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Analyzing the future of Kenya’s Financial Market

Investors around the world have a common wish. That is to speculate and predict the market future movements in order to realize profits and avoid losses.When the signs of the current market are negative, the anguish for the future becomes more intense. For several months now, everybody is trying to speculate as to what is going to happen during the year 2017. It is not a secret that this is a special year with several important upcoming events locally and internationally that will create a very interesting and possibly volatile environment. Despite the different  opinions, everybody agrees that this year is full of challenges.We are already living the reality of 2017 and since the beginning of the year the news about the economy and the market have not been very positive.

Before we start analyzing the property market it is useful to review the performance of the macroeconomic data and how they affect the microeconomics and the daily life in the country.

Kenya National Bureau of Statistics hereby released the Consumer Price Indices (CPI) and rates of inflation for February, 2017. The  CPI  increased  from   176.93  in January to 179.88 in February 2017. The overall inflation rate stood at 9.04 per cent in February 2017. Inflation has increased the last 3 months by an impressive and scary at the same time  30%  from  6,35%  in    December 2016 to 9.04% in February 2017.The effects of the high rise of inflation is very severe for investors. according to Bloomberg’s article (march 8th 2017 ) “ Kenyan investors are earning negative real returns after inflation quickened to 9.04 percent in February, 42 basis points above the rate for 91-day Treasury bills.” Obviously the same effects will affect all sectors of the economy and every type of investment including Real estate. But we will analyze this later.

But in the grand  scheme,  things  are generally going bad.  The  country’s expected growth is now forecasted to slowdown. according to the International monetary Fund (ImF), Kenya’s Growth Outlook is expect- ed to be around 5.3%, down from 6.1% which was initially forecasted. ImF has also expressed concerns about the banking sector and the Non-Performing Loans (NPLs). according to available reports from the ImF, non-performing loans (NPLs) have increased in recent months and reached  8.8  percent  of  total  gross  loans  in  September. Provisions, currently close to 50 percent of NPLs, have declined since early 2016, with significant differences across banks. Six relatively small banks, accounting for 6.7 percent of the banking system, have NPL ratios of more than 20 percent (based on bank disclosure reports for 2016Q3). The CBK recently adopted an action plan to strengthen banking supervision, including on amL/CFT (anti- money Laundering/Combating the Financing of Terrorism), as well as legal and  regulatory  framework  for banks. The authorities  continue to enhance their financial  cri-  sis readiness with the consolidation of the Kenya Deposit Insurance Corporation (KDIC), and a sufficient level of staffing is needed to ensure its capacity for timely action.

It is a fact that the number of NPLs has been increasing fast. The property market is one of the main sources of NPLs. Creditors from the Real Estate and Household default- ed on loans worth Sh12 billion as of march 2016. This resulted in a spike of nonperforming loans hitting 7.8 per cent of Gross Domestic Product (GDP)  in  the  period  under review from the former 6.8 per cent of GDP same  period  last  year.  according to figures from  the  Central  Bank  of Kenya (CBK), nonperforming loans on trade rose to Sh4 billion while manufacturing sector recorded NPLs worth Sh3 billion. CBK statistics for June 2016 indicate that private sector lending growth slowed down to 7 per cent compared to a growth of 15 per cent in 2015 according to the regulator, non- performing loans (NPLs) increased by 36.04 per cent to Sh147.3 billion in December 2015, with  the  ratio of gross NPLs to gross loans at 6.8 percent in December 2015 from 5.4 per cent in December 2014.

It is obvious that the banking sector has to face several challenges. The future does not look very bright as it seems that banks will cut down lending and finance in order to minimize their exposure. Looking into the Capital market of Kenya and the performance of the stock market, things are terrifying according to a Cma (Capital markets authority) report, the sharp drop in share prices of banking stocks pushed the Nairobi Securities Exchange (NSE) to a seven year low. National Bank and Housing Finance have lost 59 percent and 46 percent respectively of their share value in a year to date, the highest among the listed lenders. Barclays Bank is cur- rently trading 34 percent lower than the same time last year, while KCB has lost 36 per cent. Equity Bank  is down 31 percent, while Co-operative Bank has lost 30 percent of its value in a year. International recognized media, such as Bloomberg have been referring to the NSE’s bad performance stating that Kenyan Stocks, are world’s worst this year, and are set to fall further.

KBa’s latest  House  Price  Index is revealing the reality of a stagnant property market which has increased by 14.91 percent since the first quarter of 2013, the base period for the KBa- HPI. That is accumulated HPI growth of 48    months. Over the same period, inflation rates increased by 25.49 percent, according to the available data from CBK. That is over 10% more than the property prices. Now forecast- ing the future , and considering the fact that inflation is growing fast according to the Kenya National Bureau of Statistics ( February 2017 9,04%) and the wealth report 2017 released from Knight frank show- ing that luxury residential market performance in Kenya is negative by -2.1% ( Nairobi) and the obvious remark that almost all property sec- tors are showing signs of oversupply , create negative expectations for the near future.

Trying to identify a positive sign, I would say that at least there are still nominal price increases on aver- age, even low pace. But unfortunately that is not enough . The reality is that a property market increase that is lower than inflation, lower than fixed deposit account returns is definitely not attracting new investors and buyers. It is actually exactly the same situation as with treasury bills. Kenyan investors are earning negative real returns because of the low performance and the high inflation rate. That is increasing the illiquidity of the market which can lead to crowding out. according to property consultancy Knight Frank, the property market experienced an oversupply for the larger part of  the year with developers’ returns on investment shrinking. During the launch of the Wealth Report 2017 knight frank representative said that they are expecting the number of new buildings to go down during the next few years as the market has an obvious oversupply in most sectors.

The oversupply of prime properties, residential as well as com- mercial properties could eventually become the achilles’ heel of the market. In order to maintain sus- tainability and achieve growth , it is mandatory for the market to be able to have transactions. Building is not a sign of growth or market trend, buying and selling is what keeps the market alive. In a passive market where sales are slowing down, fur- ther construction which will lead to bigger supply might trigger a price depreciation.

The rule of supply and demand is now working against the  mar-  ket dynamics. Despite the existing oversupply there is still plenty of construction going on around the country. The number of unsold prop- erties and those that are available for rent are increasing even faster. The required time to rent or sell residential or commercial proper- ties is increasing too. Off plan sales belong to the history of Kenya and have today been replaced with hopes and expectations. and before some might say “but there is  a  shortfall of 200,000  houses  in the country”, I will say one more time that that    is very correct and the need might even be bigger, but it refers to differ- ent types of properties . affordable housing that will cover the needs of the majority of Kenyans who need a house for their families and not the type of commercial and residential properties that are available in the market.Well for a prop- erty  market  to  keep  growing  and maintain sustainability, it requires one key ingredient, which is money. There are three main sources that can provide money for the property market. Number one is actual avail- able cash in the market. Number two is foreign investment direct or indirect that will provide cash inflows and number three is availability of finance analyzing one at a time, it is obvious that the available cash in Kenya is not  as  much  as  it  used  to be. a lot of money is tied in the stock market which has collapsed and people, companies, chamas etc have had to take losses. more money is engaged in the property market which due to its hard liquidity and the lack of sales is not easily acces- sible. Finally banks have kept a distance from the property market since the start of its growth about 8 years ago. With a limited number of mortgages approved during the same period and a further slowdown in mortgage approvals during the last quarter of 2016 , finance does not seem to be an option for the average Kenyan potential buyer.The increase of the NPLs is one of the main rea- sons that banks will not ease access to finance as they need to control their exposure and minimize risk .

It is obvious that there is one fact that everyone needs to focus on. That is the actual cashflow  of the Kenyan economy. Several factors contributed to the current unpleasant cashflow market condition. according to my opinion, the devaluation of the Kenyan shilling, that no one  likes  to  talk  about,  played a key role to the current situation. From a rate of 83 KES/USD less about two years ago to a rate of 104 KES/USD today the economy  has  to face a 25% extra cost on imports. Kenya’s imports are huge compared to its exports. During 2016, imports costed several billion of KES more than in 2015. CBK expects the current account deficit to widen to over

6% compared to 5.5% in 2016 as the country continues to import more than it exports. That will obviously put more pressure to the country’s macroeconomics and will also affect the daily life of every Kenyan.
a second important factor responsible for the lack of cash in the market is the investment orientation of Kenyans. Over the last few years, people in the country targeted what is called the “easy money”. That is the stock market and the  real estate. Today the stock market as we said has collapsed producing huge losses to those who invested in the Kenyan stock market  the  last years. The real estate market is also an overestimated sector of the economy. Representing almost 10% of the GDP, the property market has engaged large amounts of cash. Due to the fact that there was a turnover and the market was vibrant with a quite  reasonable  balance  of  trade between construction, purchases and sales, things were moving.  Today the market dynamics have changed. The majority of Kenyans directly or indirectly via a chama , a sacco or an investment group have involved themselves in the property market. What we need to realize , is that there are a lot of investors in the real estate market but there are no users. Everybody is building to sell or rent but very few are building to use and nowadays fewer can afford.

The problem is that selling prop- erties today in Kenya is a challenge. There is an old saying which describes the effects of the market today, “Properties buy money and money buys Properties, but proper- ties don’t buy properties.” you need to remember that before you make any decision concerning real estate.

We also need to remember that construction in Kenya requires a  lot of imported materials and that it  creates  jobs  only  for a limited period of time. It means that this sector of the economy is not creating sustainable jobs and is also contributing to the country’s trade balance deficit, increasing the needs for imports which require cash outflows.

So far, I have not mentioned any- thing about elections, Brexit, Trump or any other international development that people like to blame for everything. I am not saying that these do not affect the Kenyan market. What I am saying is that even without considering any of those the market is already under big pressure. Of course considering the effects of the ongoing global changes and developments, Kenya is facing huge challenges. Blaming others is the easy way to make us feel better but unless we realize what is the source of our problems we cannot fix them. The main source of the problems according to my opinion is here in Kenya.

The country requires self-sufficiency, less dependence on foreign aid and more on its own resources. Kenya needs to invest in the future of Kenya. Creating sustainable jobs, focusing in production, manufacturing, agriculture, tourism etc, is the only way. The country needs jobs. The external debt has to stop growing, the trade balance deficit has to change in favor of the exports. Only when there will be a real income producing economy consumption can grow without destroying the country. Kenya’s population is growing fast. Unemployment is sky rocketing. With almost 50% of the popula- tion below 18years old and aver- age life expectancy growing, if there is no immediate action to create sustainable jobs, millions of jobs, ten years from today there will be chaos. Imagine another ten million Kenyans added to the working force of the country. another ten million unemployed Kenyans. The future  is scary. Immediate action is needed today.

So stop worrying about the property prices because if things will not change there will be no market at all. Over the last months, big companies are cutting expenses, shutting down, firing personnel or moving their operations to other countries like Ethiopia. Several banks have gone down, media is struggling to survive, supermarkets are facing huge problems, telecommunication companies seriously challenged. This is not an environment of positive expectations. 2017 might become a hallmark to remember and refer to for many years to come. I believe that Kenyans know better. These elections have to run smoothly and I hope they will despite the results.

Kenya’s future lays in the hands of Kenyans. a change of the mentality for fast and easy money is needed immediately. Kenyans have to look and take advantage of the amazing opportunities of this beautiful coun- try. Invest in agriculture, agroforestry, manufacturing, tourism, blue economy, logistics, quality services, start producing real income for you and the country. Create sustainable jobs, a business environment that will keep Kenyans in this wonderful country. Kenya needs to produce real income because soon will have to start paying back the international loans, bonds and other money that have been borrowed over the last years. It takes more than hopes and wishes to create a good future for this country.

When Kenya will be able to achieve growth based not only on public expenditure but on the real economy, then real estate will start growing again. People will be able to afford, banks will be able to lend and pric- es will be affordable. It is not easy and  it  is  not  going  to  happen  in  a day .But this is the only way to have sustainable prosperity and not temporarily hikes.. This is not the time to panic or get disappointed, this is time to act. Developments are already happening. But remember “you cannot have a rainbow without the Rain”

Kosta Kioleoglou REV Valuer

by Tegova Civil Engineer

MSc / DBM RMD for APC