Property bubble burst? Not in Kenya

Is there really a bubble? This is the six-million dollar question in real estate. I don’t think there is. There was a bubble in the United States, the United Kingdom and Europe which grew until it burst in 2008. The growth was tangible, mistakes were clearly evident in hindsight and the impact on commerce and society was huge.

My own business in the UK has only now gained the ground that was lost in 2008 when commercial rents tumbled and rental voids increased. After nearly 10 years, we are now back to the rental incomes that make up for lost ground.

In the years leading up to 2008, some banks allowed customers to “self-certify” their earnings when completing mortgage applications. Then they lent money to the value of up to four times the annual earnings without any real due diligence.

The loans were used to fund the purchase of properties valued at 95 per cent of the loan.

This created a situation where the lender was exposed in case the borrower defaulted.

In the US, loans were made against second rate properties such as poorly constructed houses, houses in rundown areas and trailer homes. The exposure to risk was exacerbated as the market crashed and values fell.

That is why it is wise to restrict loans to a maximum of 70 per cent of asset value. The easy availability of money led to a buoyant housing market. Concentrating more on sales targets and less on the customer’s ability to repay the loan, financiers made mistakes such as 110 per cent lending.

You could walk into a bank with no deposit and walk out with enough to buy your property and an extra 10 per cent to spend as you wish. Very few projects were rejected. Off-plan sales were further strengthened by speculators buying several houses by paying 10 per cent deposits and signing binding sale agreements.

Easy money was made by speculators “flipping” houses to new owners once they were completed.

Good things don’t last forever and in the space of one month, the market crashed. The world’s largest bank had to be bailed out by the UK government as all banks reigned in lending.

Speculators were caught holding onto contracts with no buyers to sell to. They left their deposits behind as developers went bankrupt in their hundreds. Now that was a bubble.

Kenya, on the other hand, is a tighter ship. The cost of money can swing dramatically from 16 to 24 per cent. Banks must be convinced of the business case before lending only up to 70 per cent of costs.

In recent years, property development has attracted a number of professionals who can deliver good products with a healthy choice in the market that dissuades speculators.

The industry is very flexible and when sales dry up, developers are prepared to rent out completed units for returns of around six per cent and wait until the market picks up.

Yes, the Kenyan real estate market does go up and down but not to the extent of a bubble.