By Kosta Kioleoglou
From the onset of the 1st quarter, 2015, it was obvious that the real estate sector was facing serious challenges. The amazing outperformance of the property market seemed to be unsustainable. The opinion mostly is that Kenya’s real estate sector is different and you cannot go wrong with land or property. Well, I have learned one thing in life; numbers do not lie.
The latest house price index released by the Kenya Bankers’ Association (KBA) revealed the lack of strength in the sector. The marginal increase of 1.1% during the first quarter of 2017 sounds the alarm that it is time to realize the real situation of the market before it is too late. According to KBA director of research and Policy, Jared Osoro, the house prices evolution since the third quarter of 2016 represents a downward trend being a reversal of the rising trend that prevailed from the preceding three quarters starting from the last quarter of 2015.
Whereas the supply and demand dynamics have had an equal influence on the house prices trend, the key driver of the softening seen during the first quarter of 2017 and the preceding two quarters lean more towards market demand conditions.
According to the KBA – Housing Price Index (KBA-HPI), the average house prices in Kenya increased marginally by 1.10% during the first quarter of 2017 compared to the 1.58% rise during the last quarter of 2016. Whereas this supports the observation that house prices are broadly stable, it is increasingly becoming evident that prices are softening.
Residential property prices rose slightly against a suppressed demand due to reduced lending by commercial banks following the enactment of interest capping law in the last quarter of 2016.
If we take a quick look at Kenya’s economy, it is easy to realize that the returns of the property market are definitely not lucrative any more. Any investment that cannot cover cost of inflation with its returns is not viable. Following the market trend of the last quarters, the property market is not expected to produce more than 6.0% during 2017.
The overall rate of inflation rose from 9.04% to 10.28% during April and is expected to remain high until the end of the year.
If you are wondering about the future of the property market, I am afraid that no one can give you secure predictions. What we can do though is analyze some basic facts and see how these parameters can affect the market.
Fact number one; for any market to grow, money need to be invested. The market has to win the trust of the investors and make them invest both cash as well as money via finance. In Kenya, a lot of money that used to be available in cash either locally or from the East Africa region has been invested directly or through investment groups, chamas, saccos and cooperatives in the real estate sector.
A lot of those investing were just using the market to convert money of unknown origin to legit money. The majority of this target group is not investing any more in Kenya and most of this money has left Kenya, banked in other countries and tax heaven destinations. A huge part of the money invested belongs to another group of people, those who tried to access the market via investment groups, the majority of them without any experience or knowledge on investments, risk management or even the property market. These are the ones who still own the majority of the unsold properties.
They are stack in a market that is not moving, losing money day after day and facing big problems to liquid their assets. This is the target group that is going to have to take the majority of the heat and will lose more than anybody else because of the structure the groups have. It is much easier for an individual or a company to make a decision to buy or sell than a group of people who never thought that they might have to take losses out of such investments. Losing time in periods of bear markets can cause further losses.
Then we have the banking sector, a sector that all around the world is the first to penetrate the property market by financing mortgages and projects. In Kenya, the banking sector has largely stayed away. With a marginal 22,000 mortgages active in the country, banks are the ones with the minimum exposure to the market. The problem is that without the support of the financial institutions, without easy and affordable financial options, it is impossible for the market to keep growing or even sustain its value. In a few words, for you to make money in the property market, you need money. You cannot make money with property if there is no available cash or finance in the market.
Another fact is the type of construction during the property market boom. High-end houses and apartments, huge expensive malls targeting to attract investors are all over the country. In Nairobi, especially, the oversupply of expensive properties has overcome demand and affordability. A lot of investors misinformed from the basic rule of demand and supply promoted extensively by the media, politicians and speculators saying that there is a deficit of over 200,000 units per year kept investing without understanding the numbers.
The reality is that there is a bigger deficit of units in Kenya but the type of units and affordability should be the key indicators for one to invest smart and create a sustainable market. Over the last three years, I have been writing about this via my articles. Today, KBA as well as the majority of the market stakeholders have slowly started to say the same. Developers and investors should focus on affordable housing solutions. The country cannot afford all these expensive properties.
Today, even if access to finance would ease, I am afraid it would still be difficult to sustain these prices. The future of the real estate market as it is does not seem very bright. All markets operate in cycles and now we are at the part of the cycle that leads downwards.
Should you panic? Well, when you decide to invest you should be ready for every scenario and panicking is only going to make a bad situation worse. It is obvious that the glamorous period of huge profits with low risk that people thought the property market is offering has come, for now, to an end. In such periods instead of panicking, an investor needs to sit back, analyze his portfolio, the available data and trend, his exposure to the market, reevaluate his position and make important decisions about keeping or disposing his assets, and at what price.
Investors on a long-term basis might decide to stay in the market while others might decide to sell ASAP. There is no golden rule that applies for everybody. Different investors have different portfolios, different strategies and different needs. What is important is for you to know very well your portfolio, your exposure and liabilities, to have a specific strategy and a target.
Investing blindly is a bad idea. It is never too late. Damage control and risk management are very important. For those who do not have a strategy, a plan, a target, do not know the market trend and conditions, this is the ideal time to focus and get ready. It is better late than never.
I want to repeat that there are no golden rules and no easy ways to invest in the property market. Usually, investors choose investment property based on two factors, yields and liquidity. While yields create revenue and cash flow during ownership, liquidity determines how successful the investor will be upon exiting the project.
Liquidity determines whether assets will be sold quickly or slowly and if the price will be above or below market value. Property that is easy to sell and purchased at market value is liquid. Conversely, assets that are harder to sell and transact for a discounted price are considered illiquid. During periods of market booming liquidity is not a problem for properties. Unfortunately though during periods of bear markets properties become maybe the most difficult assets to sell and liquidity is almost impossible.
When the market is hard and sales are difficult prices are negatively affected. That means that those who believe that their properties have a specific value without considering the market dynamics might be surprised and follow the wrong strategy. In periods like the one the Kenyan market is in now you need to be open-minded. Valuate the risks and make sure you are not too gritty. Investing successfully is about making smart, quick and right decisions.
Remember the value of a property is not low as long as the money you get is enough to be able to replace it with a similar property in the same area. In a few words your property’s value is not isolated from the market dynamics. Saying that, those who believe that despite a negative market trend their property will keep going higher, unless if they have a very unique property, which is trading under special conditions, they should reconsider their strategy before it is too late.
Writer is Civil Engineer Msc/ DBM – REV Valuer by Tegova
Regional Managing Director for APC