Brexit effect and oversupply dawns on local real estate market as prices sink

By Kosta Kioleoglou Over the last few years, Real Estate has been dominating investment interests of Kenyans looking to identify lucrative opportunities to place their lifetime savings. One of the most popular scheme attracting thousands of investments and billions of shillings in volume was the ‘buy to let’ investment option. Having headlines supporting the industry, promising a secure future in the sector with great returns, people’s thirst to be part of that opportunity rose leading to quick decisions. Today, the KBA house price indexes as well as market reports from international recognized organizations are presenting a different reality. The market’s performance does not look so lucrative or promising. Analyzing the actual figures, one can get really worried. From 2015, the market signs were not looking very good as a slow uptake and a rising supply of residential buildings pushed prime rents down in 2015. That was followed by further decrease as rent for prime residential buildings in Nairobi decreased by 2.9% in the first quarter of this year. According to available reports, a prime residential house in Nairobi’s up market estates goes for a minimum of Sh250, 000, while stand-alone houses and town-houses attract Sh300, 000 rent. The fall in rental prices has been attributed to rising supply and falling, giving tenants choice and room to negotiate with landlords. In several areas, more buildings are coming up and supply is overcoming demand. Projects that have been complete for almost two years remain vacant. In areas like Kilimani, one can see the number of signs advertising properties to let increasing day after day. High-end areas have been mainly targeting expats working for foreign companies, the UN and NGO’s. The fact that there are rumors that the country is pressuring thousands of expat NGO workers and volunteers to go home is another reason to worry for further pressure on this sector of the market. It makes me really wonder who is going to rent the thousands of properties around Nairobi that are available for rental with prices that for the majority of the Kenyan population are definitely not affordable. In anticipation of the House price index to be released for the second quarter of 2016 by the Kenya Banker’s Association, all interested parties are hoping to see something positive that will change the trend reflected on the last HPI for quarter 1. The 1.4 % increase of the index for the Q1 of 2016 reflected an uptick in house price with the movement representing a not very promising future for the country’s most popular sector of the economy. The property market performance of the first quarter is following 3 years of very mild price changes. This is confirmed by the evolution of the KBA-HPI, which as at the end of the first quarter of 2016, had risen by 9.08% since the base period of the first quarter of 2013.That is an average of 0.232% per month or an average price increase of 2.79% annually. The index according to the information provided by the KBA official website, is measured by averaging the price changes in the house purchase prices including mortgage financing and refinancing appraisals, giving a very good picture of the market trend. After the vote by the UK to leave the European Union, the market is about to face, possibly, further pressure. With the caveat that nothing is really clear in the immediate aftermath of a seismic event like the one that happened on June 23, there are different opinions and speculations on how the economic forces that have been unleashed will affect the markets. This has also to do with how we can expect them to play out in the weeks, months and years ahead. The Brexit is expected to affect all the markets, and people are wondering how this will affect the Kenyan economy as well as the property market. Every country is expecting different shocks. Kenya faces capital flight as investors seek safe havens like US treasuries, falling exports, and pressure on the Kenyan shilling. The level of the unexpected effects is clearly stated by the central bank’s head Dr Patrick Njoroge, who said a few days ago that, “It’s going to affect all of us and there’s no insurance, nor a position we can take to maneuver ourselves to be in a better position”. The decision comes at an uncomfortable time. The world’s central banks, normally the first responders in times of economic distress, are poorly positioned to help. Locally, the Kenyan economy has already been facing challenges due to the existing global economic turbulences. This is due to the fact that, within the last 18 months, there has been both internal and external shocks coming periodically and shaking the country’s course to further growth and sustainable economic factors. The already fragile economic and banking environment of Kenya, despite the efforts of the CBK and the other authorities to react as effective as possible to all the financial and economic tsunamis that have been hitting the country from different directions has now to face the possible affects that the Brexit will cause to the country. It is vital to understand that the Brexit effects are expected to play a different role in the short run and another one in the medium run.  One way or another the current circumstances are not favoring the property market sector and definitely not the rental market. So, the question is what is an investor supposed to do to avoid further losses, minimize the risk and do some damage control? Well, markets fluctuate and every investor has to follow the trends and cannot remain stagnant and inflexible. Property transactions are still happening all over the country. The secret to be part of those who are active and signing deals is to realize that if your expectations are too high for this period, you should reconsider your position and adjust. The sooner you get a tenant for your vacant property the less the damage from a non-producing investment. There are several examples of those who said no to a deal a few months ago simply because they did not want to realize the actual market values and today they wish they had taken that offer as the property remains vacant, supply is more and prices keep going down. Just to make things clear, I am not saying that there should be a rally of price decreasing, what I am simply saying is that you have to be reasonable with your asking prices in order to have good chances of getting a tender soon. The upcoming HPI from the KBA will give us more information on how the market trend is moving this year. The property sector is facing challenges but there is no reason to panic. Stay up to date, follow the market and be patient. We are currently sailing in unchartered waters and no one can predict what will happen in the future. Being prepared is what will protect you and produce the best results.

Kosta Kioleoglou REValuer Civil Engineer Msc/DBM R.M.D for Africa Plantation Capital

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