Landlords,tenants in rental stalemate

Landlords faced with higher financing costs have gradually sought to increase their rents, as would be tenants hold their ground with a lower bid price, leaving lots of houses vacant in Nairobi, writes ALLAN OLINGO

In March 2008, Eddy Mulinge signed his lease contract indicating that his Sh8,500 one bedroom apartment rent in Umoja was to increase by 10 per cent after two years (read 2010) and then yearly after that.

By March this year, he received a notice that his rent starting March would be Sh12,500 for the same house, yet no improvements had been done on the house. He opted to move out. Interestingly, ever since he moved out, the landlord capped the vacant house and three others at Sh12,500. Up to date they have been vacant.

This is the scenario that is playing out in most neighbourhoods with landlords increasing their rents as old tenants move out. A spot check by the Home and Away team reveals that it is now easier to go house hunting as compared to before, because chances are that you will find more houses within the shortest time possible but the catch comes in their asking rental prices. The hardest hit areas serve middle income earners with Ongata Rongai, Dagoretti, Madaraka, Lang’ata and most of the Eastlands’ estates in Nairobi. They are hit by rental increase. In Muimara, next to Imara Daima, a two bedroom apartment goes for about Sh28,000. If the house is standalone expect to cough about Sh35,000. There are plenty of vacant houses and landlords painstakingly watch and wait for tenants that are nowhere to be seen.

soaring costs

To some it might seem like a case of greedy landlords but there is more that underpins this predicament that many Nairobi landlords find themselves in.

According to the Property Price index report released by Hassconsult last week, the asking prices for all rents rose by 2.2 per cent in just 12 weeks, taking the rise over the last year to 7.7 per cent.

“However, that annual increase has been heavily concentrated in the first half of 2012. Since the beginning of January, overall rents have risen by 6.6 per cent,” read the report.

According to Farhana Hassanali, Property Development Director at HassConsult, the rises have been greatest for tenants in apartments, who have seen their rents rise by an average 10.33 per cent since the hikes began to take hold at the end of September last year.

“The rents have risen in the last nine months at ten times the rate they were rising in the two years from September 2009 to September last year,” said Hassanali.

central bank intervention

Hassanali says that they foresee continuing rises in rents, which may take some years to return to stability owing to a possible construction slowdown at a time when the demand remains relatively high.

 “We trust the move by the Central Bank’s Monetary Policy Committee (MPC) to lower the base lending rate will now be followed by further cuts, to restore interest rates in Kenya to a more normal and viable level by global standards and that this will now stimulate a resumption of healthy real estate activity,” said Hassanali.

Real estate consultant Charles Peter Mwangi says the increase in the rents is directly related to the high interest rates capped on mortgages, which most landlords are servicing for their houses.

However, the time that takes and the scale of the resumption of activity, will depend on the timing of the rate cuts. If it takes many more months to see a further cut, we are unlikely to see new real estate developments coming up before mid-next year, for completion by 2015, and will have built in a near two-year hole in building progress.

We urge the MPC to weigh the impact of its decisions on rents for ordinary Kenyans, and on Kenya’s developmental goals of alleviating the country’s housing shortages. In the absence of a rapid correction, we now predict very significant rises in both rents and house prices in coming quarters.

tough choices

Mwangi says that most landlords are still servicing their mortgages and their increasing in asking rent prices is meant to cushion them from the escalated costs of mortgage repayments.

“When most banks upped their interest rates, the landlords, who are key players in the real estate industry were really affected and given that they had leases with their current tenants, most took the advantage of adjusting the lease terms with the incoming new tenants,” offers Mwangi.

What we are witnessing cannot match up to the demands from the landlords. For those who do not have a lease agreement, they are unlucky as their landlords now use this avenue to increase the rents. The result is an exodus of tenants from these houses because most of them also want affordable units.

According to Caroline Kariuki, the Managing Director at The Mortgage Company, a mortgage consultancy firm, many landlords who had ‘bought-to-rent’ have made net losses on their investments in the last nine months.

 “Buying to rent has been a net earner for almost all of the last decade. But for the last three quarters, it moved sharply negative as an investment, overall. However, as rents now rise, and with house prices also now expected to increase as finance rates fall, we expect that gap to close relatively quickly,” says Kariuki.

By the end of last year, interest rates adjustments of the mortgage providers was evident, with Barclays Bank, which initially had its mortgage interests at 11.99 per cent having adjusted it by 2 per cent. Kenya Commercial Bank have adjusted from 13.5 per cent to 15 per cent, with the Commercial Bank of Africa having adjusted their rates from 14 per cent to 17 per cent. Housing Finance has a 14 per cent interest rate. Even new players like Family Bank have their interest rates now pegged at 16 per cent, from a previous 15 per cent.

silver lining

More positively, their is a trend of falling interest rates for mortgages, despite the long running peak in the base rate of 18 per cent, even though it is still higher than what they initially were before the shilling plummeted.

“Even before the CBK rate cut last week, mortgage rates were trending downwards, as the industry got creative and more focused in making home ownership products accessible,” said Kariuki.

There is hope for landlords and tenants alike, mostly because of the array of new products like Standard Chartered’s mortgage takeover offer at 16.9 per cent, non-bank mortgages at 14 per cent, and CFC Stanbic’s new fixed rate offer at 18.5 per cent — though its floating rate, at 24 per cent, is a bit pricey alongside Equity Bank’s 24 per cent  —with average mortgage rates now trending at around 22 per cent.

According to The Mortgage Company’s report, I&M Bank as at June had the lowest mortgage pricing, with a floating rate offer of 18 per cent, while Kenya Commercial Bank had the largest shift downwards, cutting its rate from 24 per cent to 19 per cent during the last quarter.

“We now, however, hope to now see some further rapid adjustment downwards following the cut in the base rate from 18 per cent to 16.5 per cent,” said Ms Kariuki.

This cut would ease the pressure on landlords, which would in turn save the tenants from the high rents dilemma. Despite the high asking prices by landlords, blamed on the high mortgage rates, the future looks positive with the hope that the asking prices will drop.

Well...Only time will tell.