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Corona crisis may send off-plan housing to its deathbed

By Peter Theuri | April 9th 2020

Off-plan property investment might become one of the biggest casualties of the coronavirus pandemic that has wreaked havoc on economies and crippled activities in the real estate sectors.

And with more people finding themselves holed up indoors, uncertain of what tomorrow will look like, the desire to ditch off-plan investments for completed units has been growing.

The closure of many businesses and the increase in layoffs and pay cuts has grown Kenyans' desire to own their homes so that they are not at the mercy of landlords and employers to keep a roof over their heads.

George King’oriah, who teaches at the University of Nairobi, projected that people will start rushing to secure houses as soon as normalcy returns.

“There will be a scramble for single houses and flats. However, we are likely to experience a cash crunch; there will be restricted demand owing to a lack of money in the economy,” said Prof King’oriah.

Andrew Kamau, an off-plan housing developer, said the off-plan scheme may lose favour to ready units, with smaller developers hit harder by this change.

Under off-plan housing, a developer sells an investor the design to a home before it is built, often at a discount, and in most cases uses the upfront payment to complete construction of the property.

“With this crisis exposing many to the immediate need to own homes, there is a likelihood that investor confidence in off-plan developments will wane,” said Mr Kamau.

He added that investors will shift their focus to ready units as they seek to mitigate against any unforeseen circumstances.

Off-plan developers, especially those with smaller portfolios, may not survive post-Covid-19 due to a dependence on customer deposits.

Cytonn Chief Executive Edwin Dande, however, said the off-plan scheme will only take a hit in the short-term.

He is optimistic that the situation will get better, with off-plan remaining a tenable option to address the housing shortage in the country.

“There is a deficit of two million houses in the country, and it grows at the rate of 200,000 annually. The off-plan investment programme will only weaken for some time, but it will of course recover,” he said.

Mr Dande, however, said the payment plans for the acquisition of off-plan property will have to be restructured owing to people’s reduced purchasing power.

Investors, he noted, will likely have to pay smaller installments for a longer period of time.

The Cytonn boss further observed that the government’s drastic reaction to Covid-19 will help the country overcome the pandemic in a short time, which offers long-term hope for the off-plan scheme surviving the impact of the coronavirus disease.

“This is the greatest tragedy of our lifetime. It is greater than 9/11. But it will come to pass. It took China around three months to go back to near normalcy, and our government has arguably reacted faster,” Dande said, adding that the economy will have taken a hit forcing some readjustments.

“This is like for private schools: when the tragedy passes, parents might not manage to enrol their children in those prestigious, high-cost schools. But that does not mean that the school owners will have to close. Within due time, things will stabilise and parents will afford to pay the school fees.”

There is also the question of whether housing prices will readjust to favour potential buyers who will have been hard hit by the tough economic times.

Wahoro Ndoho, the chief executive of Euclid Capital, an investment consultancy firm, said it is high time property pricing in Nairobi went through a correction.

He believes property in and around the metropolis has always been overvalued. The city’s position as the region’s business hub has led to cost of property constantly rising as more investors make their way into Kenya’s capital.

“The property market is now driven by speculation more than by fundamentals,” said Mr Ndoho.

This leads to a massive price bubble created by a surge in asset prices and driven by exuberant market behaviours.

King’oriah concurs, saying rogue real estate dealers have made properties in the city rise beyond reasonable levels.

Owners’ attitude on the property leads to a ratchet effect, where property remains at the current value despite other factors in the market that should lead to adjustments. The price determination for the most properties is unconventional.

For real property market analysis, King’oriah said most estate agents utilise crude surrogates, such as auction market results, to indicate the equilibrium price - the market price where the quantity of goods supplied is equal to the number of goods demanded.

“The highest bid in an auction is often characterised as the equilibrium price. At times, advertised rental and capital values by estate agents are described as market values,” he said.

“When challenged in courts as to how he (a property owner) arrived at his valuation, he wins by quoting as many examples of rent and sales as possible; and convinces the court that his valuation reflects an 'equilibrium market price',” said King’oriah.

Covid 19 Time Series


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