Real estate performance is ominous

By Kosta Kioleoglou For several years now, Kenya’s Real Estate Market has been creating wealth for several investors. Today, the property market in Kenya is representing almost 10% of the country’s Gross Domestic Product and has successfully attracted the majority of investment interest. Thousands of Kenyans are enjoying the positive results of their property investments while millions are trying to find a way to have the same opportunity. The scenario and the plan seem to be easy. All you need to do is to have the amount of money required to buy a piece of property. A few months, maybe years later you sell it and you make a fortune. Well that is a great scenario but in real life things are not so simple or easy. In order to make money out of any investment it takes more than having available the required capital. You need to have the experience, knowledge and proper information in order to set up a successful low risk investment portfolio that could give you some good returns in the medium term. The first step is to try to read and analyze the available real data of the potential investment – market opportunity. The good thing is the fact that today information is easily accessible unlike in the past. For example, we have two house price indexes, one from a private company and one from the Kenya Bank Association, issuing the latest market trends periodically. Plenty of other data is available via publications from the Central Bank of Kenya as well as the Kenya National Bureau of Statistics. Before getting excited or disappointed by the HPI, the first question to ask yourself is if “you really understand what these numbers represent.” The second question should be “What is the correlation of these numbers with the current macroeconomic data that the Central Bank of Kenya is providing?” You need to analyze all the available data to identify a possible opportunity and how you can take advantage of it or a possible stagnant or negatively moving market in order to avoid risking your capital into a bad investment. Unfortunately, most of the parties involved in the Kenya’s real estate sector are only focusing on one parameter, the rumors and the will to make huge profits fast. Likewise, it has been proven over the years that following the rumors in order to invest will eventually lead you to several losses. Although the Real Estate Market seems to be quite stable over the years, we need to understand that it actually fluctuates a lot and in some cases, it can even present high volatility. As I said before, one needs to analyze the available data in order to identify a possible opportunity and to stay on top of the market changes. This will help you make the right move (buy or sell) at the right time. An area that used to be very lucrative and a great place to invest just a few years ago is definitely not going to stay as one of the best options forever. A good example is Thika. Someone who bought a piece of land in Thika 5 years ago could realize some great returns out of his initial investment. Obviously buying a piece of Land in Thika today will not produce the same returns as prices in the area have already gone crazy high. On the contrary, one could even be facing loses depending on the general market trends in the medium term. This could be as a result of the purchase price not negotiated properly leaving no space margin for market fluctuations. Today the latest KBA house price index released last month is showing a market slow down. A quick review of the last 12 months will show a total of 6.39% overall price change. According to the available data, during the fourth Quarter of 2014, house prices increased by 2.18% (overall price change percent). The house price change for the first Quarter of 2015 was 2.75%, the Second Quarter of 2015 was 0.2% and during the third Quarter 0f 2015 prices rose by a marginal 1. 26%, albeit representing a relatively faster increase compared to the 0.2% increase during the second quarter. On top of that, if we add a negative performance during the 12 months period of 2013(Q3) – 2014 (Q3) by -0.47% we will get a final +5.92% price increase over the last 24 months in the real estate market. In reality this simple analysis shows the fact that real estate market cannot even sustain its value against inflation, which during the same period increased in total by over 10% over the 2-year period. Comparing the above returns over a period of 2 years with other available alternative low risk investment options in the country like fixed deposits or treasury bills, one realizes that real estate is not exactly performing as good as we possibly thinks. Real estate in comparison with several other low risk investment options as mentioned before has a serious disadvantage, and that is its liquidity. Before investing in real estate, we need to understand clearly that our capital is not available any time we might want it and that in case of an emergency if we need liquid in a very short term that will have a real cost as a discount will be required in order to attract immediate buyers. The real profits or losses can be identified only when we sell our position because this is the real value of our asset, the one we will get when we sell it, no matter what indexes or rumors say. The more stagnant a market becomes the harder it is to sell as less people want to get involved in a slowing down or a no profit producing market. That usually is pushing the market prices further down as property owners try to be competitive and sell their assets. The last decades have shown property markets crashing around the world. In some cases, like Dubai properties lost up to 75% of their pick values in such short periods as less as six months. I am not saying that there is a similar risk right now in the Kenyan market. Although within the last 2 years, several warning signs have been in the air such as  the currency sliding, the growing account balance deficit, the reduction of the expected growth of the country’s GDP,the increasing unemployment, the growing external debt, the huge need for money that forced the government to offer treasury bills with over 21% interest rates, banks going down. Still, I am not saying that Kenya has no future and we should be expecting a disaster. What I am saying is that every time a market is going down some people lose everything and others minimize their loses. Others sell at the right moment and liquidate their investments with profits. The only difference between these three categories is how prepared and how exposed you are. Staying up to date with all the related data and news of your investment will make you profits and will save you from possible losses. Nowadays with globalization, markets can be affected from any market turbulence around the world. A terrorist action in France, a war in Syria, an explosion in Libanon, a financial crisis in Greece, a war in Ukraine, a stock market collapse in China, a currency devaluation in Russia, oil prices fluctuation, an interest rate hike in States (amongst others) can directly affect the market and your lifetime savings. It is time to realize that investing our family’s future requires a lot of attention and proper knowledge. I always and highly recommend that if you feel that you cannot follow up with all the above requirements you should either use a professional accredited advisor or skip the investment.

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