Is Kenya’s property bubble about to burst?

By Morris Kiruga and Mark Anderson in Nairobi
Posted on Friday, 9 March 2018 09:33

At first glance, Kenya’s property boom looks to be in full swing. Hanging over the gigantic Kiambu Mall – one of the newest commercial properties in the Nairobi area – a huge billboard trumpets the shops that have leased space. The anchor tenant of the mall is Choppies, a Botswana-based supermarket chain that has been making inroads in Kenya. Also committed to the mall, which was built at a cost of $8m, are Kenyan fast-food restaurants Pizza Planet and Java House.

Today, many areas in Nairobi look like giant construction sites, with cranes towering over the skyline. The city is a major driver of Kenya’s real-estate sector, which has been growing steadily since the start of the century. Real estate comprised 13.8% of the country’s gross domestic product in 2016, up from 10.5% in 2000, according to Kenya’s National Bureau of Statistics. Over the past decade alone, property prices in Kenya have grown five-fold, according to HassConsult, a realtor based in the country. It is not just malls that are sprouting up around the capital, but apartments, detached and semi-detached units, and bars and restaurants as well.

But now, questions are being asked about whether it’s all been too much, too quickly. Empty housing blocks and office spaces are a common sight. According to property services company Broll Kenya, there are occupancy rates as low as 60% in some buildings in Upper Hill and Westlands. An oversaturation of malls is also causing concerns. In the past seven years, nearly 50 malls have been built in Nairobi, with 19 more under construction.

The sector is showing signs of distress as new entrants find it harder to attract tenants. “I think the market is in retreat,” says Aly-Khan Satchu, a financial analyst based in Nairobi. “The question is: will it be a headlong retreat? So far, I don’t think that’s the case.”

Sky high… rents

The property sector has enjoyed strong growth for over a decade, with some investors, such as Centum – which owns the Two Rivers project – and Tatu City posting a six-fold return. Some foreign investors are betting big on Nairobi’s property sector. Hass Petroleum and White Lotus broke ground in May 2017 on The Pinnacle, a twin-towered, multi-­purpose building that is set to become Africa’s tallest, at a cost of $220m.

But now there are fears that the cost of housing is simply too high for the majority of Nairobians. The rapid growth of prices in Kenya’s property market has made home ownership an unreachable goal for many people. Despite the demand, many new units will remain empty.

In some of Nairobi’s attractive neighbourhoods – such as Kileleshwa, Kilimani and Lavington – demand has reached a plateau. Savvy investors are rolling out more furnished apartments and are using the short-term ­rental website Airbnb to keep them occupied – often by foreigners. While casual observers would see empty apartments as a sign of a stagnating market, others argue that they are a way of people choosing to extend the speculative phase to wait for better prices.

Other experts say that the sector is beginning to stagnate, but the prospects are not too worrying for developers. David Nahinga, chief executive officer of housing company Ujenzibora, tells The Africa Report: “Our market activity is too little, and there is no single player shouldering widespread risk.” Nahinga says it is the banks who are likely to be the most exposed: “The only player in the sector who should talk about a bubble should be the financier or the bank,” he says. “But even for them, funding the built environment can crank up the loan book through revaluation to show the property is worth more than the liability.”

One of the triggers for problems in the real estate sector could well be the country’s controversial interest rate cap, which sets a maximum loan charge at 4% above the central bank rate. Earlier this year, the Housing Finance Group, a listed mortgage lender, issued a profit warning citing “slow property transactions and the interest rates cap”. The cap has made lenders more risk averse.

Spoils of speculation

The next frontier will be afford­able housing for lower tiers of the market. The government has said that approximately 240,000 new housing units are needed every year to meet growing demand. Conservative figures show that only about 50,000 units come onto the market every year, driving up the deficit to more than 2m homes. But even those units are likely to be beyond the reach of many middle-class Kenyans due to the cascading effect of speculation in the market. The World Bank has reported that only about 10.2% of urban households in Kenya could afford the cheapest newly built house in 2015, which was estimated to cost about KSh 1.7m ($17,000).

“Financing construction in Kenya is a costly affair and meeting even half the current demand for housing is a huge task,” says Barrack Obaga, a quantity surveyor and property analyst. According to Obaga, the main driver of property prices has been speculation based on the adage that property will always appreciate. But Satchu is optimistic about a recovery in the sector. “There’s a lot of supply coming on and the market just needs two years of fast growth to get us back to an equilibrium again,” he says.

Affordable housing is one of the pillars of President Uhuru Kenyatta’s five-year development plan, which sets a target of 1m affordable housing units in the next five years. There are already issues that could hamper the success of such an ambitious project. Mortage provider the Housing Finance Company of Kenya, part of the listed Housing Finance Goup, found itself in the limelight after a labour dispute raised questions about insider lending and non-­performing loans.

Another potential problem would be the domino effect of the government boldly entering a sector where it has been a ­peripheral player and not providing sufficient backing to the private sector. It is more likely that credit will flow to the companies that undertake the project, since lending to public projects is often more attractive in risk-prone ecosystems. It would also strain the government’s already ballooning infrastructure budget.

Reports indicate the government’s plan is to provide incentives for developers to build low-cost homes. While the government’s plans so far do not explicitly lay out the cost of a low-cost housing unit, it has already begun offering incentives to developers who innovate for that underserved part of the market. The first tender to build 8,000 houses on a 55-acre plot south of Nairobi was awarded to 35 firms in early January. Private companies will build the homes on government land and the government will provide public amenities. The results of the pilot phase will indicate whether the project can be scaled up.

This article first appeared in the March 2018 print edition of The Africa Report magazine

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