Why developers are not worried about housing oversupply

*NHC houses in Nairobi West National Housing Corporation houses in Nairobi West.* (PHOTO: WILBERFORCE OKWIRI/ STANDARD)

Josiah Owuor has lived for one-year-and-a-half in a rental apartment in Kilimani, Nairobi. During that period, he has seen dozens of fellow renters move out of the building to yet another house in the neighbourhood. According to Owuor, the marked increase in the number of apartments in that neighbourhood has given many people a choice even to the point of negotiating reasonable rental charges.

“I have seen many of my former neighbours move out to houses in the same locality,” he says. “The turnover of tenants here is quite high.”

Though Owuor has little experience on real estate matters, he feels he has an idea as to why a number of units in his hood take long to be occupied: “I think it is because owners insist on sales as opposed to rentals.”

Driving around Kilimani, Kileleshwa, Lavington or Westlands on any day of the week, you will see a number of housing projects in various stages of development. Alongside the new residential properties are equally imposing retail and office blocks hoping to cash in on the much-talked about purchasing power of the “ballooning middle-class”.

They portray the much-hyped property boom being experienced in the country. Amid this growth, however, are undercurrents that not many developers would like to dwell on at length.

Various reports coming out in the last few months have painted a picture of an oversupplied market, especially in the retail, office space and to an extent, the upper-middle income housing segment.

Any increase in housing stock is good news to prospective buyers and renters. But are developers spending sleepless nights worrying about the slow uptake of their property? While the slow rate of returns may seem to hurt developers, most of whom rely on borrowed funds to put up the projects, insiders say the situation is yet to reach the tipping point. They point to the fact that real estate is a long-term investment rather than a get-rich-quick scheme.

“It is true that it is taking longer to fill up available stock since much of it is coming into the market almost at the same time. That in itself does not herald what can be truly called an oversupply,” says Ben Woodhams, Knight Frank Kenya managing director.

Nairobi not biggest

Woodhams says Kenyans have to understand the dynamics of the local market when viewed against other major sector players on the continent. He says that though Nairobi has been touted as one of the most desired destinations for real estate investment, it is not the biggest.

“The continent is headquartered in Lagos and Johannesburg. Compared to the two, we still have a long way to go before we can say the market is saturated or oversupplied. True, a temporary oversupply, especially in 2015, does not in any way reverse the demand,” says Woodhams.

According to him, the market was suppressed last year due to global economic upheavals, especially in the energy sector with aftershocks felt in the real estate development. The dip in oil prices, he says, was a major factor locally as some prospecting companies that had set shop in Kenya scaled down their investments.

“A number of these companies occupied some of the best offices in the city. Scaling down their activities meant that they offload some of these prime assets back to the market. These are people who also stay in the most prime parts of the city. Again, the loss of a good number of expatriates in this field means these homes will be available,” he adds.

Lee Muchiri, who has developments on Ngong and Mombasa Roads, is optimistic that real estate is still the best investment bet. He says it all depends on the segment of the market one chooses to delve in.
For his part, he has gone for the lower end with his flats selling for between Sh3 million and Sh6 million.

“I am able to get buyers for that segment. I guess those selling homes for Sh15 million and over may see their products taking longer in the market but they eventually sell. You only worry if they are not moving at all,” he says.

Does he know of anyone who has so far lost money in the sector? “No. If anyone has lost money in real estate, then there must be something very fundamental that he did wrong.”

On the other hand, a report released at the beginning of this month by Cytonn Investment Management talks about an “increase in distressed real estate assets and real estate bad loans.” In short, a number of developers will have a hard time servicing their loans.

According to Elizabeth Nkukuu, Cytonn’s chief investment officer, the issue boils down to one thing: high interest rates. “Many people would like to own a house but the prohibitive interest rates always stand in their way. However, this can change if much of the unoccupied stock is converted into reasonably-priced rental units,” she says.

But Nkukuu says this “distress call” is being heard on yet another front. “A number of developers may have purchased land for construction. However, owing to the high bank interest rates, they have been unable to raise capital for development. This seems to be the driving force behind the interest in satellite towns where the costs of land and construction are relatively lower than in the big city,” she notes.

Similarly, another report by Knight Frank detailing the market behaviour over the second quarter of 2015 states that accommodation uptake has been slow, with a a marked decline in rental price change of 5.11 per cent from the last quarter of 2014 to last quarter 2015.

Interestingly, the high-end segment of the market, according to the report, saw a 2.9 per cent growth over the same period.