Since the devaluation of the Leone in the late 1970s, it has been the trend to denominate Rental and Property prices in Sierra Leone in United State Dollars. Given the recent free fall of the US dollar in global financial markets, it is time for property owners to be introspective and examine whether they are winning or losing. In other words, are our property investments making money or losing money?
For the purposes of this article, I would like to clarify an issue that is a source of confusion, sometimes acrimony with respect to property transactions in Sierra Leone.
The price of a property is different from the open market value of a property. The open market value of a property is a monetary value assigned to it, based on it relative location, size, macro-economic factors, access to services such as road, water and energy etc.
The price of a property is simply the agreed amount of money paid for it, as a result of negotiations between a willing seller/landlord and a willing purchaser/tenant.
In the Sierra Leone context, ninety-nine percent (99%) of the time, the two will always be different. Professional property valuers should always clarify this issue, when presenting valuation reports to their clients, especially unsuspecting ones.
During the last four years the United Stases Dollar has been losing value against other major world currencies, particularly the Euro. This is as result of various factors, not least an expanding budget deficit exacerbated by expenditures in the war in Iraq (In 2007 according to the U.S cable news channel CNN, Three Hundred million Dollars per day, Three billion Dollars every ten days, Nine Billion Dollars every 30 days).
A staggering 108 billion dollars over a 12-month period. This expenditure will perpetuate over the medium term. The United States also runs a huge balance of payments deficit. In other words, it is buying more goods from the world than it is selling. The United States of America is the world’s largest debtor nation. Traditional economics teaches us that a country’s balance of payments accounts status has a great bearing on the value of its currency.
In recent times, International Investment and Commercial banks have had to write-down or write off billions of mortgage-backed securities emanating from the chaos in the American sub-prime mortgage market.
Predictions by economic pundits and organisations such as the Organisation for Economic, Cooperation and Development (OECD) have forecasted a slowing down of the largest economy in the world perhaps even a slide into recession. However I am mindful of the resolve and the tenacity of the American authorities to restore the Dollar to its former glory.
ANALYSIS OF THE LEONE’S PERFORMANCE VIS-À-VIS THE DOLLAR
The published table depicting the Average Official Exchange Rates Le/US$/ (Mid Rate) is culled from the Bank of Sierra Leone’s Bulletin, July to December 2006. This covers the period Jan 1997 to December 2006. It shows the US Dollar steadily appreciating against the Leone or the Leone depreciating against the dollar up to 2004. During this period, dollar denomination of rental values would have meant more than average returns on property investments. From 2005, the rate begins to stabilize to an average of Le 2961.91 to one US Dollar ($) in December 2006.
At the time of writing, the author contacted a parallel market broker, for purposes of illustration only, who confirmed a rate on that day of Le 2950 to one US Dollar. Approximately a year ago (June 2007), it was hovering around Le 3000 to one US Dollar. We are currently (in 2008) getting less Leones for the dollar.
Given this background, I would like to highlight a couple of examples with respect to property transactions in Sierra Leone, where, when property prices are published by vendors/landlords, there is hardly any revaluation to take account of capital appreciation or property price inflation. Most prices are based on a principle of “Wake up in the morning and think of a number”.
Scenario A
A four bedroom property off Wilkinson Road with a rental price of $10,000 p.a. was put on the market 12 months ago. A year ago the Leone equivalent was Le 30,000,000. Today, according to a parallel market broker, it is Le 29, 500,000. An exchange loss of Le 500,000 (Five hundred Thousand Leones). Today, Le500, 000 is the equivalent of four (4), 50 kg. bags of rice.
Scenario A
An acre of land in the York Area with a market value of $2000 per town lot, equivalent to Le 6,000,000 per town lot a year ago. According to a parallel market broker, whom I contacted for illustration purposes only, the equivalent is now (June 2008), Le5.900,000 per town lot, the exchange loss of Le100,000 can today purchase 6 gallons of petrol.
As Sierra Leoneans continue to be assaulted by the constant global increase in oil and rice prices, such losses when property transactions occur are unsustainable. Yes I am stating the obvious, but when you consider the cumulative exchange losses on property transactions nationwide, there is a subsequent cumulative loss of wealth as a result of utilizing dollar denominated values/prices in property transactions.
So what’s the alternative? Contact Sonako Homes on 076-713-589 for advice!!!
The alternative
On a serious note, I propose that we begin to denominate property prices and values in good old fashioned LEONES. Why not? After all, it is the legal tender of the Republic of Sierra Leone and it is our own currency.
At this juncture I would like to endorse, His Excellency, President Ernest Bai Koroma’s clarion call for attitudinal change. In this case POSITIVE attitudinal change towards our currency the LEONE. It will signal respect and love for our country and consequently respect and love for each other.
Arthur S.C. Johnson is an Accountant and Real Estate Developer. Mobile 076-713-589. E-mail :a_scj@yahoo.co.uk.
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