The gloomy future of real estate market

The latest House Price Index published by the Kenya Bankers Association for the second quarter of 2016 is a reason to be sceptical about investing in real estate and the future of the property market in Kenya.

The 1.74 per cent increase of the HPI for the second quarter of 2016 compared to the 1.4 per cent rise during the first quarter reflected an uptick in house price, with the movement representing a not very promising future for the sector.

 The property market performance of the first half of 2016 follows three years of very mild price changes. The demand and supply market dynamics have not been subject to significant changes over the period. The supply has been in response to the broad demand characteristics in the market. The new units being put up are mainly targeting the middle-end of the market, with the lower-end experiencing supply constraints arising mainly from the tendency of developers inclining more towards renting than selling.

Nairobi is the first area to feel the heat of the market. Investors in several neighbourhoods in the capital are feeling pressure from a slump in property prices and rentals as an obvious excess supply is creating new market conditions. With prices remaining stagnant in some areas and other areas like Kilimani producing negative results as selling prices have dropped by more than five per cent since last June, the property market dynamics are challenged. Mombasa on the other hand has been hammered from the drop in the tourism industry over the few last years. That directly affected the real estate sector.

Over the last few months, developers and market makers are focusing on projects around Nairobi where several satellite cities have been producing good returns after the Nairobi market stopped being a lucrative option. Unfortunately, the reality of the market is affecting these areas too. A good example is Mlolongo — the satellite town on Mombasa Road, which, according to available data and reports, has seen prices falling during 2016.

People seem not to understand what is going wrong. Everybody keeps saying that there is a huge deficit of houses. There is a need of 250,000 houses annually when only 50,000 are built. So, when supply does not meet demand then prices should keep going up!

 The rule of supply and demand has been used inappropriately in Kenya. The truth is that there is a very big demand for housing. Maybe even more than the 250,000 houses per year.

THE REALITY

The reality is that the majority of houses that have been developed in Kenya over the last couple of years are not affordable to a majority of people. Market speculators using this “imaginary” deficit of housing have been creating a possible non-existent demand, pushing initially the land prices up and then the property market.

The problem is that when the prices do not represent the real market values, then the possibility of a market downturn is very strong. Depending on the market dynamics, that could be translated to a price collapse. On the other hand, the mortgage market in Kenya is extremely small. Basically, banks tried to stay out of the property market as much as possible.  A little over 20,000 are the total active mortgages countrywide.

According to available reports currently, a prime residential house in Nairobi’s upmarket estates goes for a minimum of Sh250,000, while stand-alone houses and town-houses attract Sh300,000. The fall in rental prices has been attributed to rising supply and falling demand for these properties. In several areas, more buildings are coming up and supply is overcoming demand.

Projects that have been completed almost two years ago remain vacant. In areas like Kilimani, one can see the number of signs advertising properties to let increasing day after day.

High-end areas have been mainly targeting expatriates working for foreign companies and NGO’s. The fact that there are rumours that the country is pressuring thousands of expatriate NGO workers and volunteers to go home is another reason to worry about.

Who is going to rent the thousands of properties around Nairobi that are not affordable for a majority of the Kenyan population? The next question is if these properties cannot be rented, who is going to pay for the losses?

So, what is an investor supposed to do to avoid further losses, minimise the risk and do some damage control? Well,  markets fluctuate. Every investor has to follow the trends, cannot remain stagnant and inflexible. Property transactions are still happening all over the country. The secret to be part of those who are active and signing deals is to realise that if your expectations are too high for this period, you should reconsider your position and adjust.

The sooner you get a tenant for your vacant property, the less the damage from a non-producing investment.

The property sector is facing challenges, but there is no reason to panic. Stay up to date, follow the market and be patient.