Property market expectations and dynamics

The high cost of houses is mainly driven by speculative land dealers who have overpriced the most critical element in real estate development

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By Kosta Kioleoglou

Over the last few years, Kenya’s economy has been growing with an impressing pace. At an average growth rate of over 5%, Kenya seems to be unstoppable. People think that there is only one way that the country can move towards, and that is forward. Real estate is considered as one of the main pillars supporting Kenya’s growth. Truth is that property market has been outperforming most of the other sectors of the economy.

Unfortunately, growth rate alone is not enough as an economic measurement to prove real prosperity. Several other economic data are equally important as economies do not operate in the vacuum but are subject to different correlations that determine their status and expected future.

Inflation, external debt, currency rate, unemployment ratio, population growth, liabilities, interest rates; all these are important key factors that affect every economy around the world.

Measuring the growth of the property market can also be tricky. There are different methods to collecting and analyzing data that can lead to different results. They can mislead the interested parties who do not know how to read in between the lines of a report.

Some analysts are using asking prices as their data, prices they find from adverts without conducting an extensive and detailed real estate market research. Usually, when the market is not booming, asking prices are much higher than the actual transaction prices. People get confused with terminologies such as asking price, market value and market price.

Quickly, let us see the definitions in order to understand better how the result of a report can be affected just by using different data.

The definition of asking price is: The price originally demanded by the seller, as before any reduction resulting from bargaining, discount, market dynamics etc.

The definition of market value is: The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.

The definition of market price is:  The unique price at which buyers and sellers agree to trade in an open market at a particular time. To collect relevant data, one needs to have access to real transactions and get the actual prices agreed between the interested parties.

All the three above can be used to get reports and analyze a property market. It is obvious though that the only one that reflects the actual situation and trend of a market is the third. The market price, the actual agreed value a transaction is made is the only data that represent the reality.

In Kenya, the KBA has been reporting a house price index using Data representing over 80% of the mortgage portfolio of banks. Data from the National Housing Corporation is also utilized amongst other sources. According to my opinion the HPI issued by KBA is maybe the most accurate, representing reality more than the other available reports.

Other available HPIs are using asking prices as their source of data or their own database of transactions.

Reports from the last 18 months have been showing the same thing. The market is slowing down.  Although there are still several daring developers who keep building and the fact that a lot of money still tied up in the property market, things look dull. The time required to sell any property, supply in many areas is bigger than demand both for selling and renting properties of every kind, the produced annual returns are lower even than inflation are signs of a challenging future for the real estate sector.

One of the biggest mistakes that one can identify in this market is that most of the interested parties are not targeting the right target group or have been misjudging the size of their target group and have unrealistic expectations.

The tremendous raise in property prices within the last 15 years was definitely a good sign for the market and impressive. As usual, there are two sides for every coin. The over ten-fold rise in houses and property prices has blocked millions of potential buyers from the market.

The majority of Kenyan’s failed to meet the required affordability to buy a house worsening Kenya’s home ownership crisis. Prices are beyond the reach of the majority of citizens who cannot even dream the purchase of a house. The current very high prices have rendered more than 90% of the population incapable of buying even the cheapest houses, allowing only a tiny segment of the population to have real access in the homes market.

Still, the huge demand for low cost housing remains extremely high. Kenya’s housing market so far has failed to meet the ever-rising demand in lower income segment of the economy giving no other option to more than 65% of those living in Nairobi and other major towns to use informal settlements.

According to a recently published report from the World Bank, Kenya needs to build two million affordable city homes to meet a growing housing deficit and stem the growth of sprawling slums, home to six out of 10 urban households. Now before anybody gets over excited from this statement, the World Bank is talking about affordable housing. These are houses that will cost less than a million KES on the high side.

“Today, many Kenyans are unnecessarily living in slum dwellings, because of limited supply and lack of affordability,” the World Bank says in the same report.

It is obvious that following the current pattern the problem will only become more acute over the next decades without a serious focus on housing and the finance of housing for the average Kenyan.

Africa has the fastest-growing cities in the world, with 40% of its one billion people in towns and cities. Kenya is not an exception. Today most new homes target the middle and upper classes, as it is easier to make a profit from high-end sales. Everybody is trying to maximize profits from the real estate sector. The high cost of houses is mainly driven by speculative land dealers who have overpriced the most critical element in real estate development. Low quality and huge profit margins are two more characteristics that are causing the housing problem.

When a market does not have the required ingredients to become sustainable it is a matter of time to see the prices go down, the number of vacancies increasing and finally to start realizing losses.

So far all the banks have stayed away from the housing market with the number of mortgages being extremely low while interest rates were very high for the few loans approved in the past. The market of mortgages currently stands at fewer than 25,000 home loan accounts or equivalent to 3.15% of GDP in 2015. This alone should ring a bell to anyone who wants to enter this market.

Foreign players have not really penetrated the market and they rather stay inactive. In such a lucrative market we can only identify very few foreign private companies who placed their monies in this market. The main source of investment of this market were saccos , chamas , local small investment groups and local cooperatives or other schemes that are collecting money from thousands of people in order to invest it in projects promising huge returns

A market like this is doomed to fall. Today people try to blame different reasons for the current market stagnation. The interest rate cap introduced last year, the upcoming elections, the international developments is the most common excuses used to explain the current market drop.

In reality we have a market which is oversupplied with extremely expensive properties outside the reach of the majority of Kenyans, owned mostly by entities which are targeting to sell while there is no qualified market to buy. This market has trapped a large part of the available cash in the country, which now is missing from all the sectors of the economy. This is creating a very dangerous environment as the lack of cash in the market is creating day-to-day problems and the inability of the real estate sector for liquidity is only going to make this worse.

Kenya’s growth is challenged. The expected growth for 2017 has slowed down while the forecast for the KES is not very positive. The external debt is growing, the external financial help is expected to face challenges, and inflation is going up day after day. Same time Kenya is not producing much.

The primary production sector as well as, existing manufacturing sector of the country is slowing down. The banking sector is also feeling the side effects of the current economic situation facing several problems the last couple of years. It is a matter of time that the market will have to take the losses of the overvalued property prices. Hopefully this will not create a disaster as it will be the second time Kenyans will be losing a lot of money after the stock market crash, which is currently producing losses of over 50%.

On the positive side, Kenya is a country with huge potential. Despite the wrong focus and estimations of the property and stock market Kenya will be able to recover and move forward. Already big investments are focusing to the primary production sector and the upcoming – under construction – infrastructure around the country will support the growth of this sector too.

Kenya’s Green economy, Blue Economy, its strategic location in the region and a more productive model of economy that will create sustainable jobs and will increase Kenya’s ability to be more autonomous and less dependent is the way to move forward and create a strong and healthy economic environment in the near future.

Blaming everybody else and doing nothing seems to be the easy way but will not lead to a solution. Now it is time to act. Start working more and spending less. Budgeting our lives and business properly thinking not only about today but also about tomorrow. Forget about the easy ways to make money and work hard. Stop listening to all those who are promising easy profits and that they will make you rich fast. If there were a way to become rich fast and easy, no one would share it with you. Nothing comes easy in life.

Writer is Civil Engineer Msc/ DBM – REV Valuer by Tegova
Regional Managing Director for APC