Brutal housing glut continues to hit developers hard

Wednesday August 14 2019

The upcoming Alma apartments in Ruaka, Nairobi, constructed by Cytonn Real Estate. PHOTO | FRANCIS MUREITHI | NATION


It has been this way for some time now - property prices in Nairobi are way above the roof, a factor that has significantly slowed down the market.

For the last three years, there has been a housing glut build-up, and ready developments are simply sitting idle with no takers. In the peri-urban outskirts of Nairobi, in Kitengela, Athi-River and in Ngong area, high-end residential estates that took millions to put up stand empty and forlorn as developers that hoped to make a handsome profit sink in debt they are unable to pay.


In a struggle to pay off loans, early this year, a number of developers slashed down prices of residential houses by up to 2.8 per cent after months of steadily falling demand which saw many residential units remain unoccupied for a prolonged period of time.

Financiers, including banks, have teamed up with auctioneers in a bid to recover their money thanks to an unresponsive market. You would imagine that auctioneers are having a field day, but no, they too are having a hard time making a sale in a stubborn market that insists on slowing down.

The first quarter of 2019 was the slowest for the real estate sector in four years. The Kenya National Bureau of Statistics (KNBS) data, covering the third quarter ended September 2018, shows real estate recorded a growth of 5.8 per cent, the slowest since the 5.4 per cent registered in the fourth quarter of 2014.


In December 2018, the Central Bank of Kenya’s Quarterly Economic Review noted that the real estate sector recorded the highest growth in non-performing loans in three months ended June. Non-performing loans (NPLs) in the sector rose by Sh6.1 billion, (15.8 per cent) in April-June to Sh44.4 billion compared to the previous quarter where NPLs rose by Sh1.4 billion, from Sh33.2 billion to Sh34.6billion. This was attributed to slow uptake of housing units. A loan is considered non-performing if it remains un-serviced for more than three months.

Despite the government reporting that the economy grew by 6.3 per cent last year in crops and animal production alone, the cost of living remains high, which has affected disposable incomes that would be normally directed towards real estate investments. This, coupled by lack of access to real estate financing for both off takers and developers, has hit the sector hard.

A report by the Economist Intelligence Unit’s Worldwide Cost of Living survey released in March this year, states that the cost of living in Nairobi has risen 13 places from position 82 in 2017 to position 69 in 2018.


In the last two years, property price growth has been supported by effective demand surpassing supply, with sectors such as commercial offices witnessing demand for top-notch office spaces especially from incoming foreign firms and workers, who are also willing to pay a premium for this.

“Also, land and overall development costs in Nairobi are relatively high, due to high financing cost, poor infrastructure and lack of utilities which developers have to provide, thus pushing property prices up as this is passed onto the end-buyers,” explained Patricia Wachira, a senior research analyst at Cytonn Investments.

“The relocation could be possibly to move to serene environments characterised by good infrastructure, utilities and amenities. However, for firms closing shop in Nairobi, this could be attributed to the tough global economic environment which has led to most firms scaling back on foreign operations,” Ms Wachira explained.

But it is the lack of ease of doing business that has really affected the property market.

“The licensing and approvals by both the national and county governments have pushed up the cost of doing business. This, coupled with corruption, have pushed off investors,” says Mr Moses Muriithi, the CEO at Fanaka Real Estate.

Relatively high costs of financing, burdening tax laws such as the proposed increase of capital gains tax, and the interest rates cap law which has led to tight lending practices from banks thus constraining access to finance for developers and homebuyers, are the key challenges facing the real estate sector.

“These are the areas which the government can offer support for real estate. Additionally, the government should come up with efficient processes of obtaining approvals, which tend to prolong development timelines in Kenya, especially at county level,” explained Ms Wachira.


There is no doubt that expensive bank loans push up the cost of property, hurting developers and home buyers while killing the affordable housing dream, observes Mr Muriithi. A case in point is the recent catch-22 situation that major developers such as Suraya Properties have found themselves in. Suraya’s Sh384 million Tiara Villas, comprising luxury residential houses in the upmarket Lavington suburb, have been put up for auction after the developer failed to settle a loan.

A number of other high-profile developers are battling auctioneers in court after failure to service bank loans. For instance, in February last year for instance, Nairobi auctioneers put on sale a Sh1.19 billion residential estate in upmarket Kitisuru estate belonging to Homex Developers, citing the developers’ failure to repay a bank loan.

This and other cases mean that there is a good number of homebuyers that risk losing homes that they have already paid for, an example being the 204 buyers of Athi River’s Sunset Boulevard Estate who face eviction following a dispute between the developer and I&M Bank.

“To protect investors, there is need for market price regulation, policies should also be put in place to ensure that all payments that homebuyers make go to the account that is being discharged to the bank. It is the bank to release that particular property to the buyer,” suggests Mr Muriithi. This, if applied, he believes, would restore market confidence.

Lack of government control in the real estate sector, many feel, is hurting the affordable housing dream, however, there is renewed optimism that the recently launched Kenya Mortgage Refinance Company (KMRC) will enhance access to home buying finance.

The government should also provide infrastructure in the form of access roads, sewer lines and water supply sufficient to support multifamily developments - lack of such facilities tends to discourage uptake.


There is also the fact that developers have to foot budgets for construction of access roads, water piping or drilling, electricity connectivity, internet and security.

“All these push up the cost of property ownership, making the affordable housing dream unattainable to most Kenyans.

If national and county governments can provide these, the cost of housing would stabilise and Kenya’s housing deficit of over 200,000 houses per year would drastically go down,” said Mr Muriithi.

Market analysts project a decline of property prices in the short run due to a space glut in sectors such as office, retail and high-end residential markets, with the focus on provision of affordable housing taking centre stage.

“Overall, we expect the real estate sector to continue growing, albeit moderately, with investors venturing into varied concepts such as serviced offices and serviced apartments, which continue to yield double-digit returns of 13.4 per cent and 10.0 per cent respectively, as well as mixed-use developments which continue to yield better for offices and residential sectors with yields of 8.2 per cent and 5.6 per cent,” Cytonn’s Ms Wachira says.

There is also need for other policies to be put in place to ensure efficiency and accountability in land approvals, a factor that would ease property acquisition in Kenya and make the process less expensive as it would drive away middlemen.

Land acquisition campaigns would also create awareness on the due land ownership process in Kenya, something that many citizens are not aware of.

“But it is we the players who will restore confidence in the market if we follow due process in land acquisition and how we handle our customers by having the documents ready and on time,” Mr Muriithi added.