(Reuters) – Pamela Onyambu went into the real estate business seven years ago to capitalise on a housing boom fuelled by Kenya’s middle classes. Now she fears interest rates that have doubled in six months will wipe out any profit on her latest venture.
Standing at the entrance to a half-built apartment block on the outskirts of Nairobi, Omyambu worries that her newest project will also turn out to be her most costly.
A leap in commercial interest rates to as high as 30 percent from a low of 14 percent, triggered by an aggressive tightening of monetary policy, has left both developers and buyers struggling to meet high funding costs.
Housing has been one of Kenya’s fastest growing sectors over the last decade, with returns from real estate outpacing equities and government securities.
But in the last quarter of 2011, the construction sector, and much of the country’s economy hit trouble after the central bank jacked up its benchmark interest rate by 11 percentage points to 18 percent to beat back inflation and stabilise the Kenyan shilling.
The high interest rates have put the brakes on the growth of private sector credit, which in turn could slow down the whole of East Africa’s biggest economy.
Onyambu’s more immediate concern is that the real estate bubble may have burst.
“Our initial cost for this project was 334 million shillings. By the end of this project we would have spent over 450 million shillings. We’ll have to charge more per unit just to recover our costs,” the 44-year-old said.
The property craze saw coffee plantations in the capital’s suburbs uprooted to pave way for gated housing estates and shopping centres. One million Kenyans found work in construction.
A study by the World Bank and Central Bank of Kenya, showed the housing sector grew at rates of 10 to 20 percent annually between 2006-10.
The slowdown in the property sector is being mirrored in other parts of the economy.
Joseph Kimeu, a manager at car dealer Marshalls East Africa , says sales have fallen.
“We bought these cars when the shilling was 107 per dollar, but they are still stuck in the show room,” Kimeu said, pointing at a wide range of luxury cars in a showroom empty of buyers.
Kiosks selling groceries have not been spared either.
“Bread, maize flour, soft drinks take longer to run out. Most people just buy groceries. Few are buying durable items such as pens, bulbs, toiletries and so on,” said Christine Maingi, at her shop in a middle class area in the capital.
Betty Maina, chief executive of the Kenya Association of Manufacturers, said some members were scaling down plans for expansion and new projects, while digging into their own reserves to avoid costly bank loans.
“People have postponed heavy capital expenditures for a while. They expect interest rates to come down from mid-this-year,” she said.
Maina also said businesses are cutting down on new investment ahead of the country’s next elections due in March next year. The elections will come under intense scrutiny because they are the first since the 2007 vote that triggered a wave of political violence in which more than 1,220 people were killed.
Adding to the uncertainty, two prominent political figures are facing charges by the International Criminal Court for their role in the violence. They have vowed to take part in the race, angering many and dividing the country ahead of the vote.
“Investors are also looking at the political climate, which is darkening the outlook further,” Maina said.
Over the past three decades, Kenya has had its lowest growth periods in or just after election years, the World Bank says.
Housing developers say the pace of building cooled in the last quarter of 2011, after six years of rises that nearly tripled values.
HassConsult, a property agency which compiles the only property index in the country, says developers are cutting back or postponing new constructions.
“Developers completing their buildings are under a great financial pressure. Their (material) costs had climbed sharply and now their financing costs have jumped,” said Farhana Hassanali, property development manager at HassConsult.
Infrastructure improvements, including new roads, provision of electricity to poor areas and improving security in crime-ridden areas, drove land prices higher. This raised expectations of even higher prices, fuelling the property boom.
The price of an acre in commuter belt territory about 20 km (12 miles) city centre more than tripled in 2011 from three years earlier. While land is seen holding its value for now, housing units that were previously snapped up even before the ground was broken are now struggling to find buyers, even after completion.
“Towards the end of October buyers were already apprehensive because of the impact of the rising inflation we saw during the year,” said Yesse Oenga, a director at Orkpark Properties, a real estate investment firm.
A dozen of the company’s high-rise buildings in Tibetan gold tower above electrified fences, giving a false sense of security in the commuter sprawl around the town of Athi River to the east of the capital.
Muggings and carjackings are common on the dirt roads snaking from the perimeters walls of the apartments. Children from shanties housing construction workers shout as they run after a football in a field nearby.
Kenya’s failure to build enough houses during the economic stagnation of the 1980s and 1990s may be the only reason the market is not already on its knees.
“The only cushion we have now is the (lack of housing) in the market,” said Orkpark Properties’ Oenga.
Even as Kenyan builders subsequently laid bricks as fast as they could, the World Bank estimated Kenya had a housing supply deficit of about 160,000 units a year.
Some real estate analysts feel this underlying demand will prevent an all-out crash.
Developer Sue Muraya of Suraya Property said that the slowdown was in large part due to bloated prices demanded by developers and a fall was inevitable.
She said it was “ridiculous” that a four-bedroom apartment in the capital was going for 25 million shillings ($300,000).
“Most developers have been very optimistic on the pricing of homes, but it is clear that a price correction is on the cards,” Muraya said.