The effect of politics on the real estate industry

The construction industry accounts for about five per cent of the country’s gross domestic product (GDP), so a booming industry is an indication of a healthy economy. This is an election year and with a political showdown between the ruling coalition and the opposition looming, it is important to know the impact of politics on the construction industry.

Mr John Wainaina, a construction manager with In House Ideas Ltd, lists some factors below.

INFRASTRUCTURE

Mr Wainaina says the construction industry is highly dependent on the government’s willingness to build and maintain infrastructure such as railways, roads, power, and water supply. 

“No one wants to put up a building where there is no power, water supply or where the road network is poor. It is the work of the government to build and maintain the existing infrastructure,” says Mr Wainaina.

He cites the 12-lane Thika Superhighway as a case in point. “The super highway has really opened up the neighbourhood. There are about five shopping malls along the road and so many residential houses are coming up,” he says.

EXPENDITURE

As the custodian of the public kitty, the government usually has the final decision on which projects to allocate funds to. For instance, Mr Wainaina says, the government’s decision to spend on the standard gauge railway, will have both a direct and indirect impact on the construction industry.

“Directly, the SGR will ease the  movement of construction material, reduce the cost of imported goods and increase the lifespan of our roads since most goods will be transported to and from the port of Mombasa via rail as opposed to road,” he says.

He adds that the project will revive business along the route and see property developers put up apartments to house the businessmen and women in different areas.

REGULATION

It is the government that lays down policies that govern the construction industry and regulate bodies that register professionals in the sector. For instance, Mr Wainaina says, thanks to the National Construction Authority (NCA), there has been an increase in health and safety considerations in and around construction sites. “By enforcing rules on the safety of workers at construction projects and ensuring hoarding and netting of buildings under construction, the  NCA ensures the safety of workers and that of the surrounding community,” says Mr Wainaina.

So a government that enforces laws governing the industry can avert disaster.

EFFICIENCY

Before beginning any construction work, a developer must to acquire a number of permits from regulators such as county authorities and the National Environment Management Authority (Nema).

The way these institutions operate affects efficiency. Mr Wainaina attributes that the corruption in the construction industry to bureaucracy, with applicants often asked for bribes so that their requests can be processed faster.

  ­­­“ If we can’t streamline these processes for everyone so that one can do construction efficiently, many people stand to lose,” he laments.

This lack of streamlined processes, Mr Wainaina says, has also affected the tendering for government projects in that government tenders new entrants in the business,  especially young people whose construction companies are not “well connected”, are highly unlikely to be awarded government tenders.

INSTABILITY

Political instability discourages investment, if the ongoing political competition is anything to go by, most investors are likely to go slow on investment until the political temperatures cool down.

ELECTION SPENDING

Mr Wainaina recalls that the high inflation rate experienced in 2012 was occasioned by heavy election spending as contestants geared up for the 2013 General Election. 

“Inflation affects the prices of goods. You will find the prices of sand, ballast, cement, much higher price than usual. It also affects the price of fuel, which in turn drives the prices of other commodities up,” he says. 

CENTRAL BANK OF KENYA ACTION

Depending on the political era, the CBK, by stamping its authority on commercial banks, greatly determines access to capital, bearing in mind that the construction sector  relies heavily on capital from these banks to thrive. 

For instance, last year, the President assented to the Banking Amendment Act 2015, which caps interest rates to not more than four per cent above the CBK rate. This move might see more people get access to capital and in turn venture into the construction business.

TAXATION

This either puts money into people’s hands or takes it away from them. High taxes on imported goods discourages investments and increases the cost of locally available materials. The impact of taxation on the construction sector depends on the government’s decision to increase or reduce taxes on building materials, says Mr Wainaina.