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How speculation and illegal money have heated up property prices

REAL ESTATE
By Peter Theuri | September 23rd 2021
Land for sale sign [Courtesy]

When the first excavator chugged into Kenol town in Murang’a County to start the upgrading of the Kenol-Marwa highway into a dual carriageway, land speculators dusted their calculators and punched in all the numbers they could think of.

An acre of land that was going for well under Sh20 million was advertised for sale at Sh40 million, an instant 100 per cent increase in price. For sellers, manna was about to fall from heaven.

But they may be wrong.

Real estate experts say the road might not lead to huge economic benefits to the region as many may want to think.

If anything, the road does not empty traffic into any of the towns it touches, it only passes by them.

All around the country, investors remain stuck with property that they acquired years ago hoping to sell at a substantial profit in the future. They are ready to sell, but there are no buyers.

Land valuer and real estate expert Mwenda Makathimo says these are the effects of an inevitable price correction.

“The market is correcting itself and there is still more to come,” he says.

The Covid-19 pandemic is leveling the ground that has been abnormal for years in an unprecedented way.

Dr Makathimo, the executive director of the Land Development and Governance Institute, says property is overpriced and what one could expect in a normal, fair market is not what is offered.

The first cause of overpricing is the lack of evenly serviced properties; that is, properties that are in areas where basic amenities are provided.

“There have been, for way too long, too many people chasing too few properties that have been serviced,” says Makathimo.

“The shortage, which dramatically increased demand, drove prices abnormally high in comparison to places where there is good planning and where the servicing is uniform.”

The high prices have seen people in Nairobi scrambling for property in areas considered cheaper, such as Kitengela and Ruiru, which are just outside the city.

“The prices went so high that they exceeded the normal (purchasing) ability of a majority of the people,” the land expert says. “People even stopped thinking of owning such property.”

Often, money invested into buying such overpriced property is not from “normal” economic activities but sometimes from crime or from a windfall.

Makathimo says money from corruption has been one of the main reasons driving up property prices.

When such money is invested in land, the investor does not feel any obligation to be rational; there is no one demanding accountability, and therefore they can buy at exaggerated prices.

“People involved in illegal activities that generate a lot of money can lump as much as they can in the property markets without a care in the world,” he says.

For many, it is a conduit for legitimisation of illicit business, such as sale of drugs. These people suddenly morph from mysterious businesspeople and into shrewd, affluent real estate investors.

Also, Makathimo says, money coming in through refugees and getting pumped into real estate has caused an increase in prices.

“But lately we have seen stringent control and regulation of money coming into the country and some of the countries that were (in turmoil) have also been stabilising.”

Kenyans in the diaspora who always invest in real estate back home have also had a hand in the spike.

“But the pandemic has gripped the entire globe and the economies out there are suffering as well, so the money they pumped into real estate has reduced,” Makathimo says.

As incomes locally were whittled down by the unforgiving Covid-19, with companies laying off staff and profit margins shrinking, there have not been serious bidders for real estate.

As a result, the market has been correcting.

“You see, normal economic activities could not support these kinds of prices. Reality is dawning as every other irregular conduit through which money was channeled into real estate gets shut,” Makathimo says.

Land owners who stuck with their land hoping to see prices soar so they could make a killing are now desperate to sell.

Hussein Hussein, a real estate enthusiast, has been seeking to dispose of his 10-acre land on the outskirts of Nairobi for well over five years now.

Every time he thinks he may be forced to reduce the price to well below market rate, he shudders. He expected that there would be a recovery after the 2017 general election, but it is yet to happen.

Ravages of coronavirus

And then came the blow from the pandemic.

“It has been difficult finding someone interested in buying land,” he says. “I have had to revise the asking price down, time and again.”

He is desperate for a sale, but it is a buyer’s market. People have property to sell but there are no takers as economic challenges have led to a lull in activity.

Mercy Koros, a property agent in Nyeri, says the last year has been challenging for business.

Many people are focusing on their health and basic needs, and have shunned investment in land.

“Land nearest the town has been most affected for two reasons: one, a lot of people suddenly decided to buy and build in their village with the uncertainties brought about by the pandemic,” Ms Koros says.

“The other reason is that land near the town is always more expensive, it was the first to go out of buyers’ reach.”

Those who have made the rare sale have had to battle buyers who are haggling aggressively and have eventually let go of the land for a value under the market rate.

“Someone who had bought half an acre of land in Chania, Nyeri for Sh14 million intended to sell it at the market rate of Sh32 million,” says Koros.

“ They could not find buyers at that rate and ended up selling at Sh24 million.”

Land under auction has been moving, though. ?

But how do property owners determine the prices they should sell at?

“First, markets are time-specific and cannot be the same every year,” says Makathimo.

One can project using the rate of economic growth and add a little margin to reach a profitable sale. Unforeseen circumstances, positive or negative, will change the estimate in a significant manner.

“The property market is dependent on local market forces, it is not national,” says the valuer. 

“Studying an index that shows the trend in the performance of the property market for a number of years is a good way to help in projecting the price, assuming that all other factors remain constant.”

In the worst-case scenario, a property owner should seek to sell at a price not lower than they bought at. 

“In the best-case scenario, a seller finds the markets bullish and makes very high returns,” Makathimo says.

While the local markets define prices, the Kenol land owners may be falling over themselves too early.

As people outcompete each other to develop their property to attract buyers, they should also be conscious of diminishing returns.

The buyers have competing needs, which, due to opportunity cost, may relegate posh housing or acquisition of land to the lower tiers.

And as speculators run roughshod over the market, those who succumb to peer pressure and buy land for prestige or to make a killing like their friends will continue to bear the brunt of an unforgiving jungle where every opportunity is pounced upon by those with the nous to tweak the markets for selfish gain, Makathimo says.

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