Jitters over poll outcome stir real estate sector

By Moses Michira

Fear has gripped the country’s vibrant and one of the most profitable sectors, real estate.

The cost of credit has increased and most investors are nervous over the country’s political risk profile as the date for the March 4, poll nears.

 Although the sector has stood out as among most resilient over the last decade, fear of the March poll outcome has forced most players to slow down or adopt await and see attitude.

Major indicators like cement consumption and building approvals have reported sluggish growth or even dips on some months over the last year, a strong pointer that investors are holding back on putting in more cash into new construction.

Slowing activity comes on the back of a vibrant growth that was driven by soaring demand for homes and commercial space, especially in urban areas, and whose reverberations have had an even wider reach across the country.

Such a slowdown would have major implications on the labour market as the sector has been among the most critical creators of new positions, and in the cement manufacturing business where a possible supply glut is shaping up.

David Masika, managing director of real estate firm Lloyd Masika, attributes the slowdown to concerns among property investors over possible disruptions that would affect the actual building process and demand for space.

“Investors are very wary of possible disruptions like we saw in 2007,” said Masika, adding “It is my very strong feeling that the same events could recur.”

He adds that the capital intensity involved in property investment was too high and investors were unlikely to commit their funds, which would often be borrowed, in an uncertain market.

Losses that have been incurred in past incidences arising from social unrest have not been compensated by insurance firms, according to Masika, which has compounded investor concerns about putting up new real estate.

The trend on cement consumption, which closely tracks the performance of the construction sector, has reported almost flat growth especially in the second and third quarters of 2012, according to the Kenya National Bureau of Statistics.

Cement consumption rose by less than two per cent in both quarters, over comparable periods in 2011 when the growth was about 10 per cent, indicating a significant slowdown in the number of new projects.

High interest rates on project finance witnessed in the first half of 2012 pushed several developers to cut back on planned projects or suspending investment, a factor that interrupted the decade-long boom in the property market.

While the cost of credit has started trending downwards since mid last year, the expensive loans only helped to discourage property purchases and stoking panic among developers who were staring at rising home inventories.

The multiple issues of expensive project financing, rising political risk and reluctant buyers have collectively posed the challenges that could explain the slowing investments in housing.

Mortgage financier Housing Finance says home buyers had started streaming back in the last quarter of 2012 when average lending dropped below 20 per cent after a near disappearance for most of the year, according its managing director Frank Ireri.

Manubhai Chotai, a private developer, is however unmoved by any shocks and has instead planned two multibillion projects within Nairobi; a five star hotel in Westlands and a residential estate of over 400 homes along Likoni Road.

“We expect to break ground for residential estate after the elections,” said Chotai adding “Nairobi is still a good market, I am very optimistic.”

A sustained slowdown in the construction sector would have major ramifications in the cement production business, where the manufacturers have invested over Sh40 billion over the last five years to boost capacity.

Savannah Cement, the latest entrant, has began transforming its status from an export-oriented firm meaning that it will fight out for a share of the local market with the five other established firms.

Past surveys of the property market have shown heavy investment in the sector in residential and commercial buildings, and rewarding investors in the construction segment with handsome returns of over 40 per cent, according to some private developers.