Home buyers hold back due to political climate

Demand for housing for purchase slowed down this year due to political tension and stringent disbursement of mortgages by banks, even as the market remains largely a renters’ market.

Presenting the findings of a market study on the housing industry in the Nairobi Metropolitan Area on Monday by Cytonn Investments, Ms Nancy Murule, a research analyst at the firm, said: “In 2017 the political environment poses a challenge, with investors adopting a wait-and-see attitude, hence reducing transaction volumes in the industry. There was reduced activity in the real estate sector as a result of a harsh economic environment occasioned by the electioneering period and low credit supply due to the enactment of the Banking Amendment Act 2015. The number of mortgages in the country is experiencing a downturn.”

'TITLED POCKETS OF VALUE'

Meanwhile, the Central Bank of Kenya’s (CBK) Bank Supervision Annual Report 2016 indicates that there was a drop in the uptake of home loans despite increased awareness and demand for mortgages, thanks to the reduced interest rates.

Titled Pockets of Value in the Face of Declining Performance, the Cytonn report says the number of mortgages declined from 24,453 in 2015 to 24,085 in 2016. The 1.5 per cent drop was attributed to increased underwriting standards by banks, which lock out potential borrowers. This was despite increased demand for mortgages due to increased affordability resulting from the enactment of the Banking Amendment Act 2015, which saw the average interest on mortgages fall from 18.7 per cent in 2015 to 13.5 per cent in 2016.

“This is the first time mortgage supply in the market has declined by 1.5 per cent. It had been growing by an average of 11.1 per cent between 2011 and 2016,” Ms Murule said.  

However, the CBK report, says commercial banks have introduced higher credit standards, leading to lower mortgage disbursements despite the increased demand.

“With the extension of the electioneering period following the annulment of the presidential election result and fresh elections to be held in October, we expect the slowdown to persist, and for the market to pick up once the political situation has stabilised,” Ms Murule added.

Notably, the Kenya National Bureau of Statistics’ (KNBS) annual Leading Economic Indicators Survey released last month show that the value of approved buildings declined by 16.3 per cent from Sh126.3billion in 2016 to Sh105.7 billion between January and May this year. The drop is believed to be due to the wait-and-see attitude adopted by risk-averse investors during the electioneering period.

FYI
Nairobi metropolitan segments defined

High-end segment: Consists of prime suburbs such as Karen, Runda and Kitisuru, most of which have low-rise residential developments only and are characterised by palatial villas and bungalows on half-acre parcels.

Upper middle-income segment: Consists of suburbs like Kilimani, Lavington, Kileleshwa, Loresho and Ridgeways. The population in these areas are middle class but with higher incomes than the average characterisation of middle class. The areas host both high-rise and low-density houses.

Lower middle income segment: Consists of suburbs in habited by the middle class such as Donholm, Komarock and Imara Daima, as well as Satellite towns like Ngong, Rongai and Juja.

According to the Cytonn research, on average, property prices appreciated in 2017, albeit at a lower rate of 3.8 per cent, which is 3.7 per cent lower than for the same period in 2016. Rental yields remained stable at 5.6 per cent compared to 5.2 per cent in 2016.

Meanwhile, Cytonn’s head of Private Equity Real Estate, Mr Shiv Arora, noted: “The continued price appreciation, though subdued, and higher rental yields, indicate sustained demand for rental housing whereas demand for housing for purchase slowed down.”

As concerns supply, the World Bank Kenya Economic Update of 2017 indicates that 48 per cent of the housing supplied is in the upper-middle income segment, 35 per cent in the high-income segment, and only 17 per cent in the low-income segment. This is attributed to limitations such as the increasing cost of land, access to funding, high construction costs, and the availability of infrastructural support. This has seen private developers focus on upper middle- and high-end units to sustain profit margins.

Generally, with an average price appreciation of 3.8 per cent in 2017 and rental yields averaging at 5.6 per cent, the total return in the market averaged 9.4 per cent. Still, some sub-markets like Thindigua recorded returns of up to 19.3 per cent.

Meanwhile, the KNBS Economic Survey indicates that the real estate and construction sector’s contribution to GDP rose from 12.6 in 2010 to 13.8 per cent in 2016.

Real estate has consistently outperformed other asset classes in the last five years, generating returns of more than 25 per cent per annum compared with an average of 10 per cent per annum in the traditional asset classes.

Residential units generated an average yield of 5 per cent in the last five years while office and retail space generated average yields of 9 per cent and 10 per cent annually respectively.

The real estate sector has seen the entry of more institutional developers such as Saccos, private equity firms and funds such as Taaleri and Actis, as well as foreign institutions such as AVIC of China.

The government has also come up with initiatives such as digitising the Land ministry, issuing title deeds, waiving certain fees and offering a 15 per cent tax cut for large-scale developers, to create a conducive environment and lower construction costs.

IN NUMBERS

1.5

The percentage by which mortgages in the country dropped

18.7

The average percentage interest on mortgage in 2015

13.5

The average interest on mortgage in 2016

Regarding demand, Nairobi has a deficit of approximately 1.9 million units in 2017, according to the Cytonn Research, with 70.7 per cent in the lower middle income segment comprising people who can afford an average rent of Sh18,000 per month. Yet this percentage is expected to continue rising exponentially due to rapid urbanization, projected at 4.4 per cent every year, compared to a global average of 2 per cent.

The anticipated entry of multinationals in Nairobi is expected to create demand for residential, commercial and retail spaces. The city already hosts the continental headquarters for some multinationals with many others having announced plans to start operations in the city. They will increase demand for grade A office, retail and prime residential houses.

Other factors expected to increase demand for housing are improved infrastructure and higher incomes, as reflected in economic growth, with an average GDP growth rate of more than 5 per cent in the last five years.

Even then, the usual challenges remain. These include the prohibitive cost of land, high construction and infrastructural costs and access to financing.

Land continues to be one of the most valued assets, recording an average growth rate of 19.5 per cent between 2011 and 2016.

Meanwhile, Cytonn Investments Chief Investment Officer, Elizabeth Nkukuu, noted: “Real estate continues to deliver attractive returns for investors, when the public markets are delivering average returns, while also being a hedge against inflationary pressures. Development of residential real estate continues to provide attractive returns, while delivering housing to combat the housing deficit. The key drivers for the increments in house prices for the best performing zones prices have mainly been high demand in the areas, ease of access from the CBD and other business districts, and lower prices compared to houses in other similar nodes.”