By Kosta Kioleoglou
For several months now, there has been speculation about what will happen during the August elections. This is a special year, with several important upcoming events locally and internationally, which might create a volatile environment. Since the beginning of the year, news about the economy and the market has not been very positive. Before analysing the property market, it is useful to review the macroeconomic data and how they affect daily life in the country.
Besides, the country’s economic growth is now forecast to slow down; the IMF says it is likely to be around 5.3% instead of the earlier 6.1%. The IMF has also expressed concern about the banking sector and the non-performing loans (NPLs).
The fund says that NPLs have increased in recent months, accounting for 8.8% of the total loans in September. Provisions, currently close to 50% of NPLs, have been declining since early 2016. Six relatively small banks that account for 6.7% of the banking system have NPL ratios of more than 20% (based on bank disclosure reports for 2016 Q3). The Central Bank of Kenya (CBK) recently adopted an action plan to strengthen banking supervision, including anti-money laundering/combating the financing of terrorism (AML/CFT), as well as a legal and regulatory framework for banks. The authorities continue to enhance their financial crisis preparedness with the consolidation of the Kenya Deposit Insurance Corporation (KDIC).
The property market is one of the main sources of NPLs, which rose to 8.8% of the total loans in March 2016, up from 5.7% for the same period in 2015. The future does not look bright as it seems banks will reduce lending and financing to minimize their exposure to risk.
An increase in the property market that is lower than the inflation rate and fixed-deposit account returns does not attract new investors and buyers.
Meanwhile, a Capital Markets Authority (CMA) report says that the sharp drop in share prices of banking stocks has pushed the Nairobi Securities Exchange (NSE) to a seven-year low. The National Bank of Kenya and Housing Finance have lost 59% and 46% respectively of their share value in a year, the highest among the listed lenders. Barclays Bank is currently trading 34% lower than at a similar time last year, while KCB has lost 36%.
Equity Bank is down 31%, while Co-operative Bank has lost 30% of its value in a year. And projections are that worse is still to come.
There is one factor we should all focus on: the cash flow in the Kenyan economy. Several factors contributed to the current unfavourable cash flow situation. First, the devaluation of the Kenyan shilling played a key role; when it declined from Sh83 to the dollar less than two years ago to the current Sh103, the economy had to contend with a 25% extra cost on imports. In 2016, imports cost more than they did in 2015. CBK expects the current account deficit to be more than 6%, compared with 5.5% in 2016. That will obviously put more pressure on the country’s macroeconomics and affect Kenyans.
Then, there is the investment orientation of Kenyans. In the last few years, people mainly targeted “easy money”, namely the stock market and the real estate. The stock market is doing badly, so those who invested in it have been making huge losses. The real estate market is also overrated. Large amounts of money are tied up in the property market, which accounts for about 8% of the GDP. Since the market was vibrant, with a reasonable balance between construction, purchases and sales, there was some growth.
The market dynamics have changed. While many Kenyans have invested in the property market, it is important to realise that there are many investors but no users. Everybody is building to sell or let but very few are building for their own use, yet selling property today is a challenge.
There is a saying, “Properties buy money and money buys properties, but properties don’t buy properties.” It is prudent to remember this before making any decision on real estate. In addition, construction requires a lot of imported materials, yet it creates only temporary jobs while contributing to the country’s trade balance deficit.
The country needs to be able to stand on its own feet and depend less on foreign aid. Creating sustainable jobs, focusing on production, manufacturing, agriculture, tourism, etc. is the only way out. The external debt must stop growing and the trade balance deficit must be turned around. Only when there is a real income-producing economy can consumption grow without destroying the country.
The country’s population is growing fast, while unemployment is rising. With almost 50% of the population below 18 years of age and average life expectancy growing, if nothing is done immediately to create millions of sustainable jobs, there will be chaos 10 years from now.
It is pointless worrying about property prices because if things do not change, there will be no market to talk about. The current economic environment does not portend well for the future. This year might turn out to be a reference point for many years to come. It is, therefore, important that the elections run smoothly.
The oversupply of prime, residential and commercial properties could eventually become the market’s Achilles’ heel. For the market to grow, there must be activity. Building is not a sign of growth or a trend; buying and selling is what keeps the market alive.
Kenya’s future lies in the hands of Kenyans. They need to change their mentality of investing in “fast and easy” money immediately. They must start producing real income for themselves and for the country. Kenya needs to produce real income because soon it will have to start paying back the international loans, bonds and other borrowed money.
Only when the country can achieve growth based, not just on public expenditure but on the real economy, will the real estate sector start growing again. People will be able to afford to buy property, banks will be able to lend them money, and property prices will come down. It is not easy, and it will not happen in a day, but it is the only way to achieve sustainable prosperity.
As far as it concerns the property market, there is still a nominal price increase on average. However, that is not enough; the reality is that an increase in the property market that is lower than the inflation rate and fixed-deposit account returns does not attract new investors and buyers.
Exactly the same rule applies with regard to Treasury Bills. Kenyan investors are earning negative real returns because of the poor market performance and high inflation rate, resulting in increasing illiquidity in the market.
Property consultants Knight Frank say the property market experienced an oversupply for the better part of last year, with developers’ returns on investment shrinking. And they expect to see few new buildings in the next few years.
The oversupply of prime, residential and commercial properties could eventually become the market’s Achilles’ heel. For the market to grow, there must be activity. Building is not a sign of growth or a trend; buying and selling is what keeps the market alive. In a passive market where sales are slowing down, further construction will lead to increased supply, which might trigger price reductions.
The rule of supply and demand is now working against the market dynamics. Despite the current oversupply, there is still plenty of construction going on around the country. The number of unsold properties and those available for rent are increasing even faster.
But similarly, the time it is taking to rent or sell residential or commercial property is increasing.
No one is arguing the fact that Kenya needs more houses. The type of houses needed though is the catch. One phrase can describe the need of the market and that is “ Affordable Houses”. Anything else is simply excess, unneeded inventory. What is needed is more affordable housing for the majority of Kenyans rather than the commercial and residential properties available on the market.
For a property market to remain stable and grow, it requires money. There are three main sources of money for the property market. First is the actual available cash in the market, second is foreign direct or indirect investment that will provide cash inflows, and third is financing by financial institutions.
It is obvious that there is less cash available in Kenya today than there was before. A lot of money is tied up in the stock market, which is doing badly. More money is tied up in the property market, and it is not easily accessible since it is hard to convert into cash.
Finally, banks have kept their distance from the property market since it started growing about eight years ago. With a limited number of mortgages approved during the same period and a further slowdown in mortgage approvals during the last quarter of 2016, finance does not seem to be an option for the average Kenyan potential buyer.
In a few words, one needs to produce income and then start spending otherwise it is a matter of time before defaulting. Elections are just a few weeks away. The way that Kenyans will handle this period will determine the future of the country’s next few years. There is already too much pressure and there is no need for any more problems.
I want to believe that everybody will be calm and elections will be completed without repeating the history. This is the period to stay calm and think twice before making any decision. Elections are part of every nation’s life and they are there to secure a better future. There are no winners or losers. There will be only Kenyans before as well as after the elections.
Writer is Civil Engineer Msc/ DBM – REV Valuer by Tegova
Regional Managing Director for APC