Why property prices will not be coming down soon

Business

By Edwin Tubei

Working as a professional in real estate and experiencing the ever-increasing property prices, I am always puzzled when I read of property prices coming down.

Following the boom six years ago, there was much talk of the bubble bursting and eventually it did — in Europe, America and across many Asian countries. This brought down many businesses.

Kenya’s market, however, has remained unshaken. Today, signs clearly indicate the shadow of recession is edging further away from our market, which encapsulates the intricate web of real estate development.

Cost of construction

Energy is the key resource to every conceivable production. Demand for energy worldwide exceeds supply hence its high costs affects inputs like steel, transportation, cement, paint, sanitary ware and even the two-inch nails and screws for cupboards.

Though cement uses 90 per cent local materials, it consumes large amounts of electricity during manufacturing, which makes it expensive.

Blackouts and the ever-increasing tariffs aggravate the already compounding crisis to manufacturers. I highly doubt if production companies can operate at full load 24 hours a day.

Tariff concessions should be encouraged for production companies that operate at night. Unless the government finds a magical solution to the energy crisis that will influence the private sector to reduce costs by 50 per cent, then reduction in property prices will continue being elusive.

Interest rates

Not every developer has vast capital resources to solely fund a project. Many, therefore, opt for bank loans. Developers intending to sell their properties are given a shorter repayment duration at slightly lower interest rates than long-term mortgage rates. Similarly, most developers give discounts to cash buyers.

Nonetheless, it will still be a long time before rates come down to eight per cent where most experts believe interest should be pegged at. Even if interest rates were to drop to five per cent, a rush for mortgage facilities plus the resultant high demand for properties would eventually push prices up.

Cost of land is one of the main reasons why property development is expensive. For instance, an acre in Westlands can fetch upto Sh150 million.

Further, limitations that include sewer and city bylaws, together with additional costs such as raw materials, labour and licenses push overall costs of construction upwards.

The writer is a marketer with Brooks Estate Agents Ltd.