Is the real estate market in Kenya in for a storm in 2016?
By Peter Muiruri | January 14th 2016
Ann Muchiri of Rozana Properties looks forward to a busy year ahead after what she describes as a lacklustre performance of the real estate industry in 2015. Sporadic incidents of insecurity conspired to deny her some much-needed sales in the high-end segment where she operates.
“A number of our units are in the high-end segment of the market that was greatly affected by last year’s terror incidents. This made a number of multinationals that we target slow down their uptake of such homes,” says Muchiri.
For her and other developers, 2016 is a make-or-break year. With the drums of next year’s General-Election starting to sound, developers expect many would-be home owners and other investors to make vital decisions concerning real estate investment this year before the industry adopts a wait-and-see attitude for the better part of next year.
But regardless of any jitters that may creep in, all projections have continued to paint a rosy picture of investing in the real estate sector in Kenya. This has not been a misplaced assurance as all the fundamentals pointed to an industry bubbling with great potential.
Indeed, Cytonn Investments 2016 Outlook Report released on Monday says that real estate is the best investment option this year despite fears that political fever may slightly slow it down.
The report says that real estate investors will ride on the growing demand for residential and commercial developments in the country, thanks to urbanisation and growth of the middle-class.
In Kenya, the housing demand has always outstripped supply, especially in the lower segment of the market. Developers have over the years filled the gap in the middle to upper reaches of the sector that are seen to be more profitable. Nothing has been strong enough to burst the mythical bubble.
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According to Muchai Kunyiha, a developer with Mashiara Park Limited, the real estate industry in Kenya has generally shown resilience for a long period, absorbing a number of tremors that have come its way in recent times.
“True, we expect a lot of political noise this year as we approach the General-Election next year. As we head deeper into that period, there may be a slowdown in mortgage uptake. However, real estate thrives on its long-term nature as shown by its weathering the numerous storms in the past,” he says.
However, despite the positive outlook by local industry players, economic downturns in America and China — the two leading world economies — could throw a spanner in the works.
According to a report by global consultancy firm Knight Frank, the undercurrents within the Chinese and American economies threaten the growth of the property sector in developing nations that include Kenya for the next year and a half.
The Prime Cities Forecast Report 2016 cites the slowdown in China as a catalyst for a slumped property market that previously benefited from China’s economic boom.
“The scale of the slowdown in China and the speed of further United States interest rate rise will determine the performance of property markets and across developed and emerging markets alike over the next 12-18 months,” says the report.
With regard to China, the report says that a “hard-landing for China’s economy would lead to a slump in global commodity prices while a prolonged slowdown in growth would mean those emerging markets that have benefited from the Chinese-driven boom in commodity prices, Africa included, would see a knock-on impact”.
Local developers and financial analysts have been quick to state that China’s economic downturn may not have noticeable effects able to scuttle any gains in the real estate sector in Kenya.
Kunyiha, who also chairs the Kenya Property Developers Association, says we should not be so fixated with the ‘Chinese effect’ as Kenya’s real estate industry is not overly reliant on the Asian giant for capital inflows.
“This may affect the big Chinese companies doing business in Kenya. It is unlikely to hurt our real estate industry that has few foreign investors. As a matter of fact, much of the financing for local housing projects is sourced locally,” says Kunyiha.
He says there would be more cause to worry, say, if the United Nations office in Nairobi closed shop “since it has been a common denominator in pricing housing units in a significant section of the city.”
Kunyiha says the Chinese economic slowdown may actually be a blessing in disguise for the local construction sector.
“The slump in global commodity prices owing to the situation in China can only mean that Kenya will see more Chinese goods dumped into the local market and in effect lowering the price of construction consumables and fixtures, most of which are sourced from the Asian economic powerhouse,” he says.
On the other hand, while the recent rise in US base rates by the Federal Reserve will see a drop in housing sales volume and moderate price rises in America, the report says emerging markets will likely see a rise in the cost of funds.
“The US housing market will see a slowdown in sales volumes and more moderate price growth as affordability concerns pinch. Emerging markets will see capital outflows increase and funding costs raised further while those countries whose currency is pegged on the US dollar will see a reduction in foreign property demand,” says the Knight Frank report.
While the US rates move may affect diaspora remittances to the country, analysts say the repercussions are not so serious for an economy that largely came out unscathed during the 2007/2008 economic recession in America.
Like the developers, financial analyst Aly-Khan Satchu says the move should not cause local developers and potential buyers sleepless nights.
“The interest rate increases in the US are expected to be gradual. I am of the view that we will not witness the intense rate volatility we encountered in October and November last year,” he says.
Currently, Kenya’s interest rates, ranging between 14 and 27 per cent, are among the highest on the continent and any external financial upheavals are bound to have a negative effect on the housing sector.
With the local built industry shrugging off any possible jitters, time will tell how much more load it can bear before any cracks start emerging.
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