Yusuf Mansur

The growth in the activity of the real estate sector in Jordan is a matter of public knowledge by now. It encompasses the largest investment transactions and, on the ground, it remains the most profitable investment in the country.

But can real estate spur sustainable growth and development?

This question arises from a debate I had with several fellow economists who seemed to support the view that the flow of foreign direct investment (FDI) into land and real estate purchases in the Kingdom will be the growth engine for sustainable growth and, consequently, development. The discussion was revived at the Inaugural Economic Freedom of the Arab World Conference that was held last week in Beirut with scholars from the prestigious Cato and Fraser Institutes. Their view was that once a piece of real estate is bought by a foreign investor, the money that accrues to the local seller can be directed to other productive investments, a belief that seems to be shared by many.

Now the facts: in spite of the tremendous activity (JD2 billion in 2005 alone) in the real estate sector since 2004, the GDP growth rate fell from 8.4 per cent in 2004 to 7.2 per cent in 2005, and is expected to further decline, to 6 per cent. Thus, the real estate activity seems to be ineffective in driving economic growth.

What of poverty and unemployment rates? The poverty rate remains at 14.7 per cent and the unemployment rate increased slightly from under 14 per cent in 2004 to 14.4 per cent in 2005. So, neither poverty nor employment was affected by the real estate investment boom. In addition, overbuilding last year has led to 2,000 empty apartments in Amman alone (unofficial figures), but that’s the subject of another debate.

So where did the money go? Because of inherent institutional difficulties relating to investment in productive sectors, such as industry, tourism, transportation, of the rising economic cost of delays, fees and procedures, and because of the low profitability index for such investments relative to the world and the real estate market, funds will not go there.

So, again, where did the money go? Last Ramadan, at a play produced by satirist Nabil Sawalha, a pun was made on how every other Jordanian became a real estate broker. And why not? Real estate transactions are easy, there is no red tape involved, the investment itself is inflation proof, and real estate never falls in value — on the contrary, historically, the return on real estate investment has been higher than the return on any other investment. Hence, the money gained from the sale of land naturally gravitates towards speculating on other lands. Consequently, land prices continue to rise ad infinitum.

In the process, while the government collects its 10 per cent fees from real estate transactions (JD200 million in 2006), and no new jobs are created.

Additionally, some of the “manna from heaven”, or money from land in this case, went into spending on luxury items (expensive vehicles, large apartments and the like). But these are either imported or large ticket items that one does not purchase frequently and are not Jordanian made — most labour in building sites is foreign and unskilled. The money is thus refrozen into idle property or leaked out of the economy in imports.

Meanwhile, few new jobs are created in a country where the number of newcomers to the labour market means there is need to create 60,000 new jobs every year in order to keep the unemployment rate the same, never mind lowering it.

Real estate investments are not bad in themselves; what matters is whether they are accompanied by a strategy that puts people to work.

When economic policy is externally driven, the danger is that FDI growth has a lower impact on he overall economy than desired. For now, we can surmise that real estate investment under the current institutional set up will look good in gross figures, but will not lead to development, just as it happened in the early 1990s.

Questions and comments can be directed at: ymansur@enconsult.com