Which way for real property market after the elections?

After a remarkable boom in the past few years, the property market in experiencing a downturn. While most reports have been showing signs of a market slowdown since the second half of 2013, most people ignored this and continued investing in the market.

Today, as if taken by surprise, many industry players are struggling to liquidate their positions, sell or even rent out. More recently, the market has been facing additional pressure thanks to the prolonged electioneering period. Then there are local macroeconomic and international economic developments.

Indeed, most reports are showing little optimism, with the more positive ones talking of a stagnant market. Analysts, market professionals, journalists, and ordinary people are all seeking explanations for these new market dynamics.

Basic economics and business principles show that all markets operate in cycles, which depend on the sustainability and real growth of an economy. Those who believe the property market is different are simply wrong.

Examples abound of markets which, under different circumstances, followed the cyclical course. Dubai, Russia, Spain, Greece, Ukraine, the US are examples of markets that did well for a time before collapsing; some did recover and even make profits again. Kenya is no different in principle. But while the country has its own dynamics and characteristics, the main principles of investment, finance and economics apply the world over.

Still, the downturn is no reason to panic. What should worry investors and those who bought properties using expensive mortgages and loans is the market’s ability to recover.

Let’s look at some characteristics of the Kenyan economy that help one understand how the market cycle operates.

First, Kenya has lost its status as East Africa’s economic powerhouse. Ethiopia has officially taken over as the region’s economic giant, with International Monetary Fund (IMF) figures indicating that its annual economic output (GDP) this year is expected to be $78 billion (Sh6.3 trillion), up from last year’s $72 billion (Sh8 trillion). Its economic growth since 2015 has been put at 10.8 per cent, placing it well ahead of Kenya. And while the economies of most of the other EA countries are expected to grow, Kenya’s is expected to continue slowing down, according to the World Bank, IMF and other forecasts, with some saying it will fall below 5 per cent this year.

The economy’s growth during the first quarter of 2017 was the slowest, compared with corresponding quarters since 2013. This makes the downward revisions of the economy’s growth outlook for the year plausible.

The greatest problem is that the economic growth registered in the past few years was mainly attributable to big infrastructural projects and public expenditure based on huge loans; the private sector’s contribution was minimal.

The country seemed ill-prepared to capitalise on the ideal global conditions, namely extremely low oil prices and the US dollar sliding by close to 15 per cent against most world currencies. The US Federal Reserve recently signalled that it could raise the rates in December. A stronger dollar would put extra pressure on Kenya’s already hard-hit economy.

The current account balance deficit has been growing, as has been the negative balance between imports and exports (trade) and external debt. There is runaway inflation, with average consumer prices recording the highest increases in the past five years. Unemployment remains a huge problem and tourism is doing badly, contributing little to the economy. Meanwhile, the agricultural and primary production sectors are suffering because of lack of investment and unpredictable weather.

Foreign investment is not enough to sustain the economy. China, which seems ready to facilitate Kenya’s finance needs, is playing a key role in the country’s infrastructural projects and taking over the management of vital public facilities – but with strings attached. Further, a prolonged electioneering period is putting more pressure on the economy, and of course, the property market. However, the elections are just one reason, not the main one, the market has worsened in recent months.

Recently, the government took serious measures to protect the shilling and the economy. The increase in central bank rates (CBR), interest rate capping, intensive monitoring of the banking system by CBK all had economic impacts. However, in addition to these financial considerations, there are other factors with bigger effects: demand in the housing market has been largely influenced by the sustained decline in the pace of credit growth in the private sector.

Private sector credit expanded by only 2.1 per cent in May this year, compared with 4.7 per cent in September 2016. This drop came against the backdrop of the amended Banking Act, which capped interest rates.

Other major issues are the absence of direct international investors to supply the market with additional cash, and the slow-down in property transactions, creating liquidity and cash flow problems for property owners.

Simply put, without easy access to finance and international buyers, and with a stagnant market where money is stuck in property, there is no money to support the people’s purchasing power, causing a slowdown in sales and prices, stifling the market.

REMEDIAL MEASURES

The sector’s huge potential has been based largely on a huge demand for housing, but the rule of supply and demand has been misused in Kenya; for the past several years, it has been held that the country’s annual housing deficit is more than 200,000 units. But this information is incomplete; the types of units needed should be defined and the deficit categorised properly to reflect the real situation. Type, size, location, and price are among the factors that should be analysed and included if we are to use the current housing deficit to make the market sustainable.

The reality is that most of the required units needed are low-end, and not just in major urban centres. While there is a huge gap between demand and supply, thousands of units remain unoccupied while those under construction have not been sold.

Huge amounts of money are held in overpriced, high-end properties, stifling not just the real estate market, but jeopardising the country’s economy. Meanwhile, recent price increases have created a market that is beyond the reach of most average Kenyans.

That many developed units remain unsold for long calls for adjustments on the part of the suppliers, who should have a good grasp of the current situation. But although there is a need to reconsider supply, the credit conditions that affect demand also apply, and therefore, affect new property to be put on the market.

No one knows how long the prevailing market conditions will last, but we should be prepared. The problem is that the economy is structured in such a way that the slowdown will affect the whole economy, and might trigger a domino effect.

Fewer new buildings mean fewer jobs, thereby exacerbating unemployment. Fewer sales, a longer time to make sales, and discounts leading to losses are creating cash flow problems in the market, which needs liquidity to sustain its day-to-day operations.

Some banks have closed down, others are downsizing while yet others are being closely monitored by the CBK. Businesses are under pressure; some have closed down while others have not paid their workers for months. Debts between individuals, companies and the government are increasing. Car dealerships are suffering and gradually, everyone is feeling the pressure of a shrinking economy.

Those who believe that things will change instantly after the repeat presidential poll should be more cautious and sceptical. The situation cannot be solved with easy solutions or shortcuts. It is worrying that in the last 18 months, the country’s projected growth has been revised downwards several times, despite the favourable international economic conditions characterised by low oil prices, a falling dollar and Chinese investments.

FYI
THE PROBLEMS WITH KENYA’S ECONOMY
1. Country no longer EA’s economic powerhouse
2. It’s growing slowly, with some predicting it will be below 5 per cent this year
3. Country has not made use of favourable economic conditions
4. There’s runaway inflation
5. Agricultural and primary production suffering because of lack of investment and unpredictable weather

WHAT TO DO
1. Transform it in such a way that it produces more and consumes fewer unnecessary imported goods
2. Focus on agriculture, the blue economy, tourism and primary production
3. Strive for sustainable production instead of relying on the stock market and real estate.

Clearly, an economy based mainly on public expenditure, a real estate market targeting local capital and lots of foreign aid and loans is not sustainable. Kenya needs to restructure its economy in such a way that it depends more on its own resources and less on imports and foreign aid. This calls for more investment in the primary production sector, a revamping of tourism, and modernising to reduce dependence on fuels like oil.

To do this, the country must produce more and consumes fewer unnecessary imported goods. The main focus should be on agriculture, the blue economy, tourism, and primary production rather than the stock market and excessive investment in real estate, which have been dominant for years.

The property market is currently standing in the middle of a growing hurricane. If things do not improve, the consequences could be catastrophic. Luckily, there is still time to take corrective measures. But the change will not happen overnight, and the government, as well as every citizen, must play their role. Hopefully, the repeat presidential poll will be followed by peace. But irrespective of who wins, 2018 can be a year of change and the beginning of an amazing course for the county. In the short- to medium-term, there will be no dramatic change in the property market; the slowdown will continue until the market becomes sustainable. That is, when prices will be affordable to the average Kenyan. Supply will mainly target lower-income earners, and real estate will be a major investment avenue without monopolising it.
In the medium- to long-term, the property market’s performance will depend on the country’s economic performance. And as in the case of other investments, you have to be up-to-date with market developments and be prepared to make decisions that might not always please you.

IN NUMBERS

2.08
The percentage by which house prices rose in the first quarter of this year
15

The percentage by which the value of the shilling has dropped in the past four-and-a-half years.

6.8

The average inflation per year in the past four-and-a-half years

ALL HAS NOT BEEN WELL FOR FOUR YEARS NOW

THE HOUSE PRICE INDEX (HPI) for the second quarter of 2017 released by the Kenya Bankers Association in July indicates that house prices increased by 2.08 per cent in the first half of the year. This downward trend began a couple of years ago. The quarter also recorded the slowest price increase since the third quarter of 2016.
While some people read a sense of overall price stability in these figures, the trend in the past four quarters points to the underlying demand-and-supply characteristics. In particular, it shows a demand slowdown on the back of the broader economic environment characterised by a general sense of softening growth and an oversupply of property in several areas. Rental vacancies are also increasing, with the average time needed to rent out a property significantly longer.

Despite the data from market reports, speculators are convinced that the market is still strong, that prices and demand will grow, and that the future of the market is promising. Yet the HPI indicates that, since the first quarter of 2013, house prices had risen by 16.67 per cent as at end of the second quarter of this year, based on the fixed-base index (KBA).

In the last four-and-a-half years, the shilling’s value dropped by more than 15 per cent against all the strong currencies, with the accumulated inflation exceeding 30 per cent, according to data from the Central Bank of Kenya. Average inflation per year during the same period was close to 6.8 per cent. So it is obvious that the property market recorded negative results during this period, and the pressure is increasing on both residential and commercial property.

The investment fever led to an oversupply of commercial properties. Nairobi and its outskirts have more than 48 malls, yet most of the new malls are half empty. And with two of the biggest supermarket chains facing huge problems, the future seems bleak. There’s also an oversupply of high-end residential properties. Off-plan sales are a thing of the past and house owners are struggling to find tenants.

Meanwhile, non-performing loans (NPLs) related to the property market are increasing rapidly, causing problems in the banking sector. This year, the ratio of NPLs to gross loans rose from 9.9 per cent in June to 10.7 per cent in August, according to CBK.

The total bad loans in the real estate sector stand at about Sh3.9 billion. Besides, NPLs of manufacturing companies related to construction such as cement manufacturers are also increasing. The ratio of gross non-performing loans to gross loans increased from 9.5 per cent in March to 9.91 per cent in June, reflecting the difficulties borrowers are experiencing in servicing the loans.

Gross loans declined by 0.8 per cent from Sh2.38 trillion in March to Sh2.36 trillion in June, one of the lowest rates in recent years. Commercial banks expect a rise in non-performing loans, citing a slowdown in economic activity.

Kosta Kioleoglou is the regional director of Africa Plantation Capital