Which way for property market this year?

Last year was a turbulent one for the country’s economic health and affected many sectors, including real estate. GRAPHIC | NATION

What you need to know:

  • In 2017, the government announced that it was planning  build half a million houses for Kenyans in  the next five years.
  • In a statement issued by Ms Aidah Munano, the Principal Secretary  the Ministry of Housing and Urban Development, the government said that it would use industrialised building technology that would ensure that  the low-cost houses are built in a record seven days each.
  • Commenting on the government’s plan, Mr Kibire says  it as a good initiative because it will cater for those at the low-end of the market who are often ignored by private developers.

Last year was a turbulent one for the country’s economic health and affected many sectors, including real estate.

A number of  factors, among them interest rate cap on loans, transitioning governments at the county level and the extended electioneering period conspired to ensure that the property market did not do as well as it had been doing in  previous years.

“Due to the electioneering period, there was uncertainty about the future of the country. People didn’t want to invest in a country that might go to hell in a handbasket due to post-election violence,” says Mr Martin Cheboror, a professional land valuer and director of Westlands-based Icon Valuers Ltd.

“Even the Central Bank acknowledged in October 2017 that the country was facing a serious liquidity crunch,” he adds.

His sentiments are echoed by the Mr Gilbert Kibire, the executive director of Advanced Valuers Ltd in Nakuru, who adds that that during the second half of the year, many investors adopted a wait-and-see attitude and thus withheld their money. As a result, fewer jobs were created in the economy, less output was achieved, and people didn’t buy a lot of real estate because their purchasing power remained low.

But the two are upbeat that 2018 is going to be a bullish year for the country’s property scene. “With the elections done and dusted, the country can now focus on developing some of the infrastructural projects in the pipeline. Investors who were holding back their money will troop back and as a result, the property scene will experience a boom,” says Mr Kibire.

Today, we take a look at some of the areas in the property scene that are worth keeping tabs on as 2018 unravels.

INDUSTRIAL REAL ESTATE

In November last year, the Energy Regulation Commission (ERC) announced that it would start offering discounted tariffs to  commercial and industrial power users who operate between 11pm to 5am, a period during which demand is low. Mr Cheboror believes that this move, combined with the transportation of cargo via the Standard Gauge Railway, will be a shot in the arm for industrial real estate.

“Due to increased manufacturing, some factories might be looking to expand their production lines. For a private developer, this is the time to invest in warehouses since traders will be seeking more industrial storage space,” says Mr Cheboror.

RESIDENTIAL PROPERTY

With the manufacturing sector experiencing a bump and the elections over and done with, Mr Martin Cheboror predicts increased demand for residential property.

“Foreigners and expatriates might troop to the country in order to exploit investment opportunities backed by government incentives. Locals, too, will have higher disposable income and will be able to afford high rents. The rents, especially for the upper middle-class and the affluent. will go up,” he says.

Meanwhile, Mr Kibire says that immediately after President Uhuru Kenyatta’s swearing in ceremony, property inquiries, especially in the residential sector, shot up. He expects the trend to continue into the new year.

“House prices are going to shoot up by a huge margin in 2018 as people express more faith in the country’s political situation,” the Nakuru-based valuer notes.

Government’s 500,000 housing project

GOVERNMENT'S 500,000 HOUSING PROJECT

In 2017, the government announced that it was planning  build half a million houses for Kenyans in  the next five years.

In a statement issued by Ms Aidah Munano, the Principal Secretary  the Ministry of Housing and Urban Development, the government said that it would use industrialised building technology that would ensure that  the low-cost houses are built in a record seven days each.

Commenting on the government’s plan, Mr Kibire says  it as a good initiative because it will cater for those at the low-end of the market who are often ignored by private developers.

“If you take a keen look at the housing market dynamics right now, you will notice that there is a biting shortage, which seems to affect only low-income earners. We are actually experiencing an oversupply of houses in the high-end market,” he says.

Mr Cheboror notes with enthusiasm that the project will mean an abundance of jobs for Kenyan youth, adding that it calls for public-private partnerships, with  the government calling in local construction firms to put up most of the units. Suppliers of construction materials will also not be left out. “It is good news for everyone,” Mr Cheboror enthuses.

But even more important than the immediate gains in terms of employment and supply contracts, Mr Cheboror says, is that as the government  executes the project, it would do well to consider  reviewing some of its policies in the housing sector.

“Large-scale housing developers are constantly crying about the bureaucracy and state-sponsored road blocks that they encounter when putting up housing. We expect that if the government is to achieve the ambitious target of 500,000 units in five years, it will try  to ease the process by coming up with more favourable policies. Such policies could include incentives such as tax breaks for large-scale property developers and a shorter approval process.”

INTEREST RATE CAP

Speaking at a press conference in September last year, the Central Bank Governor, Dr Patrick Njoroge, said the interest rate cap on loans would  soon be reversed, and  that banks would be free to  price their loans. The governor acknowledged that the cap on interest rates, which was effected in September 2016, had been “problematic in many ways.” And although he did not specify when the cap on interest rates would be lifted, both Mr Cheboror and Mr Kibire are optimistic that it will happen within the first half of 2018.

Mr Kibire recalls that before the law capping the Banking (Amendment) Act (2016) that capped loan interest charges at four percentage points above the Central Bank Rate was implemented, the real estate market was very vibrant.

“Back then, even though loans were expensive, they were easily accessible and most of this money found its way to real estate. Those who invested in property did not mind the high interest rates because real estate is a long-term investment that will still be appreciating and bringing in returns long after the loans have been paid,” Mr Kibire says.

“With the low interest rates acting as deterrence, banks have reduced lending to individuals and small and medium enterprises seeking construction loans and mortgages. Instead, they have been investing their money in safer options such as treasury bonds,” offers Mr Cheboror.

He adds that once the cap on interest rates is  removed, banks will release money to finance construction projects and mortgages.

“Individuals looking to build won’t mind the usurious interest rates. Expensive money is better than no money at all,” he says.

DIASPORA REMITTANCES

Last year saw a month-to-month increase in diaspora remittances, culminating in a record high of Sh19.2 billion ($185 million) in October. Kenyans in the United States, especially, are reported to be sending home more than Sh10 billion on average per month. 

Mr Kibire explains that Kenyans abroad usually send money back home for two reasons: for their their relatives’ upkeep, and for investment. However, he has noted that in the recent  past, more and more of this money is going into real estate investment, and the trend will most likely continue in 2018.

“Kenyans abroad,” Mr Kibire says, “prefer investing in property because it is a long-term and tangible investment. The rate of property appreciation is Kenya is also very high compared with Western markets, making investing in Kenya very attractive. Real estate also does not require complex management in  comparison to investments such as retail businesses.”

COUNTY LAND 

Property developers are facing a dire challenge from the newly constituted county governments. The change of guard means that the new county might come up with new land policies that  are distinctly different from those of their predecessors.

In Kiambu County, developers are jittery about a plan to regulate land use to boost food security that was instituted in June last year under then governor William Kabogo. This caused ripples across the land sector, with HassConsult releasing a report showing that land prices in the county had fallen as developers awaited clarification from the newly elected county government. Land prices in Ruiru fell by 3.5 per cent, in Juja by 5 per cent while Limuru registered  a 5.7 per cent drop.

Commenting on the development, Mr Kibire says it would be wrong for  county governments to place blanket bans on changing  land use from agricultural to residential.

“When the value of land is higher than what is on the land, then that land is ready for redevelopment,” he says. Kiambu County, for instance, is part of the larger Nairobi Metropolis and thus it is only natural that its land prices shoot up to be worth much more than what a coffee plantation can bring in.

Meanwhile, newly elected Kajiado Governor Joseph ole Lenku has said that his government will not be approving subdivision of any rural land into “uneconomic” pieces. Referring  to some businessmen who were subdividing land and re-selling it as conmen, Mr Lenku warned that those who buy agricultural land subdivided into one-quarter and one-eighth of an acre risk finding themselves with fake title deeds.

However Mr Kibire notes that such edicts by county governments can easily be  challenged in court because,  although the Constitution envisages that Parliament will enact  laws to guide on maximum and minimum land holding, the relevant Bills have not been enacted into law.

 “I understand that counties are getting increasingly worried about food security, but restricting the subdivision of land is not the way to go about it. People who buy a quarter of an acre sometimes go  put greenhouses that produce much more than a local with two acres can produce. Instead, county governments should focus on urging their people to produce more,” Mr Kibire offers.

The valuer warns that in 2018, counties should make decisions based solely on expert professional advice, otherwise, they risk distorting the real estate market in ways that  could  take it years to recover.

THE ZONING DEBATE

In December 2017, the Nairobi County Assembly passed a motion allowing construction of commercial centers and high-rise apartments in some of the city’s most exclusive suburbs. The areas that will be affected by the move include Spring Valley, Riverside Drive, Kileleshwa, Kilimani, Thompson, Woodley, Lavington and Loresho.

Mr Cheboror foresees a lot of resistance coming from the residents of such areas. He says that such areas should be allowed to preserve their prestige, otherwise we risk creating concrete jungles in Nairobi where few people will aspire to live in.

Wherever this debate heads into 2018, it will be an interesting one to keep an eye on.

Substandard construction and lengthy approval processes

In the recent past, the National Construction Authority (NCA) has been on the spot as storey buildings collapsed every now and then in different parts of the country, sometimes with numerous fatalities.

Mr Cheboror notes that buildings often collapse because developers who are seeking to cut corners do not engage professionals at the planning and building stages. He also blames the excessive red tape when it comes to obtaining building permits and approvals, saying that sometimes developers get frustrated by the bureaucracy and decide to take short-cuts.

In order to put this deadly trend firmly behind us, Mr Kibire says, the NCA should be given additional funding to enable it to hire additional staff. He notes that although the policies established  by the NCA are noble, they fail mostly because the authority does not have the  capacity to carry out inspections.