What Nairobi can learn from Dubai’s troubled property sector

Sixty years ago Dubai was no more than a small port city that hardly made a mark. It was a haunt of the Bedouin people and their camels. Diving for pearls was their key commercial occupation.

Proceeds from pearl diving expeditions were enough to feed the then small population of 25,000 people.

Thanks to the oil boom of the 1970s, Dubai changed. The new money ignited a construction boom that transformed the nondescript desert outpost into a modern metropolis unrivalled anywhere else.

Today, glittering lights, tall buildings and ultra-modern infrastructure and some of the most expensive homes occupy space where rows of tents built around sand dunes once stood.

However, Dubai is cooling off, as its hyped resilience in construction wears off.

In a move that will be watched by real estate developers around the world, the ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum, issued an order that will see the formation of a committee to evaluate the real construction needs and restricting of such constructions should it be deemed necessary.

“The move is part of increasing the competitiveness and highlighting the attractiveness of the real estate sector, which is a key driver of Dubai’s economic development. The committee also aims to study the needs of the real estate market to ensure projects are not duplicated,” said the statement from the Dubai government’s media office.

The September directive follows a sustained fall in property prices whose glorious days tapered five years ago. While such market corrections are normal in the industry, Dubai’s free fall in property prices will send shock waves not only to the region but to global investors, who see it as a safe haven for their money.

The Emirati ruler may have stated that the directive would create a strategy that would see real estate projects add value to the city, but a line down the statement has raised the heat among developers in Dubai.

“The ‘Higher Committee for Real Estate Planning’ will …develop an integrated plan for the real estate sector to regulate and control the pace of projects, and achieve a balance between supply and demand,” it said.

The order will hit Dubai’s residential market hard. The first half of this year saw the completion of 21,000 units with another 38,000 scheduled for completion by the end of the year. 

Dubai is home to the world’s largest developers, including Emaar, Damac, Deyaar, and Nakheel. These have built the city brick by brick. Paradoxically, they are responsible for the current glut that has necessitated the new directive.

In an interview with Bloomberg after the order, Damac chairman Hussain Sajwani said construction companies have reduced construction by 80 per cent or stopped it altogether “except for one company that keeps dumping.”

“We just need to stop for one year or 18 months but one company just keeps on dumping. Just stop the supply,” said Sajwani.

He was referring to Emaar, a firm that is 29 per cent government-owned. Its claim to fame remains the Burj Khalifa, the world’s tallest man-made structure.

Could a similar predicament befall Nairobi?   

Though on a small scale, the same fundamentals that made Dubai tick are present in Nairobi. Like Dubai, Nairobi is a relatively safe city with a pro-business environment.

The current and proposed infrastructure upgrade coupled with the country’s political stability continue to attract real estate investors.

According to World Bank and Central Bank of Kenya, real estate in Kenya grew by 10 to 20 per cent between 2005 and 2010, buoyed by an expanding middle class. So luxurious was the sector that coffee farmers, especially in Kiambu, uprooted their crop in favour of commercial home construction – a venture that promised more and quicker returns than coffee.

The rezoning of key Nairobi suburbs such as Kilimani, Kileleshwa, and Lavington from single to multiple dwelling residential areas saw a scramble for land as developers outdid each other to build high-rise apartments. The region leads in the number of vacant residential units.

Upper Hill, the former sleepy suburb where government workers retired after a day’s work on homes built on sprawling grounds, is now home to the highest office structures in the continent.

An acre in Upper Hill is way past the half a billion-shilling mark.

By the tail end of the President Mwai Kibaki’s administration, however, the Government jerked up interest rates to fight inflation and save the shilling from collapse. It did not help matters when in 2016, the Government enacted legislation to cap interest rates ostensibly to allow more people to borrow. The reverse was true.

Lenders found it lucrative to do business with Government papers that offered assured returns rather than lend “risky” individuals. Developers and prospective homeowners belonged to the latter category.

Developers found themselves with projects on the ground that required more credit either to start or complete, while buyers were starved of cash. Realtors agree the scenario has created an oversupply in some areas of the city.

“We now have an oversupply in Nairobi and not in the counties, and the developers in Nairobi may have to slow down on developments for now. The oversupply in Nairobi is not because there is lack of demand but little access to credit by most buyers. Banks stopped giving personal loans after rate cap but lend to Government,” says Lee Karuri, chairman of Resorts and Cities.

Unlike Dubai, though, Kenya needs to house millions. Statistics show that we have an annual shortage of 200,000 homes against an annual production of 50,000. Only a thousand of these cater for the lower segment of the market.

“While other market segments are slow, there is still demand in the affordable housing sector,” says Palkesh Shah, the chairman of Kenya Property Developers Association.

Shah says financing developers and prospective homeowners in this segment is key. Currently, though, such funding is a mirage, owing to financiers’ reluctance to lend to this segment or prohibitive interest rates.

The recent repeal of the rate capping law has done little to soothe the real estate sector, with a number of banks expected to adjust their interest rates upward.

“If this (financing) is available, then demand will grow in all market segments,” says Shah.

But the respite, some developers say, lies in investing away from the big city.

“The market is slow for sure, but if you choose the right market you are fine,” says Edwin Dande, chief executive at Cytonn Investments.

In Dubai, just like in Nairobi, there was first a boom. In both cities, however, the word nobody mentions is “bubble”, and whether it will burst.

[email protected]