Can Kenya’s Booming Property Market Stand the Heat?


In the ridges of Nairobi’s Ruaka estate at least one four-storey building is completed every two weeks. The majority of rentals are fully booked before completion, while those for sale are half sold before the ground breaking is done.

Those in the know say that is due to the huge mismatch between demand and supply of housing in the country.

A drive around most of Nairobi’s estates and its environs reveals the same story.

Rising demand from both residents and Kenyans in the diaspora is behind the high returns that investors in the sector have been reaping in the past decades.

Attracted by high and consistent returns, investors ranging from pension funds to small developers are deepening their stakes in the property sector.

Available data on the value of new building plans approved in 2001 – up to June that year – shows that the value rose from Sh4 billion to an annualised level of Sh198 billion.

But behind this boom lies a worried lot of investors, forecasting 2012 to be the year when the prevailing distortions in the property market will enter a correction period – characterised by a sustained fall in prices, helped by the high interest regime.

“The reason for this is the high interest rates on mortgages and construction finance. This situation is uncertain as to the period before we see a correction back to normalcy,” said Mr Gilbert Kibe, managing director of Bahati Ridge Development.

“Investors are either halting new developments or slowing down on current ones. Home buyers are putting their plans on hold for the time being,” Mr Kibe said.

For many, though, the question will be whether the prediction of a property bubble bust will be real, this time round.

Ms Farhana Hassanali, the property development director of HassConsult Ltd, publishers of property price indices, says the tripling of interest rates, devastating as it is proving to be for businesses, is yet to have as big an impact on house prices as it has on new developments.

“Very many building plans have been shelved, at least for the time being. Where constructions are underway, future phases have been postponed and the current phases down-sized, meaning that the supply of new housing units is being drastically reduced,” Ms Hassanali said.

“But it is the developers who are completing their buildings now, under great financial pressure, that will be the first to take the blow. The reality is that there will be some developers who will not make it through this ever narrowing walkway. We shall see some buildings abandoned on bankruptcy, and without finished structures that can be sold at a discount.

“These half-built premises will present a real blow to those who have paid deposits and to the developers themselves,” Ms Hassanali said after releasing the HassConsult property price indices for the fourth quarter of 2011.

“We believe that a number of developers may move to discounting so as to complete their projects, even at a loss, rather than incur ever rising interest bills on their finance. This could set up spots of bargain homes. But these will be occasional and unlikely to impact on the overall market,” she said.

These sentiments are shared by analysts at Renaissance Capital. “Of all the sectors, we are most concerned about real estate. We are not overly nervous about banks’ exposure to property mortgages per se — there are currently fewer than 16,000 mortgages in the entire banking system. Our main concern is on property developers who do not fall under mortgages, but rather under real estate, building and construction, and sometimes even under commercial loans,” Ms Yvonne Mhango, Renaissance Capital’s Africa economist said.

Cautioning clients in its research on the events that will shape 2012, the investment bank notes: We tend to worry when driving around Nairobi; we see a multitude of construction sites for new residential and commercial properties, and people start telling us about how they have gone into the property sector because the returns are amazing.

“We have seen this movie before, for example in South Africa from 2004-2007 when property prices rose sharply, fuelled by abundant and relatively cheap access to credit; and in Kazakhstan up to 2007, when Almaty became hot property. We have heard the familiar phrases echoed in Kenya: ‘buy-to-let’, ‘buy off-plan’, ‘anyone can make money in property’.”

The bank’s greatest concern is that despite the building and construction industry registering 50 per cent growth in the nine months to September 2011, the sector accounts for only 3.2 per cent of loans and advances, which rises to 15 per cent when the real estate sector is included.

Financial analysts do not expect the high interest rates to come down before the second half of the year after the latest monetary policy decision to hold the key rate steady at 18 per cent.

“The warnings on the risks to the foreign exchange rate that might be posed by the balance of payments situation, as well as the eurozone crisis, suggest that the Central Bank of Kenya will not be in a hurry to cut rates,” said Ms Razia Khan, head of research on Africa at Standard Chartered.

This means that players in the sector will wait longer to recoup returns on investments, given that high interest rates will keep off potential buyers.

Ms Khan, however, reckons that the rates have peaked and will start to decline.

She adds: “Inflation has also peaked, and the price outlook — due to the action taken by the authorities — is improving. Should the current trends persist, we expect at least 400 bps easing this year — the start of what will probably be a multi-year decline in interest rates that may take us to the end of 2014, or even 2015.”

But it is speculation in land, which has seen a near doubling of prices, that is providing players in the real estate market with the strongest signal for correction.

“The steep rise in prices of land, especially near major towns in the country, is unsustainable. Soon it will be impossible for anybody to buy land at those rates if they plan to invest in them with a view of making returns. This will be the beginning of correction,” Housing Finance managing director Frank Ireri said in an earlier interview.

In the past two years, for instance, land prices in prime sections of Nairobi and the surrounding districts have more than doubled, owing to increased demand from real estate investors racing to cash in on the booming property market.

For example, an eighth-acre piece of land now costs an average Sh1.6 million, up from Sh700,000 in December 2009.

Players in the property market are advising potential home owners to tread carefully when scouting for houses, given the difficult phase the market is in currently due to completion issues.

“Their (developers) costs have climbed sharply, and now their finance costs have jumped up and access to finance has been curtailed. This makes it more essential than ever that home buyers choose solid developers with clear and transparent guarantees and track records,” Ms Hassanali said.