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Real estate: A need needs to move beyond marketing buzzwords

Marketing buzzwords such as “high-end” and “serene neighborhood” have  been routinely ban- died  about  in the   media  by real estate devel- opers over the past few years. this has been done as part of a deliberate and elaborate plan to justify develop- ers’ sharp focus on  the upper segment of the market.

This inordi- nate focus on  upscale projects has come with a negative side effect that is becoming increasingly harder to sweep under the rug—land prices have gone through the roof and are presently at unsustainable levels, especially in Nairobi. the cost of land has more than quadrupled  in  some  locations  in  the city. A Hass Consult report from January this year shows that acreage prices in the city have risen five-fold in less than a decade to an average of $1.73 million (sh173 million). the same trend has been replicated across other markets in the country, leading to an overall increase in land and house prices in Kenya

At these high prices, there is very limited scope for upward movement in prices. this basically means that nobody is going to buy at current prices, as the possibility of reselling at a higher price in order to lock in  a profit is diminishing. Consequently, demand for housing units and land has cooled off.

Naturally, prices are now lev- eling off and signs of an imminent market correction are nigh—prices could drop significantly and abrupt- ly, introducing market volatility. this volatility could have been avoided if real estate developers were not car- ried away by buzzwords and instead focused on the real needs of the market. early warning signs of a mar-  ket correction in Kenya’s  real estate market emerged as early    as

2014, when Nation business editor Wallace Kantai observed in a pro- phetic Op-ed that:“there is no doubt in my mind whatsoever that the Kenyan  —  and  especially  Nairobi

— property market is  caught  in  the throes of a seriously overvalued market.|

One could have argued at the time that this was just another extreme opinion from a business journalist. time has, however, prov- en Wallace and other analysts who made a similar call right. Concrete data corroborating the position that the Kenyan real estate market could be headed for a correction has now emerged.

real estate is  now  the  great-  est driver of non-performing loans (NpLs) in the banking sector, according   to   a   recently  released


first quarter industry report by the Central bank of Kenya (CbK). “real estate sector recorded the highest increase in NpLs over the quarter by sh5.9 billion or 42.3 per cent. this is attributable to  slow  uptake of housing units,” the CbK report added. bad loans in real estate stood at sh19.7 billion in the first quarter of the year compared with sh13.2 billion a year earlier.

the slowdown in real estate sales means that many developers are facing an uphill task offloading their properties and consequently paying off their construction loans, explaining why bad loans from the real estate sector have spiraled out of control.

A spot check along some of the residential locations that are fre- quently  upsold  as “up  and coming leafy suburbs”, despite lacking even the most basic of amenities, indicates that sales have considerably slowed down. this is evidenced by the vis- ibly great number of unoccupied houses and unsold units.

In the commercial segment, uptake has slowed down as well, especially in mall tenancy. britam Asset managers chief executive, Kenneth Kaniu, told investors at the east Africa property Investment summit in April this year that “after two rivers mall, expected to open by the end  of  this  year, no  fur- ther retail space will be required in Nairobi as there will be oversupply.” this view is also shared by Global realtor Knight Frank, which noted in a report released earlier in the  year  that  Kenya’s  formal retail

space declined by close to half

in the second half of 2015 compared with the first. “Absorption of formal retail space declined by 45 per cent compared to the first half, largely because major retailers had already secured space in the upcom- ing developments,” the Knight Frank report read.


Misinterpreting trends

the key reason for the  current  lull in the real estate market is that many developers have read too much into the middle class phenomena. everyone is developing high end property “on the back of strong demand from the emerging middle class.” Nobody, however, is taking the time to understand, first, how big this middle class is and, second, the exact income levels of this supposed- ly lucrative market.

the result is that the prices  in the real estate market are complete- ly out of line with the real income levels of the vast majority of poten- tial customers. prices of property in some locations of Nairobi are now comparable with property prices in premium real estate markets such as London, despite the vast chasm between the two cities in terms of standards of living, income levels and basic infrastructure.

three-bedroom apartments in Nairobi with no amenities or physi- cal and social infrastructure to write home about are selling at prices in excess of sh25 million. this is puzzling as sh25 million falls with- in the price range of some decent properties in choice markets such as London. this boldly underscores the fact that prices in Kenya are no lon- ger driven by market fundamentals, but generous doses of greed, unreal- istic hope and crafty marketing.

the reality is that the middle class in Kenya is still too small to support the kind of robust activity we are seeing in the higher end of the property market. the vast majority of Kenyans who fall  under

a principal operations officer at International Finance Corporation (IFC), and Dean Cira, lead urban specialist at World bank, Nairobi. “most urban households can only afford to spend sh7400 per month on housing,” the two add.

the low mortgage rate means that most real estate deals are on cash basis, making one to wonder where the cash comes from consid- ering these deals sometimes run into hundreds of millions of shillings. this, however, is another discussion altogether that we will avoid as it is not the focus of this analysis.

this analysis seeks to demon- strate that the high end develop- ments that have characterized Kenya’s real estate market in the past five years have not been in line with the market’s needs. the supply gut in the market proves this, as does the rising number of bad loans in the real estate sector, which demonstrate that  developers  have  been unable


to offload their properties to the market, possibly because of poor product-market  fit.


Customer is starting point

the customer is always the  start- ing point of any successful busi- ness, and real estate is no exception. Developers have to be attentive to the real needs and not the mus-  ings of the market. Granted, every- one would love to live in a swanky neighborhood with a big lawn and nice neighbors, but how many can afford? What people need is afford- ability.

there are two aspects to demand—desire of product and ability to pay for the products. most developers have focused overwhelm- ingly on desire and given very lit- tle thought to the more important dimension of demand—affordability. If they looked at affordability, then they would take steps to plug the vast supply gap in the lower end of the real estate market. there is a shortfall of around 150,000 to 200,000 houses in Kenya, and the growing problem of urban slums suffices as the best  proof  of  this. At present, 60 per cent of people in Nairobi live in informal settlements

due to unaffordable decent homes.

Developers should now focus on affordable homes en masse in order to increase the volume of units in the sector and introduce economies of scale, which will ensure that con- structions costs are low and conse- quently market prices are within the reach of the majority.

Fortunately, some developers have already smelt the coffee and are turning towards the lower end of the market. A recent study by Dyer & blair Investment bank and realtors, managers mentor management Ltd (mmL), indicates that the  number of lower cost apartments coming into the market is expected to rise threefold  to  about  5,000  this year

compared to 1,700 units in 2015. even the government has thrown

its weight behind the lower end of the market by providing incentives for increased activity in the lower end of the real estate market. the treasury recently announced plans to spur the building of low-cost houses by setting up a multi-bil- lion shilling housing fund for cheap sacco mortgages, offering tax breaks for developers and eliminating levies paid to state agencies.

“We are working with our development partners to put in place a  mortgage  liquidity  facili-  ty which will provide long term funding to financial institutions, including saccos, to enable them provide longer tenure mortgages to the public,” said treasury Cabinet secretary mr. Henry rotich while reading his 2016/17 budget speech at parliament.

Government support for the  real estate sector needs to be more profound. the state  needs   to

be involved both directly and indirectly. Directly through mea- sures such as the one proposed by treasury to establish a fund, and indirectly through the passing of favorable legislation and provision of basic infrastructure and social ame- nities such as schools and hospitals, which are prerequisites for home development.


Balanced land use

planning is also of importance in  the real estate sector, and this is one area where only the government can offer support. One simply  has to look at Kiambu to appreciate  that uncontrolled development of real estate can erode  gains  made  in other equally important sectors such as agriculture. Kiambu’s profile as an agricultural town has since diminished substantially as property development continues to take the place of farms.

more than just focusing on the needs of customers, real estate devel- opers need to consult with other stakeholders in order to understand the needs of the broader economy. Kenya needs balanced land use in order to achieve more sustainable growth. this is a point that Kosta Kioleoglou from Africa plantation Capital  (ApC)  has  raised severally  added Kioleoglou.

“We see great potential in Kenya, and indeed the entire continent    of on this magazine, including high- lighting the fact that a focus on agri- cultural land use could bring greater economic dividends for the country.

ApC   is   extensively    involved in bamboo farming as an alterna- tive and lucrative use of land away from housing development,  which is proving unsustainable under the prevailing market conditions. “We think that bamboo deserves its description as the ‘miracle plant’,” said Kioleoglou. “We’ve spent years researching and testing the species in order to prove its commercial viabil- ity on a scale that we are looking at, and the results have been excellent “We see great potential in Kenya, and indeed the entire continent    of Africa and it’s an exciting  pros-  pect for us to help in the develop- ment of the bamboo industry,” added Kioleoglou, who recently witnessed the signing of an mOU between  ApC and Kenya Forestry research Institute   (KeFrI).

Kenyan real estate developers need to move away from marketing buzzwords such as “emerging mid- dle class” and focus on real market needs such as home affordability and more importantly finding a strategic fit with the broader economy, even if it means shifting land use away from property development to key sectors such as agriculture.