If you want to survive, you have to build houses for middle class

The demand for housing in the country has always outstripped supply, with developers over the years having filled the gap in the middle and upper reaches of the sector, which were seen to be more profitable. But focus in these areas led to oversupply, with many developers now turning to the lower end of the market to survive.

Four months ago, the Suraya Property Group unveiled its latest real estate development within the Fourways Junction development targeting the middle-income market. This is just one of the many projects the group has in its portfolio.

Mr Peter Muraya, a co-director of the real estate firm, says that for anyone to make it in the current market, they have to address the needs of the middle- and lower-class markets.

“In 2006, we became the first developer to introduce the gated community concept in the country when we ventured into the high-end market. There was a lot of scepticism about the location of the estate, which was close to Gachie Village. But regardless of the uncertainty about the location, Rosslyn Heights was the beginning of our real estate journey. However, we slowly realised that the actual market was in the middle class. Going through the profiles, we saw that a good number of our clients were young people who were determined to make their investment debut in real estate. This has informed our concentration on this niche market,” Mr Muraya says.

MEANT TO ADDRESS THE MARKET

The company’s EnCasa project in Mlolongo is meant to address this market. The project features a series of apartments, ranging from bedsitters to three-bedroom units with a starting  price of Sh900,000 for a bedsitter, which is relatively lower than the market rate.

“What the market needs to understand is that any real estate investment starts from somewhere. Young people need to understand that the bedsitter is the best place to start for someone who is interested in owning a big house one day. The logic is that once you buy the bedsitter this year, for instance, its value will have tripled in the next five years. You can then sell the bedsitter and buy a one-bedroom house going for about Sh2.5 million. By then, a single person or fresh graduate with a stable job or will have settled well in their job and might have earned herself a promotion, which means they can then graduate to a two-bedroom house going for between Sh4million and Sh6 million,” Mr Muraya explains.

the Suraya Group made its debut on the property scene 10 years ago with Rosslyn Gardens and Heights at the high-end market in Gigiri, but it was the ambitious Fourways Junction project that has turned the firm’s fortunes around, seeing it take firml control of the real estate market in the city.

“Fourways Junction took centre stage in December 2008. At its launch, it was the biggest, single mixed-use project in Kenya. When we sat down with our management team about the Fourways Junction project in 2009, everyone thought we were too ambitious. Our previous projects were under 100 units but this was going to provide more than 1,000 units. Even the financiers had doubts, but we managed to execute it successfully,” Mr Muraya says.

But along the way they have encountered challenges, including legal battles, the rising cost of land, high construction costs, high financing costs and poor land laws that have seen delays across the sector, amounting to billions in losses for developers.

For instance, the Fourways  Junction development was involved in a major legal battle that ended up in arbitration. Its third phase, launched in July this year, has already attracted a court case over the same land issues.

GREAT LESSON

“For us it was a great lesson on how to do joint venture projects and the inherent potential dangers. There are now new options for developers, financiers, and landowners, but it is important for all of them to form a new company and transfer the land title to the new unit. That is a safe bet to cushion against future misunderstandings and lawsuits. It makes it very easy to wriggle out of such legal dilemmas,” Mr Muraya offers.

Legal battles over grand, real estate projects in the country have become a headache for many joint venture vehicles.

“It is important that developers understand that these differences can be solved in the shortest time possible so as not to allow emotions and the differences to be irreconcilable. When people start getting emotional, it stops being a joint venture investment disagreement but degenerates into personal issues, which are harder to resolve in court. It becomes a battle of egos and power. When such emotions are involved, joint ventures are difficult to solve,” Mr Muraya says.

For the decade they have been in operation, one of the major challenges they have encountered is the high cost of land, which makes the pricing of houses rather tricky.

A report by HassConsult Real Estate released last year showed that land prices in Nairobi have shot up five-fold in the past seven years, with Upper Hill emerging the most expensive address in the city.

The report further  says that  land prices in the city have appreciated by 535 per cent, with an acre that cost around Sh30 million seven years go now going for Sh170 million.

Mr Felix Gichaga, the regional business development head at Stanlib, a HassConsult partner, says that  land prices in the suburbs have shot up beyond the affordable range for individual buyers.

“We have seen infrastructural improvement, an increase in financial access, re-zoning and general desirability of land within the suburbs as the factor. We have also seen an increase in investment in land  but on the flipside, this is making housing very expensive in the city,” Mr Gichaga says.

Mr Muraya concurs, noting that this is one of the reasons why they decided to concentrate on the middle-income market rather than their initial high-end market as speculation among land owners and dealers, coupled with demand from developers, has driven prices up nearly nine-fold, making the developments too  expensive to sell.

“It really doesn’t make sense to build for the high-end market anymore because of the land prices. When you factor in the cost of construction and the margin, you realise that you won’t get buyers for the house. For instance, half an acre in Runda costs more than Sh50 million. If you build a house on such a plot, you will want to sell it for more than Sh80 million; where will you find buyers for such an asking price?” he wonders.

REDUCTION IN LAND PRICES

For instance, land prices in Spring Valley have risen more  than four-fold since 2007, making the posh residential suburb out of reach for most developers, with an asking price of Sh160 million an acre, followed by Runda at Sh100 million an acre.

In its 2016 first quarter update in April, HassConsult reported that for the first time, land prices in Nairobi had started falling after peaking at the end of 2015, with the cost of  an acre of land in Nairobi having slowed down by 0.2 per cent to Sh59 million.

Ms Sakina Hassanali, the head of research and marketing at HassConsult, said: “We are looking at it as a market correction of some sort. We are seeing speculators and brokers looking elsewhere where they can still close the deals fast and at affordable prices with honest margins,” Ms Hassanali said.

Mr Muraya says that a correction can come only when the government starts  building houses, which will drive down the prices, and eventually, the prices of land as well.

“In the last decade, we have not seen any major input in housing by the government. Look at Eastlands, for instance. We still have a lot of government housing projects owned by the county government. If the county could partner with developers to put up decent units on these parcels of land at affordable prices, wouldn’t we be able to drive down the speculative cost of land surrounding these areas?” Mr Muraya asks.

Legislation and the high cost of credit are the greatest challengesand have seen many developers close shop.

“I am happy and relieved that President Uhuru Kenyatta signed the Interest Rates Bill. The high rates have broken many developers, and especially with regard to mortgages. It takes almost a year to register a property, which delays the sales of the units, while all this time a developer is serving their development finance facility. It is basically giving away your margins to the bank in a bid to protect the projects,” Mr Muraya says.

COMPLEX LAW

Mr Muraya  together with other stakeholders under the Kenya Private Developers Association (KPDA), is pushing for the amendment of the Sectional Properties Act and the enactment of the Proposed Shared Communities Bill to overcome these hurdles.

“The current law is too complex and makes property registration a  time-consuming process. All the blame has been heaped on the land ministry but the truth is that it’s a whole sector players’ issue – from the ministry to the banks. This circus is hurting both the developers and buyers as it adds more than 40 per cent of the cost to the final price,” Mr Muraya says.

KPDA is pushing for the Shared Communities Bill and Amendments to the Sectional Properties Act, which aim to reduce  the time and process of registering individual units and will enable buyers to have their new homes charged as collateral in a much shorter time.

The association’s Chief Executive Officer, Ms Elizabeth Mwangi, said  the proposals are being drafted by lawyers at the land ministry and will be are presented to the Cabinet.

“It would be futile for the government to push developers to put up more than 200,000 units annually when registering them is a problem. No developer would like to sit on these units as the cost wouldn’t be on their side. We would welcome the fast-tracking of these amendments so that the industry can be vibrant again,” Ms Mwangi says.

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OWNING A HOME NOT EASY IN KENYA

According to a report by the Johannesburg-based Centre for Affordable Housing Finance in Africa (CAHF), the prices of houses in Kenya are way beyond the means of individuals who would ordinarily afford them.

“Only about 11 per cent of Kenyans earn enough to support a mortgage. This means that most middle-income earners cannot afford a mortgage facility to buy an entry-level house,” the report said.

The Kenya National Bureau of Statistics classifies middle-income earners as those earning between Sh23,672 and Sh119,999 per month, according to the report. Upper-income earners make more than Sh120,000 a month while lower-income earners make less than Sh23,671 per month.

The Knight Frank Prime Global Cities Index for the second quarter of 2016 shows that the prices of luxury homes in the city increased by 2.1 per cent in the 12 months to June, and by 1.3 per cent in six months, a marginal increase compared to its heyday 10 years ago. The Knight Frank data show that the value of luxury homes in Nairobi have risen by 40 per cent in the last five years to June 2016.

Mr Ben Woodhams, the Managing Director Knight Frank Kenya, says that, while buyers are aware of market conditions, “High-end buyers are discerning and willing to pay a premium for the right property based on location and quality. The stability in luxury residential sales has largely been sustained by realistic pricing. Transactions are still happening in low volumes, driven by a mix of buyers, including Kenyans in the diaspora who are currently benefitting from the foreign exchange environment.”