12 factors that will change Kenya’s property sector going forward

One of the things that Daniel Ojijo has noted in the past two decades is that Kenyans’ zeal to own a home never wanes. Every time he is invited — in his capacity as the founder of Mentor Holdings, a real estate company — to advise investment clubs, he always senses monumental eagerness to join the home owners club in those gathered for his talks.

That eagerness, alas, is the key driver of Kenya’s bustling property sector, which is now estimated to be growing by about 16.7 per cent annually. The sector’s contribution to the gross domestic product (GDP) rose from 2.3 per cent in 2003 to an average of five per cent in the past two years, says Ojijo, and all indicators point to an even greater contribution going forward.

As a result, the construction sector has been cited as the most efficient in creating new jobs in the country, especially in the five-year period to 2012. According to the Economic Survey of 2013, the number of jobs generated by construction activities in Kenya grew by nearly 62 per cent between 2007 and 2012.

However, even with this growing desire to own homes and the buzz whichever way you turn, only six per cent of Kenyans own homes, only 21,000 mortgages are being serviced in the country, and only 60,000 houses are supplied against a 250,000 demand for housing units annually, says Ojijo, who is also the organiser of the Kenya Homes Expo, a property exhibition.

It is, you could say, a paradox of monumental proportions when viewed against the backdrop of the returns the sector realises.

And things, at least according to economists, are about to get heady as Kenya’s growth is expected to stabilise at about 6.0 per cent between 2014 and 2018. The country, do not forget, is also preparing to host one of the largest middle class groups in Africa by 2025.

As a result, says Sam Manjau of Abec Real Estate, Kenya’s property market is set to experience massive changes that will influence its growth.

Here, 12 factors to look out for in the sector going forward, according to both Manjau and Ojijo:

TENANCY AGREEMENTS

Sam Manjau says some archaic laws such as the Landlord and Tenants Act should be repealed. The law, which came into effect in 1965, was designed to protect Africans leasing property from Europeans as they did not understand what it meant getting into a lease agreement. As a result, it was designed in such a way that it was hard on the property owner because if he wished to review rent, he had to take the matter to a business premises tribunal.

And if the landlord wanted to build more shops or offices on his land, he had to seek the tenant’s approval. Such laws, says Manjau, are irrelevant now and ought to be repealed. “Moreover, when one considers the Landlord and Tenants Act in detail, every lawyer, estate manager, agent, or party worth their salt will design a lease to ensure that they are precluded from such conditions,” he adds.

PHYSICAL PLANNING

This will be vital in decision-making as planners are going to become increasingly important, especially those employed by county governments, in the formulation of county or unitary development plans. “I think some master plans do exist, and county planners will be tasked with implementing and executing them to ensure that there is order in land use and allocation,” says Manjau.

The counties will also be able to supply investors with a county development plan so that they are aware of where they are allowed to put up commercial, residential, or even industrial developments. With such restrictions in place, the future of the property market will be positive, says Manjau.

BETTERMENT TAX

With appreciation in land value growing by the day, the government will soon want a slice of the pie. Betterment tax, which is yet to be implemented, will soon require a developer who benefits from land value appreciation due to the government’s infrastructural developments near their property to share the exploits.

For instance, if a property is near a railway line, at some point, the government will require a percentage from the land or property owner, says Manjau. If before the railway the land or property was valued at, say, Sh10 million, after the development of the railway, the value may appreciate to about Sh20 million.

Therefore, the government may want 10 to 40 per cent of the Sh10 million appreciation for more development.

RECORDS DIGITISATION

The process, which is currently ongoing at the Ministry of Lands, is also expected to bring efficiency to the property industry and do away with vices such as corruption. In the United Kingdom, for instance, when one wants to do a search for a title, it only takes them five minutes from the comfort of their home.

But in Kenya, it takes more than a week — or two, or even a month — and it becomes inefficient because constructions are held up when one is trying to authenticate the deed.

UNIT TRUSTS

Property unit trusts, syndications, and Real Estate Investment Trusts (Reits) are some of the avenues unitisation is offering the market, and these will encourage investment in this sector. In the longer term, as the common Kenyan is afforded opportunities through unitisation of ownership, he or she will be able to enjoy returns of high-end retail outlets through shares. “This, I believe, will become the trend going forward,” Manjau says.

This will allow the ordinary Kenyan to own commercial property of massive value through shares and earn from it without having to incur huge expenses to come up with such a development by himself. Property unit trusts, being open-ended and owned in a trust, will allow the investor to buy shares over the counter, the way it is done at the stock market, and make it easy for a shareholder to easily dispose of his shares, unlike the case with an actual construction.

FINANCING

There are several project-specific innovative schemes in the market that are expected to bring down the cost of project and mortgage finance. An example is the Great Wall Apartments project by Edermann, who were able to source financing from China, channel the financing through a development bank, and are therefore able to offer fixed mortgages of 8.5 per cent for five years, says Manjau. Hence, when one looks at their units, their mortgage repayments come to about Sh28,000 for a two-bedroom apartment, he adds.

“Now, for the first time in Kenya, we have mortgage repayment matching or competing with rent payment. That is a great achievement and we are going to see more and more of that,” says Manjau. However, the issue would be where to source such financing because locally, money is not cheap and most developers have to source it overseas.

INTEREST RATES

Related to project-specific mortgages are lower interest rates. Diaspora remittances are pushing interest rates downward because many banks want to benefit from investments taking place in Kenya. Deputy President William Ruto has been vocal on government policy or law on high interest rates. As such, there may soon be a law or policy that will restrict such high interest rates from the banks. When mortgage repayments start matching or competing with rent payments, mortgages will also grow.

The Ezesha initiative by Housing Finance is a good example of drawing greater numbers to the mortgage market by offering to cover purchasing costs and the entire purchase price up to 107 per cent of actual purchase price.“What is surprising is that we remain largely averse to obtaining credit,” laments Manjau.

THE COUNTIES

Most of us consider Nairobi as the place to be, but everything is now moving to the counties. The amount of money governors are receiving for developments in their counties and the increased paid county staff that needs a place to live, coupled with other opportunities in these areas, will improve demand for investment opportunities. Therefore, developers should stop concentrating on Nairobi and move to the counties that are offering more investment opportunities.

“I have seen some developments in Kakamega where developers put up two- or three-bedroom bungalows and lease them out to civil servants from the county governments. One can also build and sell to the population moving to live and work in the counties,” Manjau says.

MALLS AND MORE MALLS

Kenya’s urban centres have in the recent past seen many malls coming up, but Manjau and Ojijo say that they expect to see diversification through more out-of-town retail outlets and malls. “My optimism is vindicated by the recent announcement by a British investor, collaborating with the Delamere family, to build the first out-of-town shopping complex in Naivasha, The Buffalo Mall, on 45 acres,” says Manjau. There is also another upcoming mall in Karen called The Hub, set on 20 acres. Most of these are designed for family days out and shopping.

SPECIALISATION

Right now, everybody is doing residential developments because that is what is sustainable in the market. However, in developed markets, the bigger pockets of companies and investors have little to do with residential developments, Manjau says. They opt for leisure retreats, offices, hotels, warehousing, industrial, and hospitality. “We now have professionals being trained to do commercial developments. Therefore, as Kenya continues to mature as a market, we shall see a lot of specialisation, where even property professionals will specialise in the commercial sector,” says the Abec director.

Kenya is also moving from the traditional model of construction, where one has to sit with an architect, tell them what one wants, and how one wants it. Then, at some point, a quantity surveyor is introduced, then a structural engineer... and so on and so forth. One is, therefore, forced to meet and talk to people about technical incomprehensibles. The new way of doing things is “design and build”, where a developer designates one person to manage the construction and meet with all other related parties in regard to the construction. This way the developer just has to deal with one entity.

VAT ACT 2013

The legislation on commercial property is worth taking note of because it has inherently increased the price of commercial property such as office buildings, industrial premises, retail outlets, hotels, holiday homes, conference facilities, apartments used for business purposes, and sale of land with commercial use designation, Manjau says. When considering buying either commercial land or building, an investor will have to consider the purchase price, another four per cent of the value for stamp duty, and perhaps one per cent legal costs. This brings the total cost to over 105 per cent of the value of the property, and when VAT is added in, the cost comes to around 124 per cent.

A good illustration of the application of this new tax would be that of office space of, say, 1,000 square feet selling at Sh10,000 per square foot. The purchase price of this space computes to Sh10 million. Previously, extraneous costs would amount to four per cent in stamp duty and approximately one per cent in legal fees. Therefore, the total outflow would have amounted to Sh10.5 million, that being 105 per cent of the actual purchase price.

But, effective 2 September, 2013, the same office space will now require a purchaser to stump up an additional Sh1.6 million, pushing up the total purchase cost to Sh12.1 million.

AGRICULTURAL AREAS

“The advances we expect from agriculture would be what we call eco villages,” says Manjau. Currently, what the sector is doing is not sustainable as many practise small-scale farming where one has a 10-acre piece of land and chooses to plant vegetables for domestic use on a portion of the land and build on another. Then when it comes to bequeathing the property, if the landowner has 10 sons, he bequeaths an acre to each one. By the fifth generation, they are all left with an eighth of an acre, “which does not make sense,” says Manjau. “We expect to shift to the form of agriculture where most of the villagers will move to a town centre and free up land, which will be invested under a company,” he says.

From the company, they will each get shares, which they could opt to lease to a large-scale agricultural company or form their own and manage it themselves. It will be a sustainable way of managing land and will make sense because when everybody moves to the shopping centre, it will be easy to get services such as electricity and water to them. In addition, when they need to bequeath their children an inheritance, they can give them shares. A lot of subdivision of land will be avoided for a sustainable future.