Kenya’s Slowing Real Estate Offers Cheap Entry

Kenya’s Slowing Real Estate Offers Cheap Entry

It is a beehive of activity as construction workers and heavy earth-moving equipment assemble brick and mortar for the largest mall in East Africa, slowly taking shape along the eight-lane Thika superhighway.

When complete, the 32-acre Garden City Mall, financed by a U.K.-based private equity firm, will include 50,000-square-meters of retail, 500 homes and a four-acre central park with an outdoor concert arena.

While the last four-to-five years have seen turbulence in developed property markets around the world, Kenya’s situation has remained relatively stable, said Nathan Luesby.

Luesby is managing director of Jenga Web Ltd., an ICT and web development firm focused on the Kenyan property sector. He is a former broker at the London Stock Exchange.

“Kenya’s property market has potential for higher rates of return compared to other jurisdictions. It is also relatively easy for foreign investors to enter Kenya’s real estate sector,” Luesby told AFKInsider.

While property markets in India, Dubai and China have boomed over the last 15 to 20 years, these markets have big bubbles with potential to explode anytime, Luesby said.

What foreign investors seek in Kenya’s property market depends on several factors including their risk profiles and what kind of returns they are looking for.

While industry figures show a slowdown in Kenya’s property prices, this situation offers a good opportunity to get in. However, cost of mortgages is still high – at 18 percent – making most investors hold back on buying decisions.

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“But there is no bubble in the property market here (in Kenya),” Luesby said. “A rapid population increase and a rapidly growing economy are still fueling demand for property against limited supply.”

Although there is a limited supply of houses, prices have remained stagnant in several places. High mortgage costs have hit the middle class — the main drivers of the property market.

Most people opt for rental houses.

In Kenya, most property purchases are cash-based transactions.

Property statistics suggest that for those seeking rental incomes, the best option would be to buy ready-built houses. Investment in rental houses has a return of between 6 percent and 8 percent. This compares with returns in commercial property segment where returns are at 12 percent.

“Demand is still strong in the middle- to high-income segments of the market. There is also a lot of land to be purchased around Ngong, Kitengela, Ongata Rongai, SyoKimau as well as urban areas of Nakuru and Eldoret,” said Samwel Rono, an officer at Legend Valuers Ltd. in an AFKInsider interview. Legend Valuers is a Nairobi-based real estate advisory firm.

Hot and not-so-hot

“The coastal resort town of Mombasa is a no-go zone for many foreign investors due to recent violence involving extremist Muslim youth groups,” Rono said.

In the Parklands area of Nairobi, demand is high and available property is being snapped up by the moneyed Asian community, according to Rono.

At the low-income end of the market, demand is low because so many people are struggling to buy food and lack disposable cash to invest in property.

“In the middle- and high-income end of the property market, demand is still high where mortgage companies can still find those in need of finance to buy a house,” Rono said. “While there is a severe shortage of housing for the low-income segment of the population, high mortgage rates have made matters worse.”

Although some parts of the property market are oversupplied, others are undersupplied, especially the low-income segment.

Developers are discouraged from building low-cost housing because of taxes, expensive land prices and lack of cheap, low-cost technology, said Sakina Hassanali, head of marketing for Hass Consult, in an AFKInsider interview.

Developers are concerned about negative effects of this year’s introduction of value-added tax on building and construction materials. Also raising eyebrows is a move by the Nairobi county government to put a 1.5-percent levy on all new property developments within its borders, pushing up building costs in Kenya’s capital city.

Business permit costs have also increased by up to 60 percent.

There are many taxes affecting property developers. A mortgage relief of 150,000 shillings ($1800) has remained unchanged and is yet to be adjusted.

“High mortgages (rates) have continued to limit uptake of mortgages, having a prolonged impact on house pricing and returns on property as an investment,” said Carol Kariuki, managing director of The Mortgage Company Limited in an interview with AFKInsider. “It is vital to understand that if we continue to step up demand for housing with an underdeveloped mortgage market, the casualty will be Kenya’s property market with possibly an impact as severe as falling prices.”

Developers are pushing for a radical shift to free up long-term funding for mortgages through establishment of a secondary mortgage market. The thinking here is that this is the only way Kenya will see a significant increase in mortgage uptake and home ownership.

At present, lack of credit information means financiers are not willing to touch individuals and small- and medium-sized enterprises.

“While financiers are excited when receiving applications, thereafter the customer is taken through a long protracted process to provide documentation, which is not standardized. The process of getting a mortgage facility is therefore long and protracted. For starters, computerization of titles at the lands office needs to be expedited to facilitate authentic transactions,” said Kariuki.

Financiers use their balance sheets, hold the mortgage in their books and use short-term funding to finance mortgages. Development of a secondary mortgage market will reduce the cost of funding, allowing entry of long-term financiers such as pension funds and insurance companies.

At present, little funding from these institutions is channeled to the real estate sector, apart from purchase of large commercial buildings with a rental yield of between 4 percent and 6 percent per year.

A secondary mortgage market will also allow home owners access to 30-year fixed rate mortgages. This secondary market will also provide liquidity and allow the funding of more mortgages without the restrictions on the financier’s core capital and reserves.