Real estate is victim of bad economy, say developers

Taj Apartments in Kileleshwa which might be demolished as its constructed in the water catchment area. (Beverlyne Musili,Standard)

For a big part of last year, newspaper and web pages were littered with notices of auctions. A quick check with some auctioneers indicates that more than 90 per cent of the auctions had to do with real estate developments.

For instance, of the more than 3,000 items currently listed for public auction on one Kenyan website, 1,688 have to do with real estate – that’s just over 50 per cent.

Adding to this is the fact that the value of building plan approvals reduced drastically in the 10 months to October last year compared to a similar period in 2017.

The worst was October 2018 when the value of approvals dropped by almost 44 per cent from Sh22 billion in October 2017 to Sh9.6 billion.

The message seems to be clear: real estate has run into headwinds. The era when developers would laugh all the way to the bank seems to be ebbing away by the minute.

Players in the industry have attributed the fall to several factors. Some, like the infamous interest rate cap, have hit the market for a little longer.

The effects of others, such as the recent demolition of high-end properties, remain to be seen. Some are of the opinion that demolitions ought to spur growth in the sector rather than suppress it.

“If we hold the view that authorities demolished buildings because the developers did not follow the law, that in itself should make more people follow the right procedure in property registration, unless they are holding land that was not acquired properly,” says Francis Gichuhi, an architect.

However, Mr Gichuhi says what is happening to real estate is a reflection of the performance of the economy as a whole, adding that it is not fair to look at real estate in isolation.

“When the economy fails to generate much income, then there is little money to spend on housing. It should be understood that buying property may not be the priority for an individual who has other pressing needs,” he says.

Illegitimate cash

However, another school of thought opines that illegitimate cash could have found its way into the property market, distorting prices.

This happens when a person or amorphous entity develops structures using ill-gotten wealth without a real desire to make big profits. They may price their property at a double-digit percentage lower than those built using legitimate cash or bank loans.

“Such a scenario may partly explain why some buildings remain vacant for a long time as people opt for cheaper rentals across the street. That leaves the other developer with vacant space and perhaps a bank loan to boot. He thus becomes a good candidate for auction,” says Gichuhi.

Interest rate caps introduced in 2016 have been cited several times as the main culprit in the dwindling real estate fortunes. But players in the sector point to a financial meltdown that not even seasoned economists are willing to talk about. The anomaly includes the disconnect between a growing GDP and market liquidity

Kenya Property Developers Association Chairman Mucai Kunyiha says when the fast-moving consumer goods market lacks enough liquidity, real estate, which thrives on people having disposable income, will slow down.

“Right now, a number of developers have stock that is yet to move. They cannot be expected to start new projects when what they already have hasn’t moved. If you go to the market to sell mangoes and find it flooded, do you call your supplier to bring in more sacks? No, you clear what you have before ordering more. That may explain why there were fewer building approvals last year,” says Mr Kunyiha.

Still, he adds, all is not lost as those who went slow on loans can wait for market correction without panic. He gives the example of Muslim developers and lenders whose financing modes take the Sharia route.

“They can rent out and get some income as they wait for the tide to turn. It also helps having the right product at the right location and at the right price. Those with bank loans can try to restructure the terms with the lender for a refinancing option,” Kunyiha says.

 Sadly, banks may not always refinance defaulters and the only other option is to auction the property. However, putting property on auction still does not guarantee that the lender will get the money back.

“Banks can still hold on to property that hasn’t sold. What will they do with it since they are not in the business of selling property? Unless we address the issue of market liquidity, all sectors of the economy, not just real estate, will suffer,” says Kunyiha.