Anxiety over low upmarket rental yields

By Harold Ayodo

Three years ago, Maria Mutiso bought a house in Nairobi’s South C as an alternative to her dream family home in upmarket Kilimani, Nairobi.

She says most of the bungalows off Ngong Road sold at Sh10 million but her budget was Sh6 million.

"I settled for South C — off Mombasa Road — as I could not raise more for Kilimani as the prices kept increasing by the day," Mutiso says.

Today, she is contemplating selling her bungalow for property in the high-end areas following a recent report by Hass Consult, a leading real estate firm that prices are falling.

The script is near similar to Patrick Mwangi who rented a house in Imara Daima two years ago although his taste was for an apartment along Riverside.

"The asking rent for apartments along Riverside was so high that we resolved to settle at Imara as we were a young family," Mwangi says.

On Monday last week, Mwangi engaged a real estate firm to hunt for a house in Kileleshwa following the latest report by Hass Consult.

"I hope that rent in Kileleshwa would be friendlier…Kileleshwa would be the most ideal because my wife and I work in Westlands," Mwangi says.

For Sylvia Mburu, Westlands is her residential area of choice compared to her current abode in Nairobi’s South B.

"I am searching for a house in Westlands as I understand rent those sides is falling fast and hard," Mburu says.

Uncertainties over property prices in upmarket areas are now raising anxiety among prospective investors in real estate.

Few would-be homeowners in the high-end areas have withheld their savings expecting prices to fall further. Real estate experts say there are uncertainties in the market followed the release of the findings in a report dubbed The Hass Property Index by Hass Consult.

According to the report for the first quarter of this year, rents in upmarket areas have stagnated over the last three years as property prices have doubled over the same period.

Speculative investment

Current and prospective tenants may be having their day in the sun over the stagnated rent but owners of residential and commercial premises are hard up. These are not good tidings for prospective investors keen on buying properties and make profits from rents.

Hass Consult Sales and Letting manager Fatima Moledina says it seems unlikely the market will support the targeted profit taking.

"It is clear the market is solidly underpinned in holding its current price and rental levels..," Moledina says.

Luxury apartments in Nairobi. Property prices in high-end areas are falling. [PHOTOS: JENIFFER WACHIE/STANDARD]

She says ambitions to secure profits on apartments bought as investments within two years is likely to remain thwarted for the time being. Property sales have also not been spared from the on-going real estate market correction due to over-valuation and demand-supply mismatch from 2007.

The general property transaction trends in the high-end market are on a sluggish demand path with a rise of 1.8 per cent compared to the previous quarter. Ironically, some property sellers continue to quote high asking prices for their residential and commercial property in up-market areas.

According to the Hass Property Index, the asking price of sellers rose by 7.8 per cent in the first quarter of this year. The increase was mainly driven by upmarket prices by some short-term owners seeking profits through price hikes on apartments bought for speculative investment.

As the property index report continues to have a ripple effect, some real estate firms insist investors are still scrambling for property in high-end areas.

Mentor Group director Daniel Ojijo says demand for houses remains high following the housing shortage that outstrips supply.

"The houses we have constructed have all sold at a record speed, meaning the thirst and demand for houses is still there," Ojijo says.

Homes Kenya marketing executive Louis Agili says houses in Nairobi’s Kilimani, Lavington, Riara, Ngong Road and Kileleshwa areas are hot cakes.

"There is still an inadequate supply of housing units, which has led to the increase of prices," Agili says.

Agili says prices for two bed-roomed apartments in Kileleshwa and Kilimani have increased from Sh9 million to Sh12.5 million this year compared to last year.

"Speculations that rentals are undergoing a market correction is an assumption following market forces and under-currents," Agili says.

He says there is a growing investor interest for penthouses by expatriates in the upmarket.

"Most statistics released by real estate firms is based on their performance index and often does not reflect the entire property market," Agili says.

However, according to Tysons Ltd marketing assistant Dan Arum, property market is slow in the upmarket apart from Riverside, Brookside and Westlands.

"There are several ‘To-Let’ boards and notices in some parts of the high-end areas over undercurrents in the market," Arum says.

According to Arum, town houses are hotcakes to investors in areas like Nairobi’s Peponi where they are assured of lucrative rent.

Reduced interest rates

"Townhouses are few, which explains their demand…tenants are scrambling for five bedroom houses that go for Sh250,000 per month," he says.

Arum says rent in upmarket areas continue to increase as investors seek faster ways of coping with high interest rates of mortgages.

Players in the real estate sub sector, however, say the situation in the high-end market may take a further twist as commercial banks reduce their lending/interest rates.

For instance, Kenya Commercial Bank (KCB) chief executive officer Martin Oduor-Otieno last week announced a reduction from 15 per cent to 13.5 per cent.

"The move is aimed at encouraging borrowing to boost our economy…we will support efforts of our customers to grow their businesses," Oduor-Otieno says.

Economists say prospective investors may opt to subscribe to the reduced lending rates to invest in real estate, possibly reducing rent further. However, there could be a general boom in real estate especially if the current demand for cement is anything to go by.

According to the Central Bank’s Monthly Economic Review for February 2010, cement production rose by 18.1 per cent in January compared to the same month last year reaching 292,769 metric tonnes.

"Growth in cement production has been gradual but steady through the years, reflecting increased economic activity," says the review.

Diaspora remittances

Economists argue that the per capita cement consumption is increasing due to the rise in the middle class that builds homes – driving up demand for cement.

Players in real estate say the Hass Consult report released last week is near similar to another one released late last year on the high-end market.

Last year, the report showed that prices of palatial homes fell by between 1.4 per cent and 2.2 percent in the second and third quarter respectively.

Recession, high inflation and falling remittances from the Diaspora were among possible reasons for the decline in prices.

A demand-supply mismatch resulting in over supply of property - particularly apartments, coupled with excessive speculation could also be factors.

Loan defaults

Latest stringent measures adopted by mortgage financiers could have played a role in the twist of events. The rules ensured prospective investors seeking loans to buy houses were screened to reduce incidences of loan defaults, which affected financing.

Researchers at Hass Consult arrived at their findings and conclusion based on information from 13 other leading real estate firms in Nairobi. The firms say that prospective clients who had pledged to purchase shied away after the release of the report — expecting prices to fall further.

The reduction trend was in contrast with 2007 and 2008 when prices appreciated by four per cent every quarter — translating to a 30 per cent appreciation annually.

The Hass Consult statistics meant property prices were on a free-fall after a surge over the past two years, which translates to immense buying opportunities for investors.