How manipulated speculations are collapsing real estate

4344
A mall sits empty years after completion

BY KOSTA KIOLEOGLOU

Property market’s trend is too based on expectations and speculations and, of course, depends on actual market analysis. It is subject to market fluctuations and can be affected by several factors. What makes a good sustainable market from bubbles and the fragile opportunities are a stable, well-founded economy and a balanced relationship between demand and supply. 

Unfortunately, we have seen many bubbles and bursts around the world both in the stock markets as well as the property markets. If there is a lesson learned out of all these cases is the fact that all markets will be affected by any global turbulence.

Those who are part of strong sustainable economies will recover fast with minimum losses while those in fragile economies will take longer and will have to face big losses. We also notice that markets that grow unreasonably fast and big in size usually collapse creating big issues to the economies of the countries that they belong to.

Kenya is one of these countries that have been victims of irrational investments. Currently, the country is facing the consequences of an irrational property market which dominated the economy for the last decade and which followed an irrational bubbly stock market that caused huge losses to investors. After a crazy course and unreasonable yields and returns, the trend has now changed.

Today market analysts feel that the market is deeply saturated, thanks to heavy local and foreign investments in real estate as small and big investors targeted to make huge profits. Since 2017, the property market started to show signs of fatigue. Many rushed to explain the slowdown to the prolonged elections. Unfortunately numbers do not lie and the market trend was changing for several institutional reasons, while elections were nothing but just a small temporary obstacle which ended right after the “handshake”.

Banks have always been very conservative with the Kenyan property market and the middle class’s dynamics. The market was growing based on unusual methods, practices and conditions. While the institutional lenders had a very sceptic attitude and kept their exposure to the minimum, Kenyans came up with alternative financing options, mostly unregulated, with complete lack of investment/business knowledge and culture. Sacco’s, Chamas and thousands of investment groups replaced the role of financiers in the country and magnetized the public drugging them in questionable irrational and futureless overpriced property investments.

Today everyone is trying to explain what is really going on with the property market. Saccos and Chamas are stuck with properties that they cannot sell or rent and cannot continue to boost the market as their invested capitals are trapped. Developers and sellers are now facing a new reality – an illiquid property market without financing options.

Several available studies and reports indicate that a lack of cash and poor access to credit is hurting the market. They also state that lenders are unwilling to loan individuals on the strength of title deeds, the property or payslips citing a property market slump and shaky employment environment.

Banks are now keener on whom to lend based on financial history, which will further decrease lending volumes for real estate in the future. The whole economy seems to be struggling to survive the last two years so the bankers say that payslips have lost their allure as companies kept up retrenchments as a cost-cutting measure.

Oversupply is the main problem of the market. Irrational expectations and wrong understanding of the market dynamics led Kenyans to overinvest in overpriced properties targeting a non-existent clientele. The well-advertised housing deficit of the country today is put on a different basis. The government recognizes the need for affordable housing and has started to take action in order to support this market need. All those who invested in luxury residential and commercial properties, based on this fictitious argument of the housing deficit are now stuck with properties tat they overpaid and cannot sell. Their money, which for several years has been rolling over in the market is not available anymore. Demand is no longer there. There is a huge oversupply in most of the market sectors with the exception of affordable housing.

A recent report of the property consultancy, Knight Frank, states that falling demand has made Nairobi’s property prices decline by 6.5 % in the past 12 months and blamed it on the oversupply of newly completed property. This is the fastest reduction in values in a 12-month period that Nairobi has ever recorded since the index commenced recording data.

Several realtors and property owners have reduced rent to retain ‘good’ paying tenants. The situation has also witnessed fewer transactions being executed in the past year, with rental prices stagnating or softening by a half per cent in the past three months. The recently released House Price Index of the Kenyan bankers Association also shows the same negative trends with some market sectors displaying negative records. Experts anticipate a further fall as more property units come up across Nairobi’s suburbs.

The suburbs continue to attract heavy investments especially for gated communities where investor-developers try to introduce a new type of lifestyle based properties, which preach experiences based on greenery, water features and walkways as well as basement parking bays. More luxury properties for a non-existent market demand. This continuous build-up in supplies has also resulted in high vacancy levels in rental houses, piling pressure on rents in the top end of the market, with further reductions expected.

Data tends to lag the market and we believe we will see further drops in the coming months as the market continues to soften. Owing to the high values of the properties tracked and the current supply levels, plus the on-going credit crunch, transactions will remain few and staggered unless vendors become realistic on pricing. The market is now in front of a new challenge. Kenya’s economy has been seriously supported by cash transaction and cash movement, which was not officially accounted for in the past. Central Bank of Kenya has said holders of Sh5 million and above should report to them before effecting any changes, thereby creating a new hurdle in ease of cash movement.

The future of Kenya’s Property market does not look very bright. The sooner property owners and investors will realize this, the better for them and the market. A serious price correction is required and a slowdown in development activity. Unfortunately such a development will negatively affect the economy which has been largely supported by the property sector the last years. Every type of investment and business includes a risk factor and always has the possibility to produce losses.

It is clear that the Kenyan property market has been producing negative yields for over two years now and has a long way to go to reach a sustainable level. The general economic outlook of the country seems also to be undergoing a slowdown with the external debt increasing day after day, while growth is slowing down. Markets operate in cycles and for Kenya and its property market it seems that we are now facing the downward part of the cycle hoping that this will not be very long and very deep.

REV Valuer – Tegova
Civil Engineer Msc/DBM
Managing Partner Avakon Ltd