Kenya Real Estate: Boom, Bubble, Or Bust? Less Than 10% Can Afford A Mortgage

Kenya Real Estate: Boom, Bubble, Or Bust? Less Than 10% Can Afford A Mortgage

A drive through the Westlands in Nairobi provides a bustling introduction to the dynamic real estate market in Kenya.

A chat with some businessmen suggests the need for more commercial property. Others say there are too many malls, but not enough residential properties.

Which properties are in need and which are overbuilt is debated on the streets. What is undisputed is the reality of a real estate boom in the last few years. Whether it is a bubble is an entirely different question.

There are a number of factors that suggest that the boom is no bubble, and it is here to stay.

Shortage of commercial property

Edwin Dande is CEO of investment and real estate firm Cytonn Investments. The company announced a profit of 631 million Kenyan Shillings ($6.2 million US) for its first 15 months of business ending December 2015. It plans to branch out through a franchise model to areas such as Mombasa, Migori, and Nakuru, Dande said at Cytonn’s annual general meeting.

Kenya will be short 3.6 million square feet of office space in 2016 and and 6.1 million in 2017, according to a 2016 report by Cytonn. There’s a particular need for Grade A office space — the best looking buildings with the best construction that are well located, have good access, and are professionally managed — in the Westlands, Parklands and Gigiri Peaks areas.

Kenya continues to grow as a regional hub. A number of global corporations in the private and public sector have established regional or headquarters offices in Nairobi. Indigenous businesses including young Kenyan startups and small- and medium-sized enterprises, also demand more downtown office space to house their young entrepreneurs and professionals.

Bubble advocates stress the near-30 percent annual growth rate in real estate since 2011. Others have reason to be skeptical. But the occupancy rates remain relatively stable (and high) at 90 percent which only speaks to the matching growth in demand. Real estate investors expect the end of 2016 and 2017 to stay the growth course, particularly considering 2015 was a good year despite underperforming initial expectations with the security challenges of 2015.

Demand for residential properties

Residential housing demand has always outpaced supply, particularly in lower- to middle-income segments of the market. The upper echelons of the market are seeing a rising occupancy rates — as high as 90 percent according to some analysts — which is similar to commercial properties but without the same growth in demand. If demand increases match 2014 growth figures, 2016 and 2017 could be telling years for the market.

The reality is that the majority of housing constructed in Kenya in the last five years is unaffordable to the larger Kenyan population. The supply-demand discussion easily gets confusing here because the focus rarely turns to the lower to middle segments of the Kenyan housing market, where the demand is rapidly growing but supply is relatively slow to match.

Conflate the slowing demand in the upper echelon of the residential market with the rather fast growth of development in the the lower and middle-income market and you can see how the shortage of housing can be wrongly attributed to the entire sector. But the movement of cash by local investors suggest that developers are catching on to the misnomer in past analysis.

Nairobi’s satellite towns, as local investors view it, provide the best opportunity for the return to the 2014 numbers in growth and investment. These towns include Athi Rover, Juja, Kangundo Road, and Kiserian. Land is more readily available at a reasonable price with significant portion of the Kenyan population willing to commute if necessary. A local land price index by HassConsult shows that land and property returns are outperforming treasury bills, bonds and stocks. Beyond simple appreciation and inflation, the burgeoning middle class’s growing buying power and housing taste are the multiplier effect on the bottom line returns.

The lion still roams

Many Kenyans worry that a crash may be coming but the boom is real. There is no debt hangover or borrowing binge. Less than 10 percent of Kenyans can reasonably afford a mortgage.

Unlike its American and European counterparts, Kenya could easily digest more debt in its property market. If only 30 percent of Kenyans could access mortgages, the residential boom would be uncontainable.

Commercial office space construction will continue, at least, in the near term. As one local put it, a lion escaped a couple months ago looking for a new home. Residents and business owners are pretty much the same: waiting to pounce on the right opportunity

Kurt Davis Jr. is an investment banker with private equity experience in emerging economies focusing on the natural resources and energy sectors. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at kurt.davis.jr@gmail.com.