Home » Business Monthly » Real estate: is the property bubble about to burst?

Real estate: is the property bubble about to burst?

This trend has been propelled by the growth of the middle income earners in the country. For the entire growth period, appetite for new
multi-units housing has also been increas
ing immensely leading to approval of resi- dential building plans to climb higher.

The growth of the sector has attracted a horde of developers who have continued to boost investment in residential housing and office space. Despite the fact that financing for property development has for quite some time remained a hurdle in the country, the real estate sector continued to experience a boom with an increased demand in real estate developments.

This significant demand in the sector has in the recent past led to stability that saw an increase in urbanization and formal market expansion turning this sector into one of the star turns in the country.

Further,  the  industry  has generally shown resilience for a long period of time raising the housing demand in the country. This significant demand in the sector has in the recent past led to stability that saw an increase in urbanization for a long period of time raising the housing demand in the country. This flexibility has been attracting many developers in the market

with nairobi being rated as the most pre- ferred investment destination; experienc- ing swift and dramatic growth.

Kenya’s  recent devolution of  power to local authority brought on significant growth in the industry. Developers and investors  started  branching  out  of the capital city into the satellite towns and the suburbs. The expanding consumer base led to the mushrooming of developments in the leafy suburbs in the country which in turn saw the increase in prices of apart- ments in these areas. based on this profit- ability found in high-end properties, many developers began to shift their focus on high-end segments because of the promised profit return.

As a result of demand and investors’ confidence in the entire sector, land prices also hiked immensely in the upper town region. This rapid growth in turn attracted both local and international investors which led to notable development in the real estate and infrastructure sectors. These investments from private equity houses, paved way for inves- tors  to  develop  large, defensible, institutional quality assets.

Increase in buyers’ preference, I  want  to  believe,  is  yet another factor that greatly contributed to the growth of the sector brought about by developers presenting their prospects with more diverse options. According to a report pub

lished early 2016 by oxford busi- ness group, property sales prices increased by 8.3 percent in 2014 while rentals prices on the other hand raised by 9.8 percent.

by type of property, apartment prices grew the most at 13.4 percent and 10.4 percent respectively while semi-detached houses were up  by

9.7 and 10.5 percent.

This profit jump up made the sector the most formalized with many potential businessmen opting to invest their money in office space, residential housing and land.


Market collapse?

Property index has raised concern with experts warning that supply is exceeding demand in the market. The report indicates that in the sec- ond quarter of this year, rental prices have fallen owing to an increase in the number of completed units join- ing the market. It further revealed that home sales prices have been falling since August last year; this as a result of a correction in asking prices.

The rejuvenated achievement of the sector has started showing signs of decline as more buyers are being put off by the high prices. The high supply is against low demand; there is a looming worry that if this trend is not rectified, it will be one of the forces that will actually pull down

the sector.


Increase in land prices

Land in the areas close to the CbD has become unaffordable for many Kenyans; few people can afford land in Kileleshwa today. As a real estate

agent I have only met a select num- ber of property owners who are will- ing to part with Kes 250 million plus

Kenya has a growing middle class that is looking for affordable and secure  housing. With  the current

for an acre of land in these locations. The report painted a picture of a snowball effect in that the increase in the prices of land ultimately resulted in people moving out of rental houses and buying the land itself.

Interestingly, the growing infra- structure and development in these satellite towns has been blamed for the increase in the value of property which has in turn resulted in poor sales.

To paint a more vivid picture of the current scenario; an acre in the city is fetching up to Kes 300 million while in Upper Hill, an acre sells for Kes 500 million.

The present situation can be traced back to the devolved gov- ernment   system   and   its  heavy

investment in infrastructure, which opened up nairobi’s satellite towns to major development especially in the real estate sector while also creating investment opportunities in the counties. The favorable political climate also served to attract both local and foreign investors to these towns, who wanted to capitalise on the opportu- nities for growth and development. These developments and new inter- est in the market eventually saw to the increase in the price of land.

Over Supply

Kenya has a growing middle class that is looking for affordable and secure  housing. With  the current high cost of borrowing and stringent   financial  policies,

this very vast class cannot afford to spend millions on a house.

Interestingly, rental prices in the satellite towns of nairobi went high owing to the growing infrastruc- ture around the areas such as malls and the proposed and continued construction of bypasses connecting them to the CbD.

It is also worth noting that most of the ongoing housing projects tar- get the higher classes with asking prices of about Kes 30 million plus in the leafy suburbs of nairobi.

Thus, it was no surprise that the index report by Hass Consult showed a decline in rental prices for the second quarter of this year as supply exceeded demand in the market. The report further revealed that home sale prices have been fall- ing since August last year; a devel- opment blamed on a correction of asking prices.

With the high rental and land prices and the market offering unaf- fordable homes; the middle class opted to go for the land instead and put up their own homes.

Consequently, a lot of new units were left vacant.

evidently, supply is targeting the wrong group of potential buyers and neglecting the areas where there is real demand. new projects must target the middle class and provide homes that are affordable to the majority of those who have a need.

According to data from the national Housing Corporation, there is a housing deficit of more than 200,000 units per annum for the low- to middle-income market.

Clearly, the demand is there, but for affordable housing.


Cost of borrowing money

Last year the Kenyan shilling felt the pressure of foreign currencies, especially the USD and in June, we saw the rate sliding down to 106 KeS/USD. The CbK tried to control

further losses by increasing the Cbr (Central bank rate) twice in 30 days from 8.5 to 10.5% while pumping millions of USD from the country’s reserves to support the KeS.
This increase  by  almost  30% of the Central bank rate has been viewed as the reason why loans have become more expensive and subse- quently caused people to be more doubtful about applying for one. I believe that high interest rates in Kenya is hurting real estate invest- ment. Interest is a cost to the devel- oper of real estate as it is to the end buyer.

The increase of the commercial banks’ lending rates caused a slow down to the market as it affected both existing and new loans includ- ing mortgages.

Kenya is a fast growing economy with a population exceeding 45 mil- lion people and therefore has a huge need for housing.

The biggest need  for housing is for middle and low income class and this is the reason why affordable housing has the biggest demand.

Therefore although the move by the CbK aimed at bringing relief to the economy, the effect of high inter- est rates locked out potential home owners and real estate developers. Additionally, the current average mortgage loan is at Kes 8.3 million while the average interest rate is at

17.1 percent.

This means that to take up a mortgage loan, you would need to make repayments of about Kes. 122, 000 a month; an amount few Kenyans can afford.

It comes as no surprise then that the real estate sector recorded the highest increase in non-perform- ing loans according to the Central bank of Kenya’s Quarterly econom- ic review, covering the months of January to march 2016. The report revealed that non-performing loans (nPLs) grew by 15.8 percent from Kes. 147.3 billion in December 2015

to Kes. 170.6 billion in march this year. This has been attributed to the slow uptake of housing units. I believe that a drastic change of the country’s financing environment is necessary if only for the sake of the market’s growth.

While the bill seeking to cap interest rates has sparked intense debate on its pros and cons, I feel that it raises a legitimate issue: something must be done to improve both the methodology and trans- parency of loan pricing in Kenya. The bill seeks to cap interest rates at 4 percent higher than the current Cbr at 10.5 percent. As it is now, we are charged up to 24 percent and this simply cannot be allowed to continue. Lower interest rates will mean that more people can afford to purchase homes and consequently, the amount of homes on the market will be reduced.

This will in turn push up the cost. It equally follows that, when interest rates are high, fewer buyers are able to qualify for a loan which increases supply. over supply tends to push prices lower.



The real estate market; like any other market, is subject to trends and risks. Anyone involved in the world of investment knows that all markets fluctuate. making profits and losses is part of it.

What alleviates the level of risk is how prepared we are and how we follow up on the market trend. A panic and radical move based on fear of the unknown is not a good strategy.

Let us practice patience and also constantly follow up on the markets indicators and economic data for guidance on our property investment decisions.

The article has been contributed by: Martin Dias CEO-FAPCL GROUP Email: md@fapcl.com.