amount Years Fig (7): Construction Sector Shares In Amount in GDP During (Year prices as base year) Construction Sector (%)Shares In GDP(Year Prices as base year) 6.0% Percentage Shares 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Years Fig (8): Construction Sector (%) Shares in GDP During (Year prices as base year 37

38 The objective of the analysis carried above is to make a study on the relation between the economy performance and the construction industry (represents the demand for real estate). According to this analysis the demand for new space was a result of the petroleum operations and production. The future of this demand is expected to increase for many reasons; The resolution of the Civil war in Southern Sudan. Devoting the war budget for developmental projects Developmental projects and infrastructure are expected to take place in the South. Expected entry of foreign capital 38

39 Chapter (3) Sudanese Real Estate Market 39

40 Chapter (3) Sudanese Real Estate Market 3.1 Introduction Investment in real estate is characterized by the high risk associated with the relatively high returns. Investment in the sector of real state is more risky in developing countries than it is in other countries in the world. Substantial fund is required for investing in real estate; therefore most of the developing countries find it difficult to establish organized markets for real estate. Politicians and planners in these countries face difficulties in the allocation and reallocation of funds available for development required for in different sectors in the economy. Accordingly, politicians and planners draw more attention for the sector of real estate. Moreover, real estate investments are long term investments. This fact calls for stability in the economy, to persuade investors be exposed for the risk associated with investing in real estate. When an economy experience instability, investors will shift to sector with short term investments. Economy instability contributes to the unattractivty of investing in real estate. Availability, accuracy, and reliability of information are considered key stone in the efficiency of real estate markets. Most of the developing countries face severe problems in getting accurate ad reliable information; if any is available. The absence of accessed and trustful information data base makes it difficult for investors to participate in the real state market. Investments in 40

41 developing countries are mainly sponsored by the private sector and foreign investor. Availability of information is crucial for foreign investors to enter any market; therefore, they rarely invest in real estate. Transparency in getting information facilitates the task of actors in the real estate market in decision making. Transparency is missed in developing countries, even from governmental authorities; therefore entering the real estate market becomes less attractive. Planners in developing countries try to solve problems of fund availability by establishing financial firms specialized in offering fund for real estate. These specialized firms make credible attempts to attract the private sector to invest in real estate. Most of the projects carried out by these firms are devoted towards housing projects. The private sector, therefore, participate in the real estate market by investing indirectly in it. The firms attract private sectors capital in exchange to its shares; returns of investing in real estate come in form of dividends to share holders. The policy of establishing such kind of firms contributes to the attractivety of real estate markets in developing countries. 3.2 Real Estate Market in Sudan Sudan as one of developing countries experiences the absence of organized real estate market. Many of the above mentioned reasons are responsible of the absence of organized markets for real estate. The government didn t and still doesn t show any kind of encouragement for the 41

42 private sector to launch the market of real estate. Some of the policies and plans might have contributes indirectly to attract private sector to make substantial investment. It s not till the beginning of 2000s when private sector invests in this sector. Before that, governmental authorities, firms, and banks where the only actors in the real estate market. Many factors stand behind the entry of private sector into the market, some of which are: 3.3 Demand The increasing demand for real estate from private sector, specially foreign companies and investors, made it more attractive to enter the market 3.4 Polices made by the Central Bank (Bank of Sudan) It wasn t allowed, until 2001, for banks other the Sudanese Real Estate bank to finance real estate investments or construction projects. 3.5 Economy Performance The economy stability that Sudan experienced during the last 7 years made investing in real estate less risky. 3.6 Oil Production Oil started to be produce in large scale since 1997, the government started to build modern oil infrastructure according to the international standards, this construction movement resulted in higher demand. Many foreign companies invested in oil production. The need of these companies to build, buy, and rent created new demand in real estate market for residential and offices space. Private sector 42

43 was encouraged to enter the market because of high demand and feasibility of investing in real estate. 3.7 Types of Buildings Until the near past, most of the buildings, especially residential buildings, were single storey buildings. Costs associate with horizontal expansion (i.e. infrastructure) calls for vertical expansion in buildings and cities profile. Therefore the demand for multi storey buildings increased significantly in the last 10 years. Many new projects are under construction, and some are subject to the approval of the governmental authorities. 3.8 Sudanese Real Estate Bank (SREB) Sudan similar to some other developing countries experience problems in funding real estate projects. The Sudanese parliament, in order to solve the funding problems, made its decision to established specialized governmental firm concerns with real estate. In accordance to the parliament decision, Sudanese Real Estate Bank (SREB) was established in year1967. In the beginning the main role the bank played was to find solutions for low income people housing. The bank started to build residential complexes with low cost and offer these units in long term loans free of interest. Loans were usually being repaid in a period of15-20 years, making it possible for low income households to have shelters. SREB capital was made of governmental capital from the central bank and annual subsidiaries from the ministry of finance. SREB started with only one branch, then more branches were established to avoid services centralization 43