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Tough times ahead for housing sector in Kenya

Posted by Administrator on January 12, 2012

A housing development in Nairobi. A recent report indicates that the real estate sector is finally cooling off after almost a decade of sustained expansion. The report shows the first ever reversal in prices since the bubble started blowing up in the year 2000. In the last quarter of 2011, prices fell across the board. Photo/FILE

A housing development in Nairobi. A recent report indicates that the real estate sector is finally cooling off after almost a decade of sustained expansion. The report shows the first ever reversal in prices since the bubble started blowing up in the year 2000. In the last quarter of 2011, prices fell across the board. Photo/FILE

Anthony Mwangi had been in America for 13 years when he finally decided to visit home last December.

While he had been hearing stories that Nairobi had expanded far beyond the boundaries of the late ’90s when he had last been here, nothing had prepared him for the brick and mortar explosion he witnessed.

Mombasa Road on the way to the airport was a lonely stretch of road when he drove down to begin his American adventure only three months before Osama bin Laden bombed Nairobi. Fast forward to December 2011 and Tony counted one landmark after another.

“Panari, Parkside, Sameer Business Park… it was like I had missed my way home and landed in Australia or South Africa,” he said. “The brand new three-lane highway was not helping me solve my confusion either.”

His incredulity deepened when he hit Kiambu and Thika roads days later.

“I attended St Joseph’s High School, Githunguri up to 1997 and then left for America straight afterwards. The expansive coffee estates that dotted the area back in the day have almost entirely been converted into impressive mansions as far as the eye can see.”

And so has Thika Road, which leads to Tony’s home in Gatundu. When he left, it was just another potholed, gridlocked highway with sparse shops along it.

Real estate has had its best years around the same time that Tony has been away. A vastly growing population, helped by the 2002 transfer of power to a more economically friendly administration, has helped fuel an almost insatiable demand for quality housing.

According to a UN report, Kenya had the largest shift of population from low to middle class of any nation in the period spanning 2004 and 2009, a factor that led to new housing developments falling behind demand at some point.

Real estate businesses thrived — and new millionaires emerged — as thousands of Kenyans started buying land for speculation.

In 2011, however, the industry received a direct hit. After what economists had warned as runaway consumption on debt, mostly of imported goods, the shilling came under great pressure and sharply lost its value against the hard currencies.

What followed was a painful increase of the Central Bank Rate to rein in inflation and stabilise the currency.

The measures have worked so far; the shilling has stabilised at 86 after touching 107 to the dollar in October/ November. But that has come at a huge cost to capital.

Ruffus Nakitare had one big plan for 2012 — to buy a home in anticipation for marriage to his long-term girlfriend Elsie Waswa.

In August, his plan got a big boost when he landed a dream job with an international airline in Nairobi.

Now settled and stable, he chalked 2012 as the year when he would finally settle down and start a family.

First, though, was the purchase of a family home. In the months leading to 2012, Ruffus saw his big dream first get a challenge before it collapsed.

“Previously, I was able to set aside Sh80,000 every month and I was on course to having enough money pooled for the mortgage downpayment. But from September 2011, living costs started a spiral that, in the end, made my plan infeasible,” says Ruffus, adding that he also has to support his parents and pay school fees for his younger sister, added expenses that have become more costly of late.

“While a home was always my biggest dream, I have decided that is the one thing that will have to wait,” he says. “With interest rates where they are, I don’t have a choice.”

A recent Hass Consult Index that tracks trends in the housing sector confirms that, indeed, the real estate sector is finally cooling after almost a decade of sustained expansion.

The report shows the first ever reversal in prices since the bubble started blowing up in the year 2000.

In the last quarter of 2011, prices fell across the board, with the exception of small apartments, whose rates accelerated.

Developers are now biting the bullet and looking at significantly reduced margins to still move units at a time when consumer spending has become more squeezed.

And after an 11-year rally during which the average rent for a property hit a high of Sh95,000, up from Sh39,000, asking rates have now fallen and tenants are being seduced with lower asking rents.

While real estate remains a prime investment option which still outperforms inflation, according to the Hass Consult report, analysts expect more challenging times ahead for the sector as financing options become more constrained.

John Muthua of Q-Pavillion, a real estate firm based in Kahawa, Nairobi, says smart entrepreneurs will still see off the tide by taking the challenges on the chin and becoming more innovative.

“Already,” says Muthua, “I have witnessed a significant drop in the purchasing ability of people.”

Prospects who were previously shopping for property the exclusive areas of Kiambu Road, Kahawa and Thika have now degraded their preferences to such areas like Mwihoko, Ruai and Mwiki, he says.

“The choice of such exclusive locations as Riverside Drive, Kileleshwa and the like has a romantic element to it. But when the money is not there in plenty, people get real, and that is the situation presently.”

Muthua has also started witnessing a rush by developers to cut costs on new properties with a more careful sourcing of materials.

The pricey machine-cut stones are being bypassed for the hand-mined ones which are much cheaper, while interlocking blocks, made of soil, are increasingly becoming the choice for new homes.

But, at the top end of the scale, Muthua is seeing a shift of the opposite magnitude.

“There is still a section of this country that will never be affected by such pressures as inflation and a failing shilling, and the challenge for developers is to make their homes even more appealing than ever. Already, some developers I know are importing rare tiles from Europe, art from Turkey and Iran and co-opting architectural and engineering technologies that make their developments marvels,” he says.

“The trick is to have a better product than the competitor as the middle market, forever the cash cow of real estate, contracts and more investors go for the top-end customer.”

Professor Joseph Kieya of Kenya Institute of Public Policy Research and Analysis foresees a rough period for the sector as tough choices keep people away from investing.

Prof Kieya also expects mass defaults as people who had acquired their capital in low interest regimes struggle to cope.

“What do you expect of a person earning a fixed income who had budgeted for interest repayments of 13 per cent and then he is saddled with interests in excess of 25 per cent?” he poses.

And with the economy reporting bleak prospects, Prof Kieya feels the sector may have exited from its glory years already.

“Most people are now not thinking of buying homes, but maintaining their present lifestyles in the face of rising economic challenges. The government is keen to protect the economy from the difficulties that a high inflation and a weak shilling cause, and I expect that to be the case for as long as is necessary. But the government should be wary of dissuading borrowing as every thriving economy needs cheap capital.”

Prof Kieya sees the upcoming elections as one more factor that may still throw a spanner into the economic works, and expects normal economic activity to pick up in 2013.

For the real estate industry, that could be a bit far away, meaning the next one year will be a make-or-break affair for most investors in this sector.

Source: http://www.nation.co.ke/Features/DN2/Tough+times+ahead+for+housing+sector/-/957860/1303754/-/44y83oz/-/index.html

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One Response to “Tough times ahead for housing sector in Kenya”

  1. elijah said

    Well put. The interest rates were always going to rise. Its cyclic and the market is waiting for it to fall because housing supply is still way below the demand.
    I wish this would be the last time the elections affect inflation. Then we will be looking at exponential potential.

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