Bubble, what bubble? How Chinese firms are turning profit
By Macharia Kamau and Winnie Makena | March 12th 2020
Kenya’s real estate market is in turmoil as developers grapple with empty buildings owing to a combination of factors, including a glut in residential and commercial houses as well as reduced buying power among Kenyans. But a few players are emerging as outliers, projecting a bullish image during the dire times.
Chinese developers are among those that appear to be defying the trend in Kenya’s property market. While they too talk of sluggish uptake, their degree of optimism is way higher than their local counterparts.
Among them is Erdemann Property, which has been developing what it terms affordable houses, the bulk of them in Athi River, in the process attracting major interest from buyers that many developers have neglected.
Aviation Industry Corporation of China (AVIC International) is on the verge of completing a Sh40 billion Global Trade Centre (GTC) in Westlands, which has had to fight off myriad challenges including court orders to stop construction.
The firm faced claims of lack of regulatory approvals as well as concerns by its neighbours on the impact of construction activities on their businesses.
Another Chinese firm – China State Construction Engineering – has already delivered 228 houses in the first phase of over 1,300 government-sponsored units in Nairobi’s Ngara estate this year.
Although not commercial as with the other two firms, the firm has been able to deliver on time, within budget, enabling government to offload them at affordable rates to Kenyans.
Erdemann said it had found a sweet spot developing and selling modest houses to Kenyans, a market segment that appears to have been neglected by Kenya’s real estate industry.
The firm sells a three-bedroom apartment at about Sh3.5 million.
Edermann Property Head of Planning John Rajwayi said while the firm has been hit by the challenges that the industry is experiencing, it has been able to keep selling apartments largely due to focus on affordable housing.
“The uptake is not as fast as it used to be. Demand is still there but disposable income is no longer at the levels it was and this has seen all of us in the property sector struggle to a certain degree,” he said.
The firm in February had a cash offer, selling three bedroom units for Sh3 million while in the past it has had a Sh2.7 million offer for a two-bedroom apartment.
During the February offer period, Home & Away visited Edermann’s office at Finance House on Loita Street and found throngs of customers looking for a bargain.
Individuals who invested in the earlier phases and later chose to offload the apartments have sold at between Sh4 million and Sh5 million. This is below what other developers bring to the market and still manage to make a profit from their investments.
Erdemann’s case might mirror the State’s project of affordable housing at Ngara. Units within the project are going for Sh3.5 million (three-bedroom apartment) and Sh2 million for a two-bedroom apartment.
On March 3, the Ministry of Housing invited Kenyans to go and view the units. The response was so overwhelming that the government had to set up a registration desk to coordinate the visits.
Even then, the ministry closed the registration three days later with the interested buyers viewing the houses on Fridays.
The cost of units at the two projects vary with other developers that appear to target similar clientele, but whose prices are double.
HF Group, for example, is selling a three-bedroom unit at Komarock Heights off Kangundo Road at Sh6.8 million.
The huge interest demonstrates that while developers have focused on high-end homes, there is huge demand for affordably priced houses.
A recent Hass Property Index demonstrates how nearly all players are struggling.
But it also shows the focus by most players largely been targeted as wealthy individuals, with the average price for a one to three-bedroom residential property pegged at Sh14.4 million.
The average price for a four to six-bedroom residential property was Sh39.1 million.
Property consultant Linda Mokeira says innovation also plays a part in enabling Chinese developers to stay ahead in the market.
“Chinese firms have changed the real estate landscape in Kenya because they have embraced innovation and what I can call maximum exploitation of resources,” she told Home & Away.
“They not only use affordable technology but they look at the most efficient technology to deliver desired results.”
She says the Chinese firms can put up 100 mixed units on an acre of land while local developers usually do a maximum of 36 units. This lowers their cost per unit, making it easier for them to penetrate the market faster.
“Traditionally, a three-bedroom apartment in Lavington would cost up to Sh20 million but today with Sh13 million, one can get a three-bedroom apartment at the same location,” said Ms Mokeira.
Affordably priced units appear to come through for developers that bet on this market segment while others grapple with units that they cannot sell. When they do, they have to take a hair cut.
“We build modest houses and because we can do a big number of houses at a go, we are able to take advantage of the economies of scale and keep our costs down. We also try not to make so much profit from one house but make little while looking at the volumes,” said Mr Rajwayi.
According to real estate firm HassConsult in its 2019 third quarter report, there is high demand for low middle-income housing in far-flung Nairobi’s metropolis “as tenants opt for cheaper units in the wake of the prevailing high cost of living and uncertainty in the economic environment”.
The commercial property segment has not been spared by the bleeding in the sector. Many buildings put up in the recent past have been struggling to attract tenants. But there too, the Chinese firms appear to be ahead.
It could be premature to term AVIC’s Global Trade Centre in Westlands a success until it can fill up the massive space, even going by the current trends.
To its credit, however, the developer has been able to get JW Marriot, the international hotel brand, to operate at the complex once it is completed. The complex also has a 143 metre tower, executive residential suites and a shopping mall.
While he refrains from commenting on whether other developers have outpriced themselves, Rajwayi says they benefit from reducing bureaucracy and construction time.
“Ordinarily we try and complete a project – which has between 600 and 700 houses – within one year. You note that costs tend to escalate when there are long decision making processes and other factors that may slow down a project,” he said.
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