Glut fears mount as housing units outstrip demand

Sunday July 31 2016

Housing units. Studies by real estate research firms show that in the past six months supply has exceeded demand in several segments of the property market. PHOTO | SALATON NJAU | NATION MEDIA GROUP

Housing units. Studies by real estate research firms show that in the past six months supply has exceeded demand in several segments of the property market. PHOTO | SALATON NJAU | NATION MEDIA GROUP 

VINCENT ACHUKA
By VINCENT ACHUKA
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Many recent reports indicate the country is facing a glut of housing.

Studies by real estate research firms show that in the past six months supply has exceeded demand in several segments of the property market.

Save for the low income segment — which is usually overlooked by investors — availability of units has reached “hyper” supply.

Hyper is the third stage of the property market cycle after recovery and expansion. It occurs when supply starts to exceed demand.

The latest statistics came on Monday when the Hass Property Index for the second quarter of the year showed that the abundance had finally reached Nairobi’s satellite towns which, for the first time, recorded a decline in rent prices.

“Satellite towns have been recording falling home sale prices attributed to a correction in the asking prices,” said the index.

It added that rental prices have started dropping in Tigoni, Ngong, Ruaka, Thika, Mlolongo and Athi River as more units joined the market and partly due to traffic congestion.

Land prices in Mlolongo and Athi River have fallen by 10 per cent and four per cent, respectively, signalling a decline in demand for housing.

The index followed a Knight Frank report on Prime Global Rental index released two weeks ago that ranked Nairobi last across key world cities due to a sharp drop in luxury property prices.

Prime rents for Nairobi fell 7.9 per cent in quarter one of 2016, according to the report, which pointed out that for the past four years, rents in Kenya’s capital have been declining.

This has seen the city drop from position one in the global ranking to its current tail position.

“The fall is attributable to increased supply and decreased demand for housing, as most of the demand has been mainly from expatriates,” said Knight Frank.

“Many multinational firms are downsizing as a result of adverse economic circumstances driven by low commodity prices such as in the oil industry,” it added.

HIGH LAND COSTS
The construction boom fueled by availability of credit, fixed investment appetite and corruption has seen multi-billion-shilling properties come up in major towns at the expense of other sectors.

Malls are also sprouting, despite warnings that there is more shopping space than required.

Rapid construction has led to high land prices, raising questions on whether the property market is overpriced and whether Kenyans are over-relying on one segment of the economy.

South African investment company Stanlib says land prices have risen by 535 per cent in the capital over the past seven years, making it the most profitable business.

For instance, an acre of land in Upperhill — which is currently the most expensive area — goes for Sh470 million, followed by Kilimani (Sh370 million) and Westlands (Sh360 million).

Experts say this growth is skewed to a small segment of the market which is contributing to the oversupply.

“This housing boom has made a few Kenyans, foreigners and owners of financial institutions very rich very quickly,” says Mr John Kimani, director of Urban World Property Investments.

He adds: “It is, however, flawed. It has not translated to broad home ownership for the majority of Kenyans, especially in the low-to-moderate income categories.”

According to Knight Frank, the reduction in rents is expected to continue, especially in the high-end and middle-income segments, “with companies like Coca-Cola announcing a reduction of operations in Kenya”.

The situation has been worsened by high production costs. Multinationals like Eveready, Cadbury and Colgate and Palmolive have gradually shipped out.

“An increase in housing supply in prime-end homes has contributed to a fall in rents as the market is stagnating at lower rental yields of 3 per cent to 4 per cent, compared with the middle income markets at 5 per cent to 6 per cent,” says Knight Frank.

ATTRACTIVE SECTOR
But Cytonn Investments this week insisted that the property market is still the safest avenue for investment.

Meanwhile, real estate agents are making a killing as landlords turn to them to woo tenants.

Most agents are charging 10 per cent of a month’s rent to get a tenant for a landlord, up from Sh1,000 a few months ago, according to a spot check by the Sunday Nation.

Ironically, the real estate sector recorded the highest increase in non-performing loans, by Sh5.9 billion or 42.3 per cent, according to a report by the Central Bank of Kenya three weeks ago.

It attributed this to slow uptake of housing.

But the residential market in Kenya is still an attractive investment for both rent and sale markets given that only approximately 17 per cent of Kenya’s population lives in their own homes, and there is a housing unit’s deficit of 250,000 units per annum.