Heading towards price correction

BY KOSTA KIOLEOGLOU

According to the Hass Property Index quarter two report for 2019 released on July the 24, the House Price Index showed that property prices fell by 3% while detached houses dropped by 4.5% in the quarter. 

The head of development consulting and research at Hass Consult also pointed out the fact that there is also an increase in distressed properties in the market as reflected by advertised property auctions. Additionally, developers are offering generous terms which continue to suppress prices and rents to the point where investors are opting for safer short-term investments. This new report is one more proof that Kenya’s property market, although with different characteristics from other markets in the world, still is following the market cycles. Today, the market is heading towards a big price correction. 

Several property market analysts and stakeholders state that there is no fear of an upcoming property market bubble in Kenya, noting that the factors that lead to such a situation, like access to cheap financing, were not there.

The main argument is that a bubble usually is turbo-charged by cheap finance; in Kenya there is no easy access to financial instruments or access to cheap finance. They believe that what’s happening, is that for someone to buy a property, they actually have to have all the money for it. First of all, this is completely wrong statement. The reason is that the property market in Kenya was initially fueled by funds that came to the country for other reasons. The property market was used as a vehicle to legalize the money.

The majority of property development and investment is based either on traditional finance or alternative financing options such as the saccos, chamas and investment groups. These groups have been injecting billions of dollars every year mostly from the lifetime savings of the Kenyan population and diaspora. 

It is a fact that several property market bubbles in other countries around the world were based on a fragile “cheap and easy finance” environment but that is not the only reason that a market can create a bubble and then collapse.

The rule of supply and demand, the illiquidity and the time required by the property market to adjust to any turbulence or trend change, the lack of flexibility and the inefficiency of markets are some of the reasons that bubbles were created in the past and will be created in the future. Another key factor is the fact that people feel very familiar and safe with the property market and real estate investments ignoring the risks involved. They generally feel very secure and risk free when it comes to property investments. Most people do not understand the complexity of the property market.  Like the stock market and the financial markets, the property market requires a lot of knowledge and experience in order to minimize the risk and achieve a better risk return trade off. 

Now that the market has clearly shown that it is going down, developers and other stakeholders in the real estate industry are trying to ease the effects of this trend. They are trying to quell fears of an impending crash of Kenya’s property market segment even as property prices remain on the decline for almost two years, despite the fact that clearly the market dynamics have changed. 

After consistently growing yearly over the past decade, growth in property prices began to falter first in 2017 in a regression that has continued to shadow the industry in 2019. Today, the previously advertised house deficit is finally explained properly and revealed that the demand for housing is there. The market is for affordable houses, not the type of properties that were built over the last decade targeting upper middle-class, rich Kenyans, expatriates and foreigners.  No one is talking about the need to build houses for the middle class or more luxury office blocks or malls anymore. In contrary, all reports state that there is a big oversupply to all these segments and that the only real need is cheap affordable housing projects to cover the basic housing needs of the poor. 

Banks chose not to provide easy and cheap access to housing and property finance funding due to the fact that bank analysts knew exactly where the Kenyan real estate was going and that the entire temporary growth of the sector was but a bubble. It was a matter of time until it collapsed.

Unfortunately, the same wisdom and knowledge did not exist to the thousands of people who used their lifetime savings, investing directly or indirectly via their saccos and Chamas to unsustainable overvalued projects, facing today the harsh reality of the Kenyan property market. High vacancies, low demand, over supply, rental decrease and price drop month after month is the reality of the property market for over two years now. 

It is true that during the same period some people made a lot of money from the real estate market in Kenya. These are the professional opportunists who took advantage of the positive feeling and the overrated market expectations, sometimes even supported and promoted the same for their personal benefit. Today the same people try to ease the worries of investors and property owners. The key question is why are all these big companies trying to convince people to invest or buy properties from them? Why not keep the properties for themselves and sell them in a few years with huge profits or rent them and make huge returns from the rentals? How come some companies that did not even exist 5 years ago to offer cash management solutions based on future property projects, which cannot guarantee delivery? How many more property companies have to go down for people to understand that the market is a bomb ready to explode. I also wonder why the authorities do not officially warn the investors about the real market dynamics?

Property market can be manipulated and since it has low information efficiency and requires too much time to adjust, it is actually more dangerous. It carries the same if not more risks than any other investment. The problem is that people do not like to accept these facts, they prefer to hope that the property market in Kenya is different from that of Dubai, Turkey, Greece, US, UK, Portugal, Ireland and the rest of the world. 

Being involved in the real estate industry in several countries over the last 20 years, I feel that it is my responsibility to give the other side of the story, the one that people do not want to talk about. I have been writing about the same for almost 5 years now. It is up to each individual to read and judge what makes more sense. 

In any case remember to follow the markets, stay up to date with the property market developments as well as all macroeconomic and financial trends. Do not panic, be proactive and if need be, seek professional advice and assistance. At the end of the day, investing is risking and no one can change that..  

REV Valuer – Tegova

Civil Engineer Msc/DBM

Managing Partner Avakon Ltd 

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