Residential market to face serious challenges

By Daniel Cheruiyot

Residential real estate market in Kenya entered a rough phase last year and is unlikely to come out unscathed. Several housing projects due for completion this year were planned and executed a few years back on assumption of a healthy economy, low interest rates and manageable inflation. However they come to the market under a depressed economy and are, consequently, priced higher than initially projected because of high inflation.

The initial property market boom was triggered by strong demand occasioned by low interest rates and easy mortgage terms. It was sustained in the vibrant years by a robust economy, good returns and remittances by Kenyans working abroad.

Sadly, this situation was interrupted last year by a combination of disastrous occurrences, both local and international, which depressed demand and the effects continue to threaten the market to date.

Global financial meltdown

The first setback early last year were post election skirmishes, followed by high inflation and economic downturn, which reduced the amount of disposable income among households forcing some to postpone expenditure on property purchase and restrict spending to essential consumer goods and services.

During the same period, scarcity of serviced land among other things pushed up the cost of housing development forcing developers to adjust prices upwards. Mortgage interest rates were also raised to cushion lenders against inflation. The overall effect was a decline in returns because rents, especially of up market apartments, stagnated. But in spite of declining returns, investors still preferred real estate investment because the stock market had disappointed many. This demand shift from shares to real estate supported a significant proportion of the market last year.

It was in the backdrop of a slowing economy, persistent inflation, rising mortgage interest and declining returns that the global financial meltdown plunged the world into a recession in the final quarter of last year. The negative effects of the crisis are yet to be fully felt in Kenya and the consequences are expected to trickle down to the real estate sector this year. Drought may aggravate the situation.

The global financial meltdown and the subsequent recession is expected to reduce business volume because many international financial institutions will be reluctant to guarantee letters of credit to local importers; property purchases by Kenyans working abroad will decrease; earning from tourism and exports will also fall.

redirect resources

Drought has already caused crop failure leading to food shortages, high food prices and dependence on relief rations in many parts of the country and agitation for cheap unga in low-income urban settlements. To finance the above, the Government might be forced to redirect resources meant for development projects, which may have boosted the housing market to social welfare programmes. Water shortages might be experienced leading to power rationing, disruption of production and unemployment.

As a result of the above challenges, the economy will most likely shrink further this year and reduce the demand for property in a market with a sizeable stock of already completed houses and a substantial number of ongoing projects. If, for any reason, interest rates are raised again, higher mortgage repayments will cause defaulting and foreclosures. In addition, landlords in financial distress will try to sell poorly performing property portfolios and exacerbate the problem of oversupply.

flexibe packages

If cheap credit to real estate reduces because lenders become more cautious, the market could slide. The problem can be mitigated if mortgage companies introduce more flexible repayment packages and reschedule or restructure non-performing loans. But the solution really is economic recovery; so the most prudent thing for the Government now is to come up with a strategy that will stimulate the economy, give people hope and keep interest rates low so as to avoid a recession and save the real estate sector from a serious slump. The critical factor in decisions to invest for the long term is security of income, optimism about the future and ability to repay.

The writer is the head of the Valuation Department in Regent Management Limited