Redefining wealth in Somaliland

Empty land doesn’t stimulate growth. Somaliland needs to diversify away from real estate investment in order to develop a vibrant economy.

Jesse Clain

General Partner at The Takeoff Fund

Real estate is the only choice right now

When Somalilanders are looking for a place to store money or invest capital in-country, real estate is basically the only game in town. There are no local bonds and no publicly listed equities. There’s no interest rate, so putting money in the bank is financially equivalent to stuffing it under your mattress.

Other investments create more economic value

The majority of Americans’ investment capital goes toward equities and bonds. American equities generate returns of about 10% every year. Government bonds typically return 1-6% with almost no downside, which makes them a great option when equities are in a down market or for investors focused on a shorter time horizon.

These kinds of investments aren’t only good for investors. They’re also good for the economy. Bonds help governments finance schools, roads, bridges, and other valuable infrastructure. Corporate equities allow the market to direct capital toward the most promising companies, which rewards ambitious businesses and incentivizes company founders.

The case of real estate

Real estate investing isn’t always good for the economy the way equity and bond investing are.

Nobody gets hurt when the S&P 500 goes up. But when real estate prices go up, people do get hurt. Increases in property values are good for landowners, but they’re bad for renters, and dense urban areas have a lot more renters than landowners.

Investing in vacant land

Who benefits when a person buys vacant land, does nothing with it, and then sells it for a profit a few years later? There’s no production here. No growth. One could argue that the vacant land investor is doing the good work of “price discovery”. They’re helping markets become more efficient.

But it does little good to know how to price vacant land. Imagine beautiful farmland trading hands year after year, everybody making money just for having held it, and everybody who sells it increases the price by saying “imagine what a great farm you could build here!”

The risk in Hargeisa

That’s what’s happening in Hargeisa.

The cost of land has been quickly rising in Hargeisa because there are no other investment options.

Without corresponding investments in innovative companies, infrastructure improvements, and supply chain efficiency, construction costs remain high and wages remain low. The cost of land has so outpaced improvements in other parts of the economy, and financing is so hard to come by, that it doesn’t make sense for landowners to build on their properties. They’d have to wait for 20+ years before getting a return from their building.

Given these circumstances, it’s no surprise that, as the director of one of Somaliland’s banks recently told me, the bank doesn’t bother to build anything on their real estate. They just hold on to vacant land for a few years and then sell it.

Over time, this investment style will cause real damage to Hargeisa.

Investors are acting rationally

We can’t blame investors or financial institutions for doing what they’re doing. They’re simply acting rationally. Investing in land and letting it lie vacant until it’s the right time to sell has been the best strategy, and will be the best strategy until something changes in their incentives.

Increasing the menu of investment options

One option is for Somalilanders to invest overseas in things like American equities. That’s a good solution for individual investors, but it won’t have a particularly stimulative effect on the Somaliland economy.

Another option is Islamic bonds (sukuk).

Sukuk are halfway between equities and conventional bonds. Like conventional bonds, they have a set maturity date at which the principal is returned to the bondholder. Like equities, they return proceeds during the holding period based on the performance of the underlying asset.

There are about $150B in sukuk issuances globally each year. They’re used for specific public projects like airport construction in Saudi Arabia and renewable energy generation in Malaysia, as well as to provide immediate government liquidity in a way that’s compliant with Islamic finance.

As far as I can tell, there are no sukuk issued in Somaliland. There should be! They’d be a great way to finance important revenue-generating public projects or time-sensitive government expenses.

A third option is local corporate equities.

There’s already a culture of equity ownership in Somaliland. Several companies offer opportunities to become shareholders, but it’s typically done through word of mouth. There’s no public exchange in Somaliland in which people can trade shares in mature local companies. Maybe that sort of exchange would make sense here.

We’re approaching this from another angle through The Takeoff Fund. We’re creating a vehicle for Somalilanders to invest in local companies through the form of a venture fund portfolio. The Takeoff Fund selects high-quality companies in Somaliland, acquires shares of those companies, and helps the companies grow through various forms of management and technical assistance. Somalilanders can invest in the fund and become shareholders in the entire portfolio of companies.

Multiple approaches are needed

These approaches are all helpful, and there’s no reason to do just one. The more investment products we can develop that allow Somalilanders to allocate capital to something other than real estate, the better off the country will be. If we can’t figure out how to diversify away from real estate, economic stagnation in Somaliland will be inevitable.

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