Why Kenya’s real estate market efficiency is disputable

The majority of developers and investors in the big cities are building properties that are out of range for the average Kenyan family leading to the paradox of having an oversupply in a market that has a huge housing deficit

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BY KOSTA KIOLEOGLOU

Many people argue about the efficiency of the Kenyan real estate market with many questions being raised on the same. It is important to understand what an efficient market is and its main characteristics.

An efficient market should provide knowledge and information that would minimize the risk to investors allowing them to make rational decisions on up to date information. It also includes a time dimension, related to the need to assess the adaptability of property market process as economic and social conditions change.

In such a market, there are many participants, many buyers and sellers as well as users. A stable legal and taxation environment is a basic requirement too.  Finally an efficient market requires all parties involved to be rational and to have realistic expectations. A market that attracts irrational investors cannot be efficient or sustainable.

A basic characteristic of markets that crashed is an irrational behavior from the investors. A good example is when investors continued to put money into commercial property despite risk premia falling. Having high rental growth expectations based on an irrational belief that performance would continue to be good without considering the real market potential and dynamics, without reading the available signs of the market cycle can be catastrophic and will definitely affect market efficiency. Around the world, people periodically tend to believe that investing in real estate assets is a secure decision.

The truth is that the real estate market like any other market involves risks, which is related to the knowledge and decisions that the investor will make as well as other exogenous and beyond control factors. Looking back in the recent history of global property market, it is easy to notice a chronic underestimation of the dangers of asset bubbles breaking. People usually create an unjustified faith in rational expectations and market efficiencies without real knowledge of the market characteristics or dynamics, which are basically the same like in every emerging market but it is also dominated from its own unique features. A growing economy and political instability 10 years ago created the ideal environment for the real estate sector to grow.

A huge demand for housing, which remains up to date unmet set the foundations for a huge opportunity. The poor performance of the insignificant property market sector the years before this booming period was the reason why no one ever bothered to create an info data bank, legislation and policies to secure easy and clear transactions, a stable taxation system and property indexes that would provide the required information to anyone who wanted to get involved in the market.

Today the market has evolved and there are several available indexes, statistics, international players, and new laws regarding the industry. The problem is that the majorities of those who are involved in this market do not know or do not want to use all these tools to understand the market dynamics and protect their interests. In contrary, the majority of investors prefer to follow the rumors and irrational expectations, which cannot be supported by this market or explained with facts.

The Kenya Bankers Association is one of the institutions that has been monitoring the property market over the years, gathering information, analysing the market and issuing reports quarterly as well as a House price index with its base period being quarter one 2013. Since the base period of the first quarter of 2013, house prices have risen by 19.19% up to the end of the fourth quarter of 2017. That is an average of 3.38% per year. The market’s performance during 2017 was the worst of the last decade with a total marginal raise of prices reaching 3.71%. A lot of people blame the political environment for this poor performance. The majority of the available reports unveil a different reality.

Property owners and developers recorded the lowest returns last year, with some segments registering the worst performance in 17 years. Relevant data from the Hass Property Index covering the fourth quarter of 2017 shows significant drops in rents and sale returns relative to previous years in most residential property markets. Land prices for both Nairobi and satellite towns similarly recorded the slowest growth rates in close to a decade and are becoming very difficult to dispose, binding huge amounts of cash, which is trapped into land investments and is not available anymore in the market.  


According to the Kenya Bankers Association’s latest report, the trend on suppressed growth of house prices mirrors that of credit growth to the private sector. Credit is evidently integral in influencing the demand and supply dynamics in the housing market. The results for quarter four continue to support the evidence for depressed demand in the economy and the slowdown in credit expansion, households relying on the credit market towards home acquisition have been adversely affected.

This has consequently influenced the house prices trend. But it is not only the house market that is under pressure. According to available reports and statements from top real estate firms such as Knight Frank, Broll Property Group and Hass consults, there is an oversupply of commercial property available for both purchasing and renting in the city against low demand which is forcing owners and landlords to cut prices in order to appeal to consumers.

It is obvious that this is leading to significant losses and at the same time eroding the overall values of the prime assets raising questions on whether the property crash Kenyans have been warned about severally in the past is finally here. According to the latest Hass Property Index covering the fourth quarter of 2017 there are significant drops in rents and sale returns relative to previous years. According to the same report the highest declines in 2017 were reported in Lavington, Kileleshwa, Upperhill and Westlands where rental prices fell by 13, 14, 11 and 10 per cent respectively compared to 2016.

a mostly empty mega-mall in eastleigh nairobi-kenya

A recent report from Broll Property Group covering the commercial sector during 2017 indicates that average occupancy levels for commercial space are lowest in Upper Hill at 61% with Nairobi’s Central Business District leading at 90% occupancy. Karen, Kilimani, Mombasa Road and Westlands were reported to have 88, 80, 85 and 74 per cent occupancy respectively with the property firm saying developers were having a harder time selling than renting.

But it is not only the oversupply and the expensive asking prices that are putting pressure to the commercial property sector. One of the challenges that has made it difficult for the high-end office blocks to fill up is the fact that building owners insist on letting entire floors to only one tenant. This is in contrast to similar property in the city’s central business district where landlords allow sub-letting.

This makes it possible for smaller tenants to take spaces that fit their lean operations and budgets. In addition to this, the minimum six-year lease period offered by most of the high-end office blocks further heightens the competition for tenants and adds more uncertainty as to how much longer the existing empty space will remain unoccupied. It is a must for landlords to start adjusting to the current market dynamics, become more flexible and realize that the cost of money and lost opportunity is destroying their investments if they do not recover fast their initial capital or create income.

Affordability and the real demand are the two key drivers that are leading the property market trend. There has been a long discussion about the upcoming middle class of Kenya. This so promising sector of the Kenyan society has been seriously overestimated concerning its affordability and consuming power.

According to the Ministry of Housing and Urban Development, the majority of Kenya’s working class may not be in a position to pay more than Sh3, 500 rent. This fact is underlining the financial strain that urban dwellers routinely undergo every month. As per the Principal Secretary Aidah Munano, about 60% of the country’s workforce takes home about Sh25, 000 or less a month, making it difficult to comfortably afford rent and settle other bills. With this kind of income in order to be able to survive the majority of the Kenyan population can hardly release about Sh3 500 for their rent.

The majority of developers and investors in the big cities are building properties, which are out of range for the average Kenyan family leading to the paradox of having an oversupply in a market that has a huge housing deficit.

Housing blueprints have targeted the provision of 200,000 housing units annually for all income levels. However, the production of housing units is currently at less than 50,000 units annually, culminating in a housing deficit of over 2 million units, with nearly 61% of urban households living in slums. This deficit continues to rise due to fundamental constraints on both the demand and supply side and is exacerbated by an urbanization rate of 4.4%, equivalent to 0.5 million new city dwellers every year.

According to available data, the annual housing supply in urban areas is conservatively estimated at 50,000 units, largely in the mid and high-end segment of the market, resulting in proliferation of informal settlements for low-income residents in the country’s five major urban centers. Amid rapid growth in urbanization, estimated at 4.4% by the World Bank in 2015, the housing deficit is now estimated at about 1.85 million units a year. So in reality the house deficit is much higher than what people think.

But affordable housing is a completely different type of the real estate segment. It requires public initiative and cooperation between the private and the public sector together with international organizations with main priority being to provide decent shelters to those who need them and create better standards of living for all Kenyans, not the profit. Housing is also part of the United Nations 11th Sustainable Development Goal, which is to “make cities inclusive, safe, resilient and sustainable”. One of the most important targets of such a goal is to “ensure access for all to adequate, safe and affordable housing and basic services and upgrade slums

Collaborative efforts between government and the private sector are required, and a supportive policy and regulatory environment strengthened so that relevant, necessary tools can be leveraged. It is a necessity to narrow the affordability gap in the housing market and improve financing for both developers and users. The inaccessibility of affordable housing finance is highlighted by the fact that there are fewer than 25,000 mortgages outstanding in the country. Exploring financing solutions can play a catalytic role in stimulating the supply and demand of affordable housing, and create momentum for other underlying reforms. A quick research will lead to solutions that have been used successfully in other emerging markets, such as  the creation of Mortgage Refinance Companies (MRCs), the provision of Housing Finance Guarantees, and developing Public-Private Partnerships (PPPs) for Affordable Housing. 

A very good example is Brazil. Since 2009, Brazil has been implementing an ambitious national social housing programme: the “My House, My Life Programme” (Programa Minha Casa, Minha Vida – MCMVP). The initial goal was to constract 1 million housing units in the biennium 2009-2010. For its magnitude, scale and amount of subsidies the program is considered an important milestone in reasserting social housing as an issue of national importance for Government policy and action.

The MCMVP program, emerged in response to specific conditions in Brazil. It is obvious that for that reason, it should not be assumed as directly replicable in other countries. Important social, political and economic shifts that have taken place over the last few decades in Brazil have shaped the program formulation, design, and implementation in order to suit the country’s specific context. The Program has counted on an enhanced institutional and policy framework that has better equipped local governments and improved policy tools. The sociopolitical environment of Brazil also played a key role to the setup and success of the program. Yet, many things go into making the Brazilian experience a reference worthy of the attention of other countries.

The Program creates special mechanisms to mobilize private sector housing production and designs innovative arrangements of subsidy and finance for a large range of income groups to acquire new homes. New legal and institutional arrangements evolved towards a smoother flow of resources, work procurement and a more reasonable division of responsibilities amongst municipal, federal and central governments as well as private and community agents, reflected positively in the implementation and accelerated project execution. Together these measures have demonstrated the potential of public-private partnerships to produce social-interest housing. Such a large-scale project had also to face and to overcome huge challenges and problems.

A pressing concern has been raised on the socio-spatial and environmental implications of housing developments, which the program was promoting and financing, particularly related to the location of projects and the challenges of urban integration. Improvements could be made to better connect new housing projects with the existing urban fabric to improve urban inclusiveness and prevent urban spatial fragmentation and sprawl. The quality and design of housing units and neighborhoods and post-occupancy management were also important factors that had to be dealt with to maximize the positive impact for intended beneficiaries.

Such programs are not perfect, on balance though the example of the Brazil program is positive to the extent that it has established itself as a major instrument of the Government to structure social and economic policies. It has also become a flagship program to boost labour market, reduce poverty and tackle social and economic inequality. Brazil has advanced in tackling historical challenges so that affordable housing can be produced at scale for poor- and middle-income families.

In the context of strengthened social protection policies, these types of affordable housing programs are also playing a crucial role in the economic scene of the country. The integrated approach to housing provision and economic development runs evenly to the extent that this kind of Programs has helped to stimulate the construction chain and create jobs. This will lead to a healthy increase in tax revenues and consumer power, which in turn feeds the domestic market and public revenue.

I am not suggesting that Kenya should copy paste the model that Brazil or any other country used in the past or is currently using. I believe though that all these aspects of the Affordable housing Programs enable every country facing serious affordable housing deficits to learn from the available experience and build upon the knowledge produced to formulate appropriate policy responses, and scale-up access to affordable housing.

Kosta Kioleoglou
REV Valuer by Tegova
Civil Engineer Msc/DBM

MD AVAKON GROUP