The agony of buying property in Kenya

If you were planning to buy property in Kenya, you had better make a quick decision about it, for very soon you might be priced out of the property market.

Take the case of Eric Okoth and his colleague. The two took out bank loans in 2007, planning to buy pieces of land. However, Okoth saw a car on sale at a low price, and opted to buy it instead. His colleague went ahead to buy a plot at Mlolongo for Sh400,000.

Fast forward four years. Two months ago, Okoth finished paying his bank loan, took out another and went back to Mlolongo to look for the same plot. To his chagrin, the value of the plot had shot up; it would now cost him Sh1.6 million. Disappointed, he ended up buying land in Isinya town in Kajiado district.

The cost of buying land, or a house in Kenyan urban centres has escalated to alarming levels. Market players blame it on a variety of reasons, including the growth of the middle class, investor speculation and even Somali pirates.

An eighth of an acre in a place like Ruai in Nairobi, for example, cost Sh40,000-Sh50,000 four years ago. The same size of land now goes for not less than Sh400,000.

A plot in Mlolongo in Nairobi used to cost Sh400,000 five years ago. The same now costs Sh1.6 million, a four-fold increase in five years. A plot in Kahawa West has increased in price from Sh1.6 million four years ago to Sh2 million today.

In Kilimani, an acre costs Sh80 million while plots in Ruaka have increased in price from Sh4 million in 2009 to Sh6 million today. In Parklands, an acre goes for Sh55 million while a similar size would cost Sh25 million in Eastleigh.

The demand for land in Nairobi is now putting pressure on land prices in neighbouring districts with Kajiado and Machakos feeling it the most.

Mr Jacob Auma, a programme manager with Christina Mission Aid in charge of Kajiado and Machakos, says the cost of land in the two districts has been heading up north.

Property agents and real estate sector players are a happy lot. They say the current boom in prices, caused by Kenyans’ rush to own property, has been long in coming. Skeptics, though, wonder how long the boom will last.

Mr Justus Munene of Daytons Valuers Limited believes the huge hike indicates that the country’s property market is finally maturing.

A three bedroom flat in Kilimani, sold for Sh3.5 million four years ago, now costs up to Sh8.5 million. An acre of serviced land in the same area has risen from Sh18 million four years ago to Sh40 million today.

In Nairobi’s South B and South C, houses that cost Sh4 million in 2004 now cost Sh7.5 million. An acre in the city centre now costs Sh300 million. Four or five years ago, it sold at Sh160 million.

Mr Munene says land prices have increased by an average of 30 to 40 per cent in two years.

Mr George Laboso, the S&L sales manager, believes the rise in property prices is because demand by far outstrips supply.

Mr Daniel Ojijo, the executive chairman of Mentor Group of Companies, says the government was borrowing less from the private sector, giving Kenyans more opportunity to borrow. Commercial banks have relaxed their lending rules, and more cash is available for the public to borrow.

“Mortgage companies now offer lower interest rates,” says Mr Ojijo. “Some go for as low as 11.99 per cent with the highest being 14 per cent, a drop from the exorbitantly high of 30 per cent,” says Ojijo.

The promise of good infrastructure outside Nairobi, says Mr Munene, is also encouraging more people to move out of the city.

“Thika Road, Nairobi-Namanga road and infrastructure development in places like Kiserian, Ngong and the bypasses have encouraged people to put up homes on the outskirts of the city, places where no one used to live before,” said Mr Munene. 

Mr Laboso believes the property bubble is not about to bust as the middle and low income Kenyans have not yet been tapped.

“The prices will increase for a few more years before they stabilise,” said Mr Laboso.

However, predicting the market’s long-term viability is difficult as external factors, including politics, could easily affect prices.

Political stability, however, seems to have convinced Kenyans abroad to begin investing in property in their motherland.

The acting Foreign Affairs permanent secretary, Mr Patrick Wamoto, says a large part of remittances from abroad was going into the property market.

“They know that the sector has fewer risks and could easily be managed on their behalf, and that the investment is permanent,” maintains Mr Wamoto.

However, Mr Martin Owuor, a trade economist for Advisory Centre for Trade and Investment Policy, wonders how property prices could be so high for a low income country like Kenya.

“Is it that Nairobi now has better infrastructure, has population growth been so high to warrant increase in demand for houses or has Kenya suddenly regained international status resulting in mass migrations into the country? What could be the cause?” asks Mr Owuor in his blog.

He warns that what is happening is dangerous speculation where private investors were rushing into the property market with money borrowed from banks.

He gave the example of Dubai, which was praised for a few years as the world’s fastest growing city before the real estate sector went bust and left the city littered with incomplete projects.

“The Dubai government has stopped further construction in the city, mortgage prices fell and no buyers are willing to buy these ghost projects,” says Mr Owuor, adding that the property market in the US before 9/11 was booming, but the bubble bust, leading to a full economic recession that claimed famed firms such as Lehman Brothers and Merill Lynch.

Piracy-accrued cash

Mr Owuor warns the Central Bank of Kenya that the sector is facing a bubble bust.

There are also fears that some of the money pouring into the local property sector could be accruing from the lucrative piracy off the coast of Somalia.

In a Daily Nation report last year, Mr Kenneth Kaniu, the investment manager of Stanbic Investment Management Services, claimed that cash from Somali pirates had found a safe home in Kenya as some Somalis viewed Kenya as a second home and wanted to invest their money here.

That some of these investors do not care about the value of the property they are interested in is interfering with property prices, he said.

“There is no reason why the price of land should suddenly go up by 500 per cent.”

Although the precise amount of ransom cash invested in Kenya’s property market is unknown, Mr Kaniu said conversations with property management agents indicates immense levels of investment.

Making it even more difficult to track these transactions is the fact that the money does not go through the banking system. The transactions are mainly cash-based.