Effect of the 2017 General Election on the Real Estate Environment in Kenya

(Proposed Taraji Heights Development in Ruaka by Cytonn Real Estate)

As history has proven, elections have the sole capability to change a nation’s economy especially during the post-election period due to the possibility of a change in political stability, government policies and even investors’ confidence in the appointed government.

The electioneering period is as risky as it is unpredictable for the real estate market. This is so especially because the period has both perks and at times, huge disadvantages. During this period, a lot of factors play a crucial role in the general outcome as everything from interest rates, government expenditure and investor appetite tend to fluctuate depending on the election period mood.

Some of the benefits of the election period include infrastructural development, increased expenditure and implementation of favorable policies.

Infrastructural Development

Infrastructural development has been known to be one of the key election tactics for incumbent leaders. This in turn results in opening up of areas for development. Improved transport systems and other infrastructural amenities such as commercial properties lead to an appreciation in property values as property dealers anticipate demand growth.  In a bid to seek re-election, effort is increased towards construction and rehabilitation of roads, bridges, electricity, water and sewer connection.

This is seen not only through an increase in the number of wage employees, but also through an increase in the funds allocated for infrastructural development. For instance, during the 2007 elections, the Kenya Roads Board increased funds allocated to infrastructure by 49.6% compared to a 7.3% in the previous year.

The current governments’ key projects such as the standard gauge railway is expected to be launched in June, 2017, while projects such as the Western Bypass are expected to roll into their second term, should the government be re-elected. This gives them a higher bargaining power over the electorate and in the long term, this has a positive impact as it removes the uncertainty that comes with transitioning governments.

Increased Expenditure

The amount of expenditure, and hence money supply, within the economy increases as politicians contribute funds for social projects which in turn increases liquidity. This is a recipe for increased investment in the real estate sector, leading to increased property values.

Implementation of favorable policies

The incumbent government also tries to woo voters by creating policies that are favorable for the economic environment as a whole. Case in point, on top of issuing more than three million title deeds to streamline land ownership, the Jubilee government has waived the fee for title searches at the land registries which is bound to speed up the land transaction processes. Plans are also under way to digitalize all land registries which are notorious for land transaction red tape.

This in turn will reduce the amount of time it takes to see real estate projects come to fruition. In addition, the government has already enforced other policies to boost real estate development including scrapping of NEMA and NCA fees, waiver Official Title search fees and tax incentives for mass development. In a nation with such a high a housing deficit as 200,000 units, this will go a long way in making houses affordable as costs for development are guaranteed to go down.

The positive effects could last mid to long-term. However, as much as they improve the sector, the election period can also be daunting for real estate stakeholders.

In the 2007/8 post-election violence, property worth millions was lost. This set a bad precedent for developers and investors as they now adopt the wait-and-see approach in fear of history repeating itself. The negative effects of elections are mainly due to political uncertainty which leads to:

Lower Transaction Volumes

In 2007, the contribution of real estate to the country’s GDP declined marginally by 0.05% from 6.178% to 6.175%, while in 2012, the same declined by 1.6% from 6.2% contribution to GDP in 2011. This is attributed to the fact that as elections loom, real estate transactions tend to slow down thereby reducing real estate activity.

According to Hass Consult, the housing market generally experienced a slow down during Q1 2013 as purchasers held off from concluding house moves with townhouses and apartments recording a 1.5% and 0.2% fall in prices, respectively during that period. Asking rents only increased by 1.9% from Q4/2012 compared to 4.4% increased recorded the previous quarter. In a nation where tribal politics thrive, political tensions play a vital role in discouraging investment in real estate and postponing of property -purchase decisions due to the uncertainty of election results.

Lower Credit Advancement

The uncertainty of transitioning to a new government as well as the possibility of political instability and violence following disputed elections also affect the amount of credit lent to the real estate sector as lending institutions minimize the amounts advanced. For instance, according to KNBS, there was only a 4.5% growth in the value of bank loans advanced to the building and construction sector in 2007, compared to a 41% growth in the preceding period. Reduced access to credit results in a slowdown in development activity, due to the capital intensive nature of the sector. This could also result in reduced uptake, albeit marginally, as only few Kenyans buy houses on mortgage.

So what does the future hold for real estate? The outcome of elections is not the ultimate determinant factor on real estate performance. Other more important factors such as the health of the market, the general economic environment and demand for real estate products also play a vital role in determining the depth of the election period’s effect on the real estate market. Typically, developers rush to get approvals for developments ahead of elections to avoid possible delays and inconveniences that may result during the transition period, should a new government win the election, and thus immediately embark on projects once the country stabilizes.

Moreover, real estate demand remains high driven by population growth at 2.6%, urbanization at 4.4%, the rise in the middle-class population and expansion of businesses and SMEs. This indicates that the demand for both real estate products will remain strong and should counteract any negative election effects.  Should calm elections be held, we are likely to not only witness increased investment and rolling out of projects but also increased prices, selling and marketing of real estate.

Therefore, it is the right time for a discerning investor to invest mostly for long-term gains. Real Estate remains the highest returning asset class with average returns of 25.8% compared to other asset classes’ average returns of 12.3%.

For more insights on Real Estate Investments in Kenya, visit: http://www.cytonn.com/research

Patricia Wachira is Research Analyst at Cytonn Real Estate

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