Why this is the best time to invest in real estate - Evewoman
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Why this is the best time to invest in real estate

It is a beehive of activity as heavy earthmovers and a group of builders assemble brick and mortar for a lavish property development taking shape on an expansive piece of land situated on the eight-lane Thika superhighway.

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When completed, 32-acre Garden City, financed by a UK-based private equity firm, will comprise a 50,000-square metre retail mall (expected to be the largest in East Africa), modern commercial premises, 500 homes and a four-acre central park that will house an outdoor house arena for staging shows and concerts.

“Kenya’s property market has potential for higher rates of return compared to other jurisdictions. It is also relatively easy for foreign investors to enter Kenya’s real estate sector. While the last four to five years has seen turbulence in developed property markets around the world, Kenya’s situation has remained relatively stable,” says Nathan Luesby, the Managing Director of Jenga Web Limited and a former broker at the London Stock Exchange.

While markets such as India, Dubai and China have had a boom over the last 15 to 20 years, these markets have big bubbles with potential to explode anytime.

What a foreign investor seeks in Kenya’s property market depends on several factors, including one’s risk profile and what kind of returns they are looking for.

Industry figures show a slowdown in property prices, a situation experts say offers the best opportunity to get in. However, the cost of mortgages is still high, making many investors hold back their buying decisions.

“But there is no bubble in the property market. A rapid population increase and a rapidly growing economy are still fuelling demand for property, against limited supply,” says Luesby.

Limited supply

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While there is limited supply of houses, prices have remained flat and stagnated in several places. High mortgage has hit the middle-class, the main drivers of the property market. The market has stagnated because many are unable to buy and are instead renting.

In a bubble situation, prices inflate exponentially on the back of no demand. People who borrow to finance purchase of houses panic when the price of the property dips below the cash borrowed to finance its construction. In Kenya, most of the property purchases are cash-based.

Property development is one of the most lucrative businesses, with a rate of return of at least 30 per cent.

For those targeting rental income, the best option would be to purchase ready-made houses. Investment in rental houses has a return of between six and eight per cent. This compares well with returns in commercial property where returns are at 12 per cent.

It all depends on whether one is looking to buy land and construct houses or buy ready-made units.

“Demand is still strong in the middle to high-income segments of the market. There is also a lot of land to be purchased around Ngong, Kitengela, Ongata Rongai, Syokimau as well as urban areas of Nakuru and Eldoret.

The coastal resort town of Mombasa is a no-go zone for many foreign investors due to recent violence involving extremist Muslim youth groups,” says Samwel Rono of Legend Valuers Limited.

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The recent unrest in Mombasa is already affecting property prices in coastal regions, driving away buyers and investors alike.

In areas like Parklands, Nairobi, demand is high.

At the low-income end of the market, demand is low because most of those residing in this segment do not have spare cash to invest in property.

“In the middle and high-income end of the property market, demand is still high, and mortgage companies can still find those in need of finance to buy a house. While there is a severe shortage of housing for the low-income segment of the population, high mortgage rates have made matters worse,” says Rono.

While some parts of the property market are oversupplied, others are undersupplied, especially the lower end.

“Some of the factors that discourage developers from putting low-cost housing include tax, expensive land prices and unavailability of cheap, low-cost technology,” says Sakina Hassanali, the Head of Research and Marketing at Hass Consult.

Developers are concerned about negative effects of this year’s introduction of value added tax on building and construction materials.

Increase in levies

Also raising eyebrows is a move by the Nairobi County Government to slap a 1.5 per cent levy on all new property developments within its borders, pushing up building costs in the capital.

Business permits have also increased by up to 60 per cent. There are many taxes coming through, affecting property developers. A mortgage relief of Sh150,000 has remained at this level for a long time and has yet to be adjusted.

“High (interest rates on) mortgages have continued to limit the uptake of home loans, having a prolonged impact on house prices and returns on property as an investment. It is vital to understand that if we continue to step up demand for housing with an underdeveloped mortgage market, the casualty will be Kenya’s property market with possibly an impact as severe as falling prices,” says Caroline Kariuki, the Managing Director of The Mortgage Company Limited.

Developers are pushing for a radical shift to free up long term funding for mortgages through establishment of a secondary mortgage market. This, proponents say, is the only way the country will see a significant increase in mortgage uptake and home ownership.

At present, lack of credit information means financiers are not willing to lend to individuals and small and medium-sized enterprises.

“While financiers are excited when receiving applications, thereafter the customer is taken through a protracted process to provide documentation, which is not standard and so is the information requested. For starters, computerisation of titles at the Lands office needs to be expedited to facilitate authentic transactions,” says Kariuki.

All financiers use their balance sheets, hold the mortgage in their books and use short-term funding to finance mortgages. Development of a secondary mortgage market will reduce the cost of funding, allowing entry of long term financiers such as pension funds and insurance companies. At present, little funding from these institutions is channelled to the real estate sector, apart from purchase of large commercial buildings with a rental yield of between four and six per cent per year.

A secondary mortgage market will also enable homeowners to access 30-year fixed rate mortgages. It will also provide liquidity and allow the funding of more mortgages without the restrictions on the financier’s core capital and reserves.

Photo: gohrealestate.com


 

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