Why it might take real estate longer to get out of the woods

Like the fabled elephant and the blind men who sought to describe it by touching, the state of Kenya’s real estate today depends on who you ask.

To investors, it is the best sector that guarantees decent returns on investments and a panacea to financial freedom. To prospective home buyers or renters, the playing field is skewed towards developers.

To financial institutions, it a double edged sword. Real estate controls billions in terms of property that banks can use as collateral, yet the industry sits at the top of non-performing loans list.

Under the robust growth, time was ticking for many. When a Sh1 billion estate in Kitisuru went under the auctioneers’ hammer last month, many tongues were sent wagging.

The fate of the 119 three-bedroom maisonettes built by Homex was blamed on tough economic times. It was one in a long string of auctions targeting the real estate industry.

“There has been talk of economic growth in the last two years but this has not been reflected in people’s purchasing power,” says Peter Muraya, CEO of Suraya Property Group.

He adds: “With banks lending little to the private sector, people have not been able to make meaningful purchases in real estate in recent times. One of the main culprits in this downturn was the interest rates cap. There has been talk of a review. However, rather than scrap it, it is better to restructure it so that people can get unsecured loans at a rate that cushions banks from default.”

The 2017 Economic Survey details the activities of the last five years.

According to the report, the value of reported new buildings completed in Nairobi registered a growth of 7.6 per cent to stand at Sh76.2 billion in 2016.

In addition, the value of reported building plans approved increased by 43.3 per cent from Sh215.2 billion in 2015 to Sh308.4 billion in 2016.

While the Department of Housing has spearheaded the development of houses, especially for civil servants and segments of the disciplined forces, the bulk of new buildings came through the private sector.

The survey shows that the total number of reported private buildings completed increased by 10.5 per cent from 9,054 units in 2015 to 10,002 units in 2016, with residential buildings accounting for 86.2 per cent of the completed private buildings during the review period.

This and many other reports with forecasts, projections and a “positive outlook” depict a robust and solid industry. But stakeholders lament that this has not translated into returns, especially to lenders and those who took development loans or mortgages.

“The government’s plan for a global social housing programme will have an impact on real estate players. If the social houses are affordable to the masses, this means some people may move from the middle-income residential areas to the new housing schemes, thus affecting house prices. If the government releases land for such mass housing, the ripple effect will be felt in the market as price of land drops,” says Muraya.

Last year was especially rough. Many houses came on to the market. Only a few were sold. There was the obvious suspect – the long electioneering period and prevailing drought.

“The sector has been under considerable stress recently. 2017 saw a bit of holdup in the market. Investors held on to their cash as they adopted a wait-and-see attitude,” says Daniel Ojijo, CEO of Homes Universal .

“The bad political scene saw many businesses fail, resulting in little uptake of housing units offloaded over the years. If companies were closing, how could we bury our heads in the sand and pretend everything was okay? Remember, people buy into real estate after satisfying the other basic needs such as food and clothing. They only buy property if they got some disposable income,” adds Ojijo.

Many hope that 2018 will be better. “This year holds some promise that things will work out. Already, we have seen a healthy appetite for local property. Last week’s political truce between President Uhuru Kenyatta and Opposition leader Raila Odinga has helped cool temperatures and create an enabling environment for further growth in the sector,” he says.

“Despite the sluggish performance of prime residential rents in 2017, it is projected that the market may be reaching its cyclical trough and is about to turn around. Sales are expected to pick up in 2018,” said Knight Frank in their Inside View Kenya 2018 report.

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