How the highs and lows of real estate in 2014 shaped sector

Stakeholders in the real estate industry agree on one thing; that the year 2014 has been quite fruitful for the industry.

The market is yet to mature, the spring is yet to really dominate its steps, but its future looks strong.

Great opportunities, it seems, await the forward-thinking investor who plants his or her seed in the sector.

To understand how important  real estate has become, says Pete Muraya, the chief executive officer of the Suraya Property Group, think about this: when the government rebased its Gross Domestic Product earlier this year, it announced the sector as the third highest contributor to the economy.

The year’s success, however, is tied to the spill-over effects from 2013, the election year during which investors hoarded their monies for fear of the political risks associated with electioneering.

Most of that money was released to the market at the start of this year, translating to bigger volumes of transactions, says Samuel Manjau, the director, Abec Real Estate.

PRO-BUSINESS PHILOSOPHY

Also, “the ideological thrust of incoming leaders and policy makers was a determinant of the volume of investment the country experienced, where, for the left-leaning politicians, higher taxation for more social programmes was always expected, while from the right-of-centre leaders, less taxation, smaller government and a pro-business environment are standard features of their philosophy,” says Manjau.

Despite the need for implementation of our socio-liberal Constitution, which encourages a bigger government, and, inevitably, higher taxes, the current crop of leaders are deemed to be right of centre, and therefore pro-business, thus there was more investment activity in 2014 compared to 2013, adds Manjau.

The growth in the sector has attracted a huge number of investors, both local and international, institutional and individual, and many more are on the way.

Institutional investors, who previously shied away from putting their money in real estate because it was characterised by a lack of liquidity and required huge amounts for investment, are now attracted by the good performance of the sector and its relative stability compared to other investment options.

As a result, says Ms Patricia Githu, the Developing Africa Limited (DAL) chief executive officer, they are pumping billions of shillings into real estate projects.

The year also saw the ground-breaking of many projects by different developers, and these have provided vast options and a wide selection of house designs, “which are bound to improve going forward”, says Ms Githu.

The market has been boosted by the high demand for accommodation, office space and homes at the county level, making county governments design policies to encourage investments in the sector, say Lee Karuri, the chairman of Longonot Gate Development in Naivasha, a flagship project away from the traditional investment zones of Nairobi, Mombasa and Kiambu.

That demand for office is, however, shadowed by a recent report by Mentor Management Limited, titled Nairobi Commercial Office Property Report: On the Brink of Oversupply, that predicts that by the end of 2016, 19 per cent of the total stock of new buildings delivered since 2009 “will be lying vacant”.

SILVER LINING

This excess supply in office space is expected to originate from Upper Hill and Westlands in 2015, according to the report.

The year also brought an acceleration in office building in the city’s outer suburbs, with Gigiri, Thika Road and Karen accounting for more than a quarter of all new office buildings delivered in and around Nairobi this year.

The construction of Nairobi office buildings is, however, set to slow in the coming days and only northern parts of the city will continue to experience intense activity, with three quarters of this year’s new office planning approvals falling in Gigiri, Westlands and Waiyaki Way, according to Mentor Management.

But there is a silver lining; the researchers found something interesting when they looked into the parking ratios being offered at different offices, a key driver of rentals and sales,

“Only five per cent, or one in 20, of the city’s new office buildings meet the minimum international standards for parking, yet there is an absolute relationship between ample parking and speedy uptake,”  said Mr James Hoddell, the MML chief executive officer.

Away from the cities and their hunger for office space, devolved centres of power, which are products of the devolution process, have eased the pressure at land transaction offices, “and we want to see this continue in 2015”, says Ms Githu of DAL.

Her sentiments are echoed by Mr Muraya, who says that the government’s focus on real estate “has been a positive aspect of 2014 as we believe it will look at incentives for this sector”.

“It has also done a commendable job at the registries of the Ministry of Lands,” says Mr Muraya, “as it is now easier and faster to get information on titles at the various registries. We are also glad that the ministry is moving to clean-up all the other registries in Kenya.”

The Real Estate Investment Trusts method of funding mega projects is still relatively new in the market, but it has great potential, especially as more companies were granted REIT status in 2014.

Also, the development of the trusts will see many more institutional investors “as the framework will bridge the financing gap in the capital-intensive sector,” says Ms Githu.

SEGMENTED MARKET

Real estate marketing has also had a great impact on investments. Online, print, electronic and physical real estate marketing has grown tremendously within the past 12 months, while property expos have become one-stop shops for both buyers and developers.

“They have also continued to create a platform where buyers are able to compare various projects on sale and make informed decisions,” says Mr Karuri.

Other advertising media, especially TV, radio, online and social platforms, have created awareness to consumers and introduced various developments to potential buyers, hence opening up the market.

In 2014, advertising moved, in a big way, to social media. However, traditional media formats like newspapers, radio and television still dominated the market.

This, explains Mr Muraya, is because markets tend to be segmented, and that segmentation leads to different media consumption trends and appeals.

“One must, therefore, understand one’s core market before choosing a medium,” says Mr Muraya.

The future also looks bright for Saccos and small investment groups as they gradually become major players in the property industry through micro-investments and cheaper credit, says Mr Manjau says.

Stories abound of small groups — like a Kitengela-based boda boda riders association — that have pooled enough resources to build whole estates, sometimes with the assistance of banks, sometimes by going it solo.

The year also saw the launch of new modern building technologies that were embraced by a number of developers, although their uptake is still low.

That wanting enthusiasm, however, is expected to change in the coming months as awareness grows away from the conventional brick-and-mortar technologies that have dominated the Kenyan market.

“We cannot avoid moving into cheaper costs of construction,” says Mr Karuri of Longonot Gate. “Western countries have used these technologies for some time now, and the result is good enough to try in Kenya.”

There are also exciting times ahead for the retail market as scheduled completion of major projects determine the next phase of the sector. Activity in the industrial sector is expected to pick up, especially with the opening up and expansion of roads on major arterial routes.

“We expect high levels of competition in residential and retail market, driven by emerging high-rise and mixed-use developments, as well as comprehensive schemes that are more lifestyle based, with advanced technologies, captivating designs and concepts both outside and within the city in 2015,” says Ms Githu of DAL.

However, even with all the positives that have characterised the real estate sector in 2014, there have been challenges that have continued to drag it back.

Corruption is still a key challenge to property related transactions, if land scams, disputes, court cases, demolitions and even deaths as a result of land-related conflicts are anything to go by.

MORE TAXES

Land continues to be a valued — and therefore emotive — resource, which explains why some people are willing to do anything to own a piece of earth, including dealing in unethical practices. 

The biggest negative impact this year, though, has been the level of insecurity occasioned by a string of terrorist attacks in the country.

This has resulted in poor country ratings that  have snowballed into investor lethargy, especially in mega projects.

The market is also growing rapidly, yet trained labour, especially for specialist work, is lacking and material by local manufactures are also not enough for the magnitude of developments coming up in the country, says Mr Muraya of Suraya Properties.

Industry players have also argued against the re-introduction of capital gains tax, which will come into effect in January 2015. 

Last month, tax experts warned that failure to amend the law on capital gains tax in its entirety could impede the smooth implementation of the measure meant to raise more revenue.

The government has set January 1, 2015 when the new tax takes effect, but the experts say it contains some grey areas due to lack of clarity.

A capital gains tax is assessed on any gain in value from the sale of land, buildings or shares that are being transferred from one person to another.

Kenya had a similar regime in effect until 1985, when it was dropped  to encourage growth in the real estate and capital markets. It has been introduced as the government moves to increase revenue to meet its development objectives.

Experts have expressed support for the new tax but have voiced concern that government failure to change particular areas of the law, especially Shedule 8, to accommodate changes in the economy, such as inflation levels, will make it difficult to implement.

“An obsolete clause in Schedule 8 puts land at Sh30,000 (value of land in 1985), which is the base value. Such land has escalated in cost and is now worth millions.

The law has not factored in the change in economic environment, which includes inflation rates,” PKF Taxation Services Ltd consultant Mr Nahashon Mathenge told the Daily Nation last month.

ROOM FOR MORE

However, even with the opposition, some observers have praised the reintroduction of the tax, arguing that the economy has profoundly changed since 1985, and that such a move is unlikely to negatively affect the country’s attractiveness as an investment destination.

Away from taxes, Kenya’s property sector continues to perform regional peers, whose growth drivers are also similar, with factors such as rapid urbanisation, modern household formations, regional economic growth, improved government policies contributing to higher uptakes.

“However, even as we continue to provide housing which is so much required, we must endeavour to consider the environment,” says Ms Githu of DAL. 

“Proper research, policies and guidelines need to be put in place in order to secure agricultural land, especially in Kiambu. We believe that there is still so much land suitable for housing that will not necessarily invade on coffee, tea, and agricultural farms.”

Ms Githu’s concerns are borne of a growing trend in which vast agricultural lands are being transformed into residential and commercial zones, especially in Kiambu and Kajiado counties, which border the ever-expanding Nairobi.