Turbulence in Kenya’s real estate market may persist into 2020

Developers are now offering 10 years installments with 0% interest rate and landlords six months free rent or more as they come under pressure to attract new tenants and retain existing occupiers


This has been the year that optimistic analysts expected the property market would finally bounce back and start producing profits again. 

For more than two years now, property owners and developers have counted losses as the property market seemed unsustainable and faced a lot of pressure due to an oversupply of both residential and commercial housing units. This is coupled with the credit crunch as well as unreasonable prices that are beyond the real affordability of the market. 

As we head towards the end of the year, despite all the reports presenting this reality, there is some hope on the horizon. The government has abolished the interest rate cap in its latest bid to satisfy the demand of a large group who blame the caps for the collapse of the real estate market. The big challenge will be to find out if this move is the solution to the real estate problem or if it will not make a big difference. 

The key point is that the whole sector has been shrinking for more than two years, following a spectacular but irrational course that has led to unsustainable levels of value and supply. Yields, prices and even number and size of construction have been slowing down month after month. 

A recent market update from property consultancy firm Knight Frank indicated that values in the country’s property market fell by more than 6% in the past year, dashing hopes of a long-anticipated recovery. Kenya Bankers Association’s latest House Price Indices showed a supply side weakness quarter-on-quarter to June caused by a reduction in the number of building approvals in the period. There has also been a decline in construction activity leading to less cement and other primary building materials demand. 

The real estate and construction sectors’ contributions to GDP have decreased from 5.6% and 13.1% in 2014 to 4.1% and 6.6% in 2018 respectively. The recorded market facts from all market analysts and available reports are really creating worries and ringing a warning alarm that the market is going through serious correction. According to available reports, the average rental rates for office space in Westlands, Upper Hill, Kilimani and Nairobi’s Central Business District (CBD) have all plateaued, with some of them hitting a five-year low.

Cement production also decreased to 1.46 million metric tons (MT) in the first quarter of 2019, a 5.8% drop from 1.55 million MT over the same period in 2018, pointing to a slowdown in construction projects as developers sit out the current glut.  Similarly, cement consumption decreased to 1.46 million MT in the first quarter of 2019, a 2.7% drop from 1.50 million MT over the same period in 2018. The value of building plans approved in Nairobi County decreased to Sh48.54b in the first quarter of 2019, a 19.2% drop from Sh60.11b in a comparable period in 2018. 

Rent for prime spaces in shopping malls also decreased by 5.9% in the first half of 2019 to Sh480 per square foot per month. All over Nairobi, one can now observe billboards full of desperate offers in a last effort from developers and property owners to sell and rent their premises. Developers offering 10 years installments with 0% interest rate and landlords offering 6 months free rent or more as they come under pressure to attract new tenants and retain existing occupiers. Additionally, developers are offering generous terms, which continue to suppress prices and rents to the point where investors are opting for safer short-term investments

Another interesting fact is that there is also an increase in distressed properties in the market as reflected by advertised property auctions. During this year the need for affordable housing, which represents the biggest part of the current housing deficit has been finally identified as the way forward in solving the huge housing deficit problem from the government as well as the majority of the property industry’s key players and stakeholders.

This market segment seems to be the future of the real estate market in Kenya but it also reveals a weakness of the current market structure. Kenya’s property market has been focusing on covering the needs of the new upcoming middle- and upper-class market. Thousands of properties have been constructed all over the country and especially the capital city of Nairobi and its suburbs, targeting this sector of the market. Prices grew very fast and, in most cases, have reached unsustainable levels, as the real demand for this specific type of houses was not as initially estimated but much smaller.

As a result, the country has witnessed a housing glut build-up for the last three years with many ready developments sitting idle with no takers due to declining demand occasioned by lack of affordability. According to the Kenya Bankers Association Housing Market Index for the second quarter of 2019, house prices recorded further declines between April and June mainly due to a weakening purchasing power among prospective buyers and because of excess supply in several areas. The real estate ranks among the sectors with the highest non-performing loans according to Central Bank of Kenya, prompting commercial banks to tighten their credit standards to property developers in order to reduce the level of bad loans in the sector.

The mounting defaults in the property market are a reflection of the struggles that mortgage holders are undergoing in an economy that has witnessed a string of job losses in recent years across nearly all sectors as corporates intensify austerity measures

As we head towards the end of 2019 there is a lot of talk regarding the potential and the opportunities that affordable housing may create for developers as well as for the new home buyers, especially for the lower affordability class segment. None though says anything about the losses that current house and commercial property owners will have to face as the market dynamics change limiting the demand for housing to the affordable housing sector. This will leave the middle and upper market sector in a huge glut, with low demand, oversupply of properties and further price decrease.

Currently, properties cannot give the yields initially estimated and sellers cannot achieve sales prices as anticipated when they decided to invest. Thousands of small investors, chamas and even saccos are stuck with overvalued properties that they cannot dispose or rent to recover their initial invested capital and/or pay their financial liabilities to creditors creating a huge cash flow problem in the market.

The property market in Kenya is going through a period of correction. The market fundamentals and expectations are now changing, prioritizing the social aspect of housing rather than profits. Affordable housing is one of the main priorities for the country. Hundreds of thousands of Kenyans do not have even a basic shelter to live. The government has finally identified this need and seems like it is now taking action towards this direction. 

Unfortunately, property market investors will have to face and accept losses as a result of a decade of irrational investing and unrealistic expectations from a limited financial market sector such as the Kenyan economy could provide.  The fact of the matter is that in Kenya project and mortgage finance remains inaccessible and expensive compared to most property markets around the world. Due to current market conditions and the increase of NPLs and defaults, lenders have introduced tighter credit standards that have put off many borrowers from the mortgage market who show a preference for short-term loans compared to long tenure mortgage loans.

As a result, households have been unable to purchase houses while developers have not been able to put up new buildings due to limited funding. Bad loans surged to Sh342.2b in August as firms and households continued to grapple with a tough business environment. This saw NPLs – credit for which principal or interest has not been paid for 90 days or more – as a fraction of the total loans increase to 12.5% in August, according to new data from the CBK. Default on mortgages jumped 41% to Sh38b, pointing to widespread distress in the real estate sector as Kenya’s economy slows down and property auctions pick up.

Latest CBK data shows that mortgages recorded the highest growth in NPLs last year from Sh27.2b in 2017, reflecting the struggle by investors to find buyers for their houses amid dwindling returns. Unpaid mortgages increased by Sh11.2b or 41.1%, a rise that outpaced other segments like manufacturing (19%), traders (4%) and personal loans (6%) in growth of default on loans. 

The slowdown in real estate is also hurting property developers exposed to financial liabilities as they are finding it difficult to sell units that were built on loans. Meanwhile, auctioneers reckon they held more auctions in 2018 compared to 2017 linked to mortgage defaults, arguing that banks were moving much faster to seize properties from defaulters since the cap was put in place. This strategy implemented by the banks is creating a glut on the market of repossessed homes and office blocks causing a further slowdown on new property projects.

According to a KBA survey, the number of building approvals is falling quarter after quarter, representing the current real estate trend. Same time, asking prices in several areas are still trying to compete with some of the most expensive and elite property markets globally, offering properties beyond the market’s affordability. Indirect means of financing such as investment groups, chamas and saccos have been also under a lot of pressure over the last couple of years as they are facing cashflow challenges and in several cases even bankruptcy. Law changes and improved policies regulating the banking sector and monetary issues are minimizing the so-called circulation and availability of “Black Money” as Kenya is giving the battle to fight money laundering.

Another key factor contributing to this negative market trend is the fact that for almost a decade Kenyan diaspora has been injecting billions of dollars every year in the property investments in Kenya. Seeing that the market is facing challenges, diasporas’ property investments are also cutting down.

Nothing went wrong with the Kenya’s property market except that investors decided to ignore the basics of real estate investing. Property markets operate in cycles and can be easily manipulated by institutional investors, big players, and governments. Key fundamentals of investing in the property market have always to be considered before making any investment.

The rule of supply and demand, the illiquidity and the time required from the property market to adjust to any turbulence or trend change, the lack of flexibility and the inefficiency of markets are some of the reasons which increase the risk factor in real estate investments. Unfortunately, potential investors feel very familiar and safe with the property market and real estate investments ignoring the risks involved. 

According to the latest World Bank economic update released just a few months to the end of the year, Kenya’s economic activity softened in 2019 to 5.8% from 6.3% in 2018. The moderation in growth is attributed to a slowdown in agricultural output and weak private sector investment. The World Bank urged Kenya to increase revenue, make revenue projections more realistic, and strengthen expenditure controls and cash management.

In addition, the report noted that measures to adjust the government’s borrowing plans are essential to rebalance the public debt portfolio towards lower cost and longer-maturity debt, hence reducing its vulnerability to market instability as well as creating fiscal space. The expansionary fiscal stance has resulted in the crowding out of private sector investment, an unanticipated rise in public debt, a continuation of slower private sector credit growth, and the rise in the value of bad loans.  During 2019, economic growth was sluggish, with major economic sectors like construction, real estate, agriculture and manufacturing, slowing down. Analysts have attributed the anomaly to the fact that much of the country’s current growth has been driven by public expenditure as opposed to private investment and consumption. 

The country’s macroeconomics is not in the most favorable point to create the required momentum to boost the property market. Just a few weeks ago, Kenya lifted its interest rate cap, in a move meant to revive shrinking credit access to the private sector. Keep an eye on this latest development but do not have big expectations, because the banking sector is facing more challenges such as the increasing number of NPLs.

Heading into 2020, no one can predict the future’s market developments. It is a fact though, that 2019 is ending with a lot of international turbulence which will affect the local economic and business expectations. Investors must remain calm and rational. Adjust your hopes and expectations with the real market dynamics and trends instead of fictitious cravings. 

Kosta Kioleoglou 
REV Valuer by Tegova,
Civil Engineer Msc/Dbm
Managing Partner Avakon 

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