There’s no real estate bubble now, or in sight - Daily Nation

There’s no real estate bubble now, or in sight

Thursday February 15 2018


A "For Sale" sign stands in front of a house. The real estate sector has consistently outperformed other asset classes in the past decade. PHOTO | FILE 

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The real estate sector, which accounts for about 9 per cent of Kenya’s GDP, has consistently outperformed other asset classes in the past decade, incurring minimal losses while consistently generating returns of between 25 per cent and 30 per cent, according to a 2016 report released by investment firm Cytonn.

The sharp increase in returns has attracted both speculators and long-term investors to the local property scene. However, some skeptics and investment analysts have intimated that the huge increases in property prices might  be  the signs of a bubble that is likely to burst soon.

Mr Johnson Denge, the senior manager for regional markets at Cytonn Investments, strongly rejects reports that there is a real estate bubble in the country. He says those who believe that there is a bubble in the sector have not conducted any research and, therefore, have no facts.

“It is only when someone studies the numbers and trends exhaustively that they can make an informed decision about any form of investment. At Cytonn, we constantly strive to educate our clients and the public by conducting market-based research and issuing regular reports on investment opportunities,” says Mr Denge. He further notes that Cytonn has an in-house development team that does market surveys and quality assurance for the firm’s real estate development ventures. Mr Denge points out that many potential investors grow cold feet towards real estate because they lack accurate data and have low financial literacy.

“Fifty to 60 per cent of our portfolio, which amounts to billions of shillings, goes to real estate investments. We have immense faith in the property scene because, over the years, our firm has been seeing returns of up to 50 per cent from such investments. We wouldn’t be doing all this if our data indicated that the property market is just but a bubble headed for doom,” the senior manager says.

So, what is a bubble?

A bubble, Mr Denge explains, is a phenomenon that occurs when there is a rapid rise in the price of an asset class above the product’s intrinsic value. In real estate, this means that a bubble would occur if there were a rapid rise in land and housing prices, to the extent that the properties retail at several times their worth.

For such a scenario to occur, a number of key factors — which, according to Mr Denge are all missing from the Kenyan scene — need to conspire to work together. Such factors might include extremely low-interest rates, relaxed lending standards,  high demand fuelled by high speculation and an incredible increase in house prices.

“Our data forecast for more than two decades does not predict a scenario where these factors can conspire to bring about a bubble,” he says.

A real estate bubble, the expert explains, usually unfolds in five stages:


For a real estate bubble to occur, there has to be an external factor that causes a great disruption in the market by changing the behaviour of investors. This, Mr Denge says, might happen when, say the government decides to give free land to developers, which is highly unlikely to happen in Kenya in the foreseeable future.

However, a displacement mostly happens as a result of incredibly low interest rates.

“We will have a bubble when our interest rates hit 5 per cent. That will allow many aspiring home-owners to qualify for mortgages, which they might not be able to pay back, while investors might take construction loans to build houses that are not fiscally viable,” Mr Denge says.

He adds that in 2017, mortgage numbers in the country dropped by 1.5 per cent to 24,085 by the end of the year, and that they are still out of reach for 90 per cent of the population.

Interest rates currently stand at 14 per cent, but there is talk of removing the cap on interest rates and allowing banks to set their own rates. A large percentage of Kenyans finance their homes through personal savings, unlike what happens in markets that have experienced bubble bursts, where home ownership is financed using mortgage.


After the displacement, many people will decide to cash in on the property scene because of its perceived high returns. Here, the prices of real estate will rise at a higher-than-normal rate as more people join the craze. People will buy land and houses so that they don’t miss the gravy train. In addition, real estate will receive widespread media coverage, with talk at most social gatherings being animated discussions about how so and so made a major profit in a real estate venture.

Though he acknowledges  that property in Kenya appreciates at about 15 per cent per annum,  Mr Denge dismisses talk that this points to a speculation-fuelled boom. He argues that the increase in real estate prices, especially around Nairobi and other urban centres, is attributable to demographic factors such as a high population growth rate and rural-urban migration.

A case study of such a boom took place  in Ruaka, Kiambu County, where land prices doubled in 2016, with an eigth of an acre going for  Sh18 million at the end of the year, up from Sh8 million in January. Mr Denge supports the sharp rise, saying that the price increases were justified by fundamental issues such as market forces, a change in zoning regulations that allowed landowners to put up high-rise apartments, and improved infrastructure that came with the advent of developments such as the Two Rivers Mall.

“Just because rents in Nairobi’s satellite towns are relatively high does not point to a bubble. Property closer to the services provided in the city have to cost more,” Mr Denge says.


Buoyed by the returns accrued in the boom phase, a bubble market then enters a state of euphoria. Here, all caution is thrown to the wind as investors sell other asset classes like equities and retail businesses and shift all their money to real estate.

Kenyans, Denge notes, are cautious enough not to put all their eggs in one basket when it comes to investing.

The Euphoria stage, Mr Denge expounds, is driven by over-speculation and the “greater fool theory”. He explains that the greater fool theory is displayed when an individual buys a house or a piece of land without caring whether the property is overvalued. The investor acquires the asset with the intention of selling it later for a profit because they are confident that there will always be someone (a bigger or greater fool) who will be willing to pay a higher price. Unfortunately, this bubble will eventually burst when the greatest fool fails to get a buyer.

“Though Kenyans have a peculiar habit of being overly speculative, there isn’t enough capital in the economy to satisfy an immense appetite for making profits on the real estate scene.  Very few people can even afford decent housing. In Nairobi, for instance, 60 per cent of the population lives in slums. Not everybody is buying plots left, right and centre, because very few can afford it,” he says.


The fourth stage of a bubble is return-taking, where a few smart investors sense an impending burst and resolve to cash out their investments before it is too late.

A cursory look at the local print and electronic media reveals that real estate companies have intensified the marketing of land and houses. Is this evidence of return-taking?

Not unexpectedly, Mr Denge disagrees, saying that those land-selling companies and housing developers aren’t making obscene profits, like many citizens would like to believe.

 “Yes, the returns are there,” he says, “but they are just as steady as other investments. These developers and land sellers are servicing loans for their investments and other significant costs that eat into their profits. The enterprises are in the property business for the long-haul because they do not believe in an impending collapse.”


When the bubble is finally pricked as a result of the “greatest fools” not being able to find buyers, panic grips the market and prices fall sharply, resulting in major losses.

 “Once the bubble bursts,” Mr Denge says, “You cannot inflate it again, no matter what measures you take.”

He gives the  example of Angola, where the real estate market, riding on a bubble, was fuelled (pardon the pun) to a large extent by the petroleum industry.

“Because of the boom experienced in the country as a result of oil mining, real estate prices in Angola went extremely high and when the global prices of oil skyrocketed. However, when oil prices tumbled, real estate prices fell drastically. Even after oil prices stabilised globally, Angola’s property scene is yet to reach its prime,” Mr Denge notes.


Currently, there are conversations on online platforms in which Kenyans are pointing out that rental apartments in upmarket areas such as Kileleshwa and Lavington have many vacant units. Do the high vacancy rates prove that the bubble — if there was one in the first place — has already burst?

Mr Denge says it doesn’t, adding that what we are experiencing are not symptoms of a real estate bubble burst but simply a phenomenon known as market correction. Market correction, he says, occurs during periods where there is a temporal oversupply of real estate and it might take some time for the demand to meet the supply.  However, this does not mean that the developers are incurring losses.

Mr Denge cites the example of commercial office space where developers got returns of between 200  per cent and 500 per cent from 2005 to 2007, but that went down significantly as occupancy rates went down and the market corrected itself.

The price-to-rent ratio is mostly used as a yardstick to calculate the profitability of a real estate venture. It is usually determined as a ratio of home prices to the annual rental yield. During 2008-2009, The United States’  price-to-rent ratio increased dramatically, leading to the property market’s crash.

Despite not putting a figure to Kenya’s current price-to-rent ratio, Cytonn, in a report issued in January this year, revealed that the ratio in the Kenyan market is too low for a bubble economy.

“People are paying high rents in the country justifiably because there is an immense shortage of housing. It will take many years just to develop the capacity to handle the undersupply of housing,” he says.

The government estimates that the country’s housing industry faces an annual shortage of more than 200,000 units.

“I would encourage Kenyans to invest in real estate. However, such an investment needs to be made from a point of informed knowledge,” he says