Scared real estate developers withhold billions as political tempratures rise

A section of Upper Hill on 20th June 2017. PHOTO:WILBERFORCE OKWIRI

Scared real estate developers have held on to their cash as the heightened political activity throw the economy into uncertainty.

According to the latest data from the Kenya National Bureau of Statistics (KNBS), property developers in Nairobi have considerably scaled down their construction activities, pointing to a struggling property sector.    

The report by the national statistician shows that the value of buildings approved for construction by Nairobi County in the first seven months of 2017 declined by 18.4 per cent to Sh149.5 billion down from Sh183.2 billion in the same period last year.  

This means the economy lost a massive Sh33.7 billion during this period, enough to put up four projects similar to HF Group’s Komarock Heights in which 1,272 two-bedroom and three-bedroom apartment units will be built on a 23.5-acre land in Komarock, Nairobi.

It is a blow to the taxman who would have earned a lot in taxes and Kenyans who would have found jobs in these projects.  

The KNBS report paints a bleak picture of a struggling housing sector in which activities, both in residential and non-residential buildings, were subdued in what many analysts blame on the toxic political climate in the country.

The value of residential buildings approved, according to the report, declined by 17.4 per cent to Sh88.5 billion in 2017 from Sh107.2 billion last year. Commercial building approvals dipped by 15.1 per cent to Sh61 billion in 2017 compared to Sh76.1 billion last year.

Kenyans will go back to the polls in October 26, after the Supreme Court annulled the presidential results of August 8 in which President Uhuru Kenyatta had been declared winner.

Both in the run-up to the August 8 and October 26 elections, both sides of the political divide (the ruling Jubilee Party and the Opposition National Super Alliance) have taken hardline stances, rekindling memories of the 2007 post poll chaos in which more than 1,000 people died and property worth billions destroyed.     

Lowest point

In July 2017, just a month to the General Election, only a measly Sh2.7 billion worth of commercial buildings were approved for construction by Nairobi County. It is one of the lowest values of building approvals in the housing sector in recent times.

Like other sectors of the economy, the housing sector has been hit by a slowdown occasioned by a number of factors, including heightened political activity that has seen investors adopt a wait-and-see approach.

A recent Housing Price Index , KBA-HPI by the Kenya Bankers Association (KBA) found that the average prices of houses recorded their slowest growth since the third quarter of 2016, with a minimal increase of 0.98 per cent compared to the 1.10 per cent rise in the first quarter of 2017.

According to KBA director of research and policy, Jared Osoro, the sluggish economy is to blame. Osoro said that the economy’s real growth during the second quarter of 2017 was the slowest performance compared to the corresponding quarters since 2013, a pointer to a bleak economic outlook in 2017.

“The demand attributes of the housing market have largely been influenced by the sustained decline in the pace of credit growth in the private sector,” said Osoro.

Mucai Kunyiha, group MD of Kzanaka Limited, a real estate development firm, knows this all too well. Mucai, who is also the chairman of Kenya Property Development Association, says he has put on hold any new development. 

“Demand for houses is low. Up-take is down,” said Kunyiha, whose company has been involved in such projects such as Waterfront Gardens Estate, an upper-middle-income housing estate with 127 units on Waiyaki Way, Nairobi.

He says it is hard and expensive to stop ongoing construction projects, said Kunyiha: “Those working will continue. But most new projects are being postponed.”

Starved of cash

Analysts say developers have been starved of cash to build. According to Cytonn Investment’s senior manager, Johnson Denge, reduced credit to the private sector by banks as a result of the enactment of the Banking Amendment Act 2015 which capped interest rates, has curtailed credit extension to the private sector.

Credit growth, he notes, decreased to 1.6 per cent in August 2017 compared to 5.4 per cent in August 2016.

“This is impacting negatively on both the buyer and the end user borrower as evidenced in reduced number of mortgages, which declined by 1.5 per cent to 24,085 in 2016 from 24,453 in 2015,” said Denge.

KNBS also attributed the slowdown in the construction sector to poor credit extension. “Credit to building and construction activities declined by 1.2 per cent, a further reflection of relatively less activity in the sector,” said the report for the second quarter of 2017.

The report showed that the gross domestic product or the total value of goods and services produced between April and June 2017 grew by five per cent compared to a growth of 6.3 per cent ithe same period in 2016. It was the slowest second quarter growth since 2012.

Although the construction sector was “robust” according to the national statistician, its 7.5 per cent growth was, however, slower than in the same period last when the sector expanded by 7.6 per cent. 

“The slow growth was evidenced by 6.3 per cent decline in cement consumption, which is a key input in the sector,” said the report, adding that declines in the volume of imports of construction materials such as iron and steel, and cement by 28.9 and 27.1 per cent, respectively, also explained the slowdown in the sector. Performance of the construction sector over the last five years in the second quarter is anything but impressive, growing steadily from a low of seven per cent in 2012 before hitting a high of 16.5  per cent in the second quarter of 2014.

The growth then began to slow down to 12.1 per cent before it plunged to 7.6 per cent last year.

And with the politicians still playing hard-ball, it looks like it will be heady days for the sector that for a while has given the country’s economy the Midas touch, particularly after the country rebased the way in which it calculated its GDP and included real estate in its computation.

“We expect the real estate industry activities to remain on a slow to the end of 2017, but will pick up in 2018 should the elections be peaceful,” said Denge.

This will be driven by the demand as seen through the high population and urbanisation growth at 2.7 per cent and 4.4 per cent, respectively, and real estate’s high returns of on average 25 per cent per annum in the last five years and 25.8 per cent recorded in 2016, said Denge.