The Kenyan market has been awfully lucrative especially for foreign investors because of the high profit margins of 20 to 30 per cent, which analyst Nathan Luesby has argued is impossible even in the US or European markets.

In the last decade, Kenya’s real estate has been anything but robust. The real estate boom survived the 2008 Post Election Violence and global economic downturn that crippled other sectors such as tourism and agriculture. The construction sector is approximated to have created 82,000 private sector jobs in 2010.

But danger is looming. Last year’s weakening of the shilling against major currencies, double digit inflation and interest rates hike to a historical 30% up from 14% is taking its toll on one of Kenya’s most resilient sectors.

Developers and buyers are struggling to meet financing costs occasioned by the high interest rates triggered by aggressive tightening of monetary policy to counter the weakening of the shilling and high inflation.

Developers are abandoning projects, postponing phases, or reducing the number of homes under construction, construction workers are being laid off and fore closures are anticipated in coming months- all these amidst an annual demand of 250,000 housing units and supply of only 60,000.

The Government’s  recent announcement that it plans to tax landlords to finance the 1.4 trillion 2012/2013 budget could also worsen the demand supply mismatch.  Is Kenya’s real estate sector future doomed?

According to research by property firm HassConsult, which conducts property pricing index in the country, the housing market  as at the end of the first quarter of 2012 was  facing stalled development of new properties and a 5.6 % hike in rental prices due to high interest rates.

“The Kenyan property market is in trouble,” warned Jenny Luesby, a consultant at HassConsult,  in April during the release of the results. At the time she projected that Kenya would face acute housing shortage in the next two years which would prompt further increase in house prices.

“The biggest impact of the high interest rates is in the middle income market where developers rely largely on mortgage financing from commercial banks. The impact (high interest rates) on real estate has fallen entirely on the supply side,” said Farhana Hassanali, property development manager at HassConsult while releasing the Hass Consult property price index for the first quarter of 2012.

For investors in the industry, money has been flowing in. A lot of money.

The Kenyan market has been awfully lucrative especially for foreign investors because of the high profit margins of 20 to 30 per cent which analyst Nathan Luesby has argued is impossible even in the US or European markets.

Big international real estate firms have invested millions of dollars in luxury properties and the high-end market targeting expatriates, diplomats and wealthy Kenyans.

The uncertainty over the March 2013 general elections is however expected to slow down the influx of foreign money into real estate projects.

The Knight Frank’s  2011 Prime International Residential Index (PIRI), which monitors price changes across the world’s top-end property markets shows  that  Kenya’s luxury real estate saw the greatest price increase globally.

The value of Nairobi’s prime real estate grew by 25%  while at the  Kenyan coast  it went up by 20% outdoing other major cities like  Miami (19.1%), London (12.1%), Moscow (9.8%), New York (3.1%), Shanghai (-3.4%) and Singapore (-4.7%).

The Hass Property Index has  however shown that the upper end of the market is highly saturated, and this price growth may not be sustainable in the future.

In capital Nairobi, huge billboards advertise the newest house apartments. These have become quiet common as agriculture paves way for real estate.

Some of the big projects include Tatu City ,  a multi-million dollar development located on the outskirts of  Nairobi  set on 1,000 hectares  of land  and estimated to house  70,000 residents and create close to 220,000 short term construction jobs and over 115,000 permanent jobs. The project championed by both local and foreign investors including Renaissance Capital, the Moscow-based investment bank, is estimated to cost in excess of Ksh. 400 billion ($4,784,688,643.00 USD).

Another project, Thika Greens Limited (TGL) stands on a 1,135 acres of land in Thika, just  40 kilometres from Nairobi. The $650 million golf estate will have 4,000 housing units when complete.  The project is  a brain child of  TGL  chief executive Charles Kibiru among other shareholders.

Not  too far off is ‘Migaa’ a project set on 774 acres of land in Kiambu, just  20 km outside Nairobi. Developed by  Home Afrika Communities Ltd, the project will feature  2,500 homes, and an  18 hole golf course.

Other than being mega housing plans,  these three projects also have in common the fact that they  are set on what were  previously  coffee farms.  Farmers and agricultural experts have warned that this trend would threaten food security in the future.

Land prices in neighboring areas to these projects has also skyrocketed, as sellers anticipate demand following the establishment of new amenities that will transform sleepy rural villages into  mega urban estates for middle and high income earners.

The uptake of these projects has been  slowed down  by last years unfavorable  microeconomic environment.

TGL’s Charles Kibiru  reckons that high interest rates has affected the purchase of land with price tags above Ksh.3 million ($35,88.17USD).

“We have partnered with several banks to finance our clients in the purchase of land and construction of homes.  The uptake has been good all along. However, since November last year, only two clients have taken these loans to finance their purchase,” says Kiburu.

He adds, “If interest rates were lower , our uptake would be at 40% higher than where it is today. The high rates have directly affected us.”

According to the  Mortgage Company, a  mortgage broker specializing in sourcing and arranging mortgages for home buyers,  the  hike in interest rates last year slowed down  mortgage uptake despite the fact that nearly 38 percent of last years’ new-builds can be bought through mortgage.

Kenya is traditionally not a mortgage market. However, by October last year the uptake became even worse due to the hike in interest rates.

“Mortgage uptake in Kenya stands at slightly under  20,000 homes  notwithstanding the fact that several banks  offer mortgage lending. Tings are however improving,” says Carol Kariuki, managing director of  The  Mortgage Company.

She cites the fact that the Standard Chartered Bank has reduced its mortgage lending rates to 16.9%  and the  Mortgage Company partnering with financiers to lend at 14 % as signs that the challenges of high financing  costs will be solved soon.

Gilbert M. Kibe, Managing Director, Bahati Ridge Development Ltd, of Thika based Bahati Ridge Gated Community project, concurs  that the high interest rates have had a negative effect on the sector.

“In the short term there is a negative impact, however in the long run, we see a marked improvement. There is no bubble to burst and there shall not be one in the foreseeable future,” says Kibe.

According to Kibe prices  of property are realistic in the middle sector, unrealistic in the upper sector as being high and lower sector as being too high.

“The houses in the high-end sector are for cash buyers who can afford it. The low-end sector prices are unaffordable to most people. The middle-end pricing is good but interest rates are too high. The truth is that house prices shall not fall, they may stay the same for now and increase when times are better,” says Kibe.

Analysts predict that there will be no tumbling in house prices whatsoever during the current economic slowdown borne of the Government’s  monetary policy, much to the disappointment of home buyers.

Pricing has always been a big issue. In the past, it was attributed to the piracy activities along the Kenyan coast.

Meanwhile, the  recent proposal to tax landlords has caused panic among landlords and tenants with some of the former issuing notices to hike rent.

The tax move has been described as both good and destructive depending on whom you talk to.

Kibiru welcomed the move, but called for proper mechanism in implementation. He says the Government should consider situations where a landlord has borrowed heavily to finance a project, to ensure that even if they pay taxes they are still able to services their debts.

For Kibiru however, high interest rates are not his biggest worry. Prospective clients, Kibiru says, have  expressed fears over the outcome of next years elections and are reluctant to invest even though they have the purchasing power.

Next year’s poll will be Kenya’s first presidential elections since the 2007  elections  that triggered  political violence  in which 1,300 people were killed, 300,000 displaced and hundreds of millions worth of property  destroyed.

“People are worried about the elections and whether it will be like the last one. They don’t want to buy land in case there will be chaos,” says Kibiru.

Meanwhile Kibe is optimistic about seeing more foreign investment in the sector  when  investors  security concerns regarding the  Al-Shabaab and the forthcoming elections in March fade away.

“Our real estate sector is one of the most vibrant and profitable in the world today. Africa is the next big thing and it is led by Kenya being in the heart of this continent and with the highest level of growth going forward,”  says Kibe.


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