Property prices in upmarket unlikely to decline

By Harold Ayodo

Prospective investors in the high-end market waiting for prices to fall may be disappointed as trends indicate a continued increase.

Real estate agents say would-be homeowners withheld their savings expecting prices to fall based on research findings published in the Hass Property Index report released towards the end of last year.

The study, which was commissioned by Hass Consult, an established real estate firm, indicated that prices of palatial homes had fallen by between 1.4 per cent and 2.2 per cent in the second and third quarter of last year, respectively.

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

According to the report, other factors included a demand-supply mismatch resulting in over-supply of property, particularly apartments, coupled with excessive speculation.

Recent stringent measures adopted by mortgage financiers could have also 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 were increasing.

Researchers at Hass Consult arrived at their findings and conclusions based on information gathered from 13 other leading real estate firms in Nairobi.

Following the release of the report, property investors began to shy away from buying land, houses and offices expecting prices to fall.

Growth in profits

This move was a sharp contrast to the frenzy that rocked 2007 and 2008 when homeowners invested in property and prices appreciated by four per cent every quarter, translating to a 30 per cent rise annually.

The Hass Consult report gave prospective homeowners hope in the believe that, with the price free-fall, there would be numerous opportunities to buy properties.

Ironically, despite the freeze by prospective investors, mortgage financiers like Housing Finance (HF) and Savings and Loan (S&L) recorded profits last year compared to previous years.

HF managing director Frank Ireri says the institution registered a 57 per cent growth in pre-tax profits for the third quarter last year.

"Profit before tax increased to Sh202 million up from Sh128 million during a similar period last year," he says.

S&L Managing Director Caroline Kariuki announced an increase of pre-tax profit by 127 per cent from January to September compared to same period in 2008.

"We registered a pre-tax profit of Sh765 million in the first nine months last year compared to Sh336 million over a similar period in 2008," she reveals.

Players in real estate argue that the findings in the Hass report has caused confusion in the sector as many clients rushed to property companies expecting to get reduced prices of homes.

Tysons Limited marketing assistant Dan Arum says prices will not fall as expected as they have just reached optimum.

Realistic prices

"We sold more property in up market areas from January to November last year compared to the same period in previous years," Arum says.

Brooks Estate Agents partner Edwin Tubei agrees. According to him, the agency sold more homes in Kileleshwa, Kilimani, Lavington and Westlands last year.

"The prices of the property we sold never fell largely due to the ever increasing cost of land, especially in high-end areas, and the rising costs of construction materials," Tubei says.

Arum believes developers are asking for realistic prices for units, which may be understood as falling prices.

Homes Kenya marketing executive Louis Agili says prospective investors hoping that prices in upmarket areas will fall will be disappointed.

"Prices in the upmarket, according to our figures, had temporarily reached optimum before appreciating," he says.

Prospective investors who pledged to purchase properties but took a back seat expecting prices to fall may end up counting their losses when the prices for those same properties appreciate highly.

According to Tubei, a three-bedroom house that cost Sh4.5 million in 2003 and rose to Sh9 million in 2007 sold at Sh12 million last year.

Agili says a three-bedroom house in Lavington and Kileleshwa that cost Sh8 million three years ago sold like hot cakes at Sh15 million late last year.

"The demand in high-end neighbourhoods continues to rise, especially for buyers who understand the market," Agili says.

S&L Sales and Marketing Manager George Laboso says clients eyeing property in upmarket areas sought their services all year round.

"We have never advanced mortgage facilities to as many clients as we did last year…it has been our best," he says.

Tubei says investors must understood that prices in areas like Westlands skyrocket due to the ever-increasing cost of land.

"An acre of land along Waiyaki Way costs Sh150 million," he says.

proposed partnerships

According to the National Housing Corporation (NHC) Managing Director James Ruitha, the increasing cost of land contributes to the uncertainties in the cost of property. He urges the Government to provide land for construction of affordable houses.

"We buy land at market prices, which limits us in lowering prices of finished houses," Ruitha says.

Partnerships between private developers, municipal councils and the Ministry of Lands, however, could see prices of houses reduce.

Laboso says property prices in upmarket areas increase perpetually but seemed to have reached a peak late last year.

"Current uncertainties over prices could be attributed to speculation that costs would decline following over-supply," suggests Tubei.

Construction in real estate, however, is still on the rise if latest figures from the Kenya National Bureau of Statistics (KNBS) are anything to go by. The figures show that the Nairobi City Council approved Sh19 billion worth of buildings in the first three months of last year.

City Hall approved developments worth Sh12 billion in the first three months in 2008, proving there is a construction boom.

Consumption of cement increased by 38 per cent from two million metric tonnes in 2007 to 2.7 million metric tones last year.

Not surprisingly, manufacturers recorded a rise in revenues. Bamburi Cement, for instance, recorded an increase of 45 per cent to Sh16 billion in the first half of last year compared to Sh11 billion in the same period in 2008, according to KNBS statistics.

Arum says prices of property sold last year witnessed increasing costs in line with investments in real estate.

"We sold three-bedroom houses for Sh10.5 million in Ngong View and Kilimani mid this year. Those prices rose to Sh12.5 million in October," he reveals.

Similar increments in cost were witnessed at Kingara Greens (Kilimani), Malberry Apartments (Lavington) and Riverside Drive near Kileleshwa.

"Apartments are in demand in upmarket areas and prices have reached optimum levels. They are not declining," Arum says.

Ireri says loans advanced to investors in real estate increased by 33 per cent last year to Sh13 billion, up from Sh9.8 billion over a similar period in 2008.

Figures from HF indicates interest income last year increased to Sh1.2 billion from Sh932 million during the same period in 2008.

"Customer deposits increased to Sh12 billion up from Sh9 billion in September last year," Ireri says.

Kariuki attributes S&L’s increase in profits to significant growth in interest income, which went up by 92 per cent — to Sh1.29 billion up from Sh673 million in September of 2008.