By Kosta Kioleoglou
The signs of the property market slow down have been increasing month after month for the last two years. A year ago I wrote in the August Issue and the KBA house price indexes as well as market reports from international recognized organizations presented a different reality. That the market’s performance did not look so lucrative or promising. Analyzing the actual figures, I wrote, one could get really worried. I also said that from 2015, the market signs were not looking good as a slow uptake and a rising supply of residential buildings pushed prime rents down followed by further decline as rent for prime residential buildings in Nairobi decreased by 2.9% in the first quarter of the year.
Twelve months later, everyone talks about the property market stagnation. People try to explain how it is possible for the gold mine of Kenya to stop producing profits and start producing losses. It is easy to start blaming the bubble due to different factors such as the interest cap rates or the Brexit or the elections or the high development costs amongst others, but the truth is very simple and obvious. Kenya was not ready for such a price and supply increase.
Speculation and propaganda about the easy way to make money was the only reason for this unbelievable price increase and the local real estate fever because the property market was just a domestically focused market. During the years of the property market boom, the foreign capital invested in the market was minimum. None of the big international players or the small ones touched the burning Kenya market. Anyone with basic understanding of economics and investment knows that the Kenya property market was producing huge returns because it included extremely high risks as it was not sustainable or based on reasonable foundations.
Today it is not a secret anymore that the golden days are gone. Everybody now talks about a market that is shrinking, prices dropping and lack of buyers; an industry that is not creating profits and does not seem to have a great future. The value of building plans approved by the county government of Nairobi dropped by 16% in the first five months of this year compared to the same period in 2016. Total value dropped to Sh105.7 billion from Sh126.3 billion last year, pointing to slowed construction activities this year. A report released recently by the Kenya Bankers Association (KBA) showed that house prices slowed in the second quarter of this year on the back of a dip in economic performance. The Housing Price Index showed that house prices increased by a marginal 0.98%, the lowest increase since the third quarter of last year.
For any investment to produce real profits, it has at least to produce returns bigger than the average inflation. Last year we saw inflation increasing to double-digit numbers while the house price index could barely reach 5%. So it is time to stop dreaming and come back to reality. The property market is not the way to become rich unless you are ready to take the risks.
The biggest problem of the Kenyan market is the oversupply of expensive (in local standards and affordability) properties while there is a huge need for low cost, affordable housing and properties. Real estate has been representing almost 9% of the GDP in the last years. That means that a huge amount of cash has been “invested” in the industry and now is trapped in a market that is not moving. The lack of buyers and the almost non-existent financial facilities create an environment of stress for the millions of Kenyans who are involved in the property market either as direct investors or via investment vehicles such as cooperatives. As long as the market was moving, the money was circulating and everything seemed to be fine creating temporary jobs, theoretical profits and generally a virtual prosperity. Over the last months it is obvious that we are heading towards the opposite scenario. The market is not moving, people are losing their jobs as we have fewer constructions, and the cash is stuck in the real estate or even worse gone outside the country. It is not a secret that in order to build, the majority of the materials required are imported which causes money out flows. At the same time developers and others who made money from the property market either have sent the money outside the country directly or while spending them purchasing imported goods like expensive cars. So today we have walls, unemployment and debts.
The only money that somehow helped the economy was the diaspora money. Huge money influx came to Kenya from all the hard working Kenyans who believed the story of a booming sustainable market and decided to trust their savings to the Kenyan real estate market. The possible upcoming collapse of the property sector will make the Kenya diaspora extremely skeptical to trust the Kenyan opportunities again.
I know that sometimes it may sound very negative. People keep saying even today the same stories – “you cannot go wrong with land,” or “there is a huge house deficit and the market will keep going up,” or “Kenya is not like the rest of the world,” etc…
Well, I know all this, but I am sorry to tell you that you can go wrong with land as well as any other investment. I agree that there is a huge house deficit, but the ones who need the houses have no money and those who have money have more than one already, and finally Kenya is not like the rest of the world. Kenya still depends a lot on foreign aid.
Kenya has done huge steps towards improvement of life standards but there is a long way to go. The Kenyan economy compared to its population and needs is very small. The Gross Domestic Product per capita in Kenya was last recorded at $1143.10 in 2016. The local GDP per Capita is equivalent to 9% of the world’s average. So yes you are very right Kenya is not like the rest of the world.
The biggest challenge of the country today is that the more Kenya borrows money from the World Bank, IMF, US, Europe, and the Chinese more regulations will be implemented. Everyone who gives his money wants to make sure that he will get it back. So unfortunately Kenya is not a good destination for other sources of cash that were supporting the country the last decades. It is known that a lot of the “alternative” money is now heading towards other countries of the region with less regulations and controls.
Do not get me wrong, Kenya becoming a country which is now trying to implement the laws is a good thing and will be great for the future, all I am saying is that those who do not understand what is happening better start to think outside the box and open their minds because Kenya as you knew it is not there anymore. Today any transaction can be monitored merely by pressing a button. KRA today can be much more effective and all those who were used to skipping their tax liabilities will soon have no other option but to pay. The country will need more money soon in order to start paying back all the money borrowed the last years. That means more taxes, more strict policies and, possibly, if things will not change, austerity measures to control the economy.
There is only one way to have hopes for Kenya’s future. That is to stop consuming, realize that hard work is required and that no one is going to give you money for nothing. Kenya needs to start producing and to start investing in the primary production sector. Support foreign investment and stop the existing xenophobia against any foreign project. Kenyans have to unite, create a reasonably stable environment; the feeling of safety and security, become business friendly and attracting foreign investment. Same time Kenyans have to go back to what made Kenya the center of the region. Agriculture was the backbone of the Kenyan economy and has to become the foundation of a great future again. That requires investment in money and human resources, devotion and plan. A well planned and organized agroforestry sector will create real sustainable jobs, decrease imports and cost of food and basic products as well as boost exports and create real earnings for the economy.
Such a blessed country with amazing human resources of all the levels, great soils, good climate and strategically located in the east African region, should be playing a key if not a global role in the food and agroforestry industry instead of importing maize to feed its own people.
Whatever damage is done, is done. The country needs to understand where it has to focus on the next years. Services and primary production should be the key sections of investment the coming years. The real estate will only grow when the GDP per capita and the economy will increase and when people will have money to buy or build the house they need.
The mentality that dominates Kenya societies, the one that everyone has to become rich fast has lead Kenyans to make wrong decisions and bad investments the past years. The elections are over and the country needs to move forward. The challenges are several and the future of the Kenyan economy is not as promising as people thought a few years ago. Now it is time to act, to work harder, cut spending, reduce imports and create jobs, become more self-sufficient and increase exports.
The majority of growth that Kenya showed the last years was based to public expenditure and real estate. Both now are on the downside and other sustainable sectors are required for the economy to move on.
Should you Panic? Definitely not. Everyone who makes an investment has to be able to understand the risks. When you invest you can win or lose. So for now sit back, review your position and make calm reasonable decisions about your portfolio and your next moves. Concerning the property market, a further drop of the prices should be expected especially in the most popular and expensive areas in the big cities and of course Nairobi.
Commercial as well as residential properties in several areas are already oversupplying the market while more and more owners are trying to sell increasing the available properties for sale. Wealthy property owners are increasingly selling their mansions and prime tracks of land in Nairobi. This is a turn of events that points a peak of property values in the city, which is now heading downwards. According to available reports land owners in old high class suburbs such as Muthaiga, Karen and Kilimani are now ready to sell and are advertising their land for sale trying to get as much as possible for their properties before the market turns around and becomes completely stagnant. Prices in several areas have remained stable for almost three years which has caused fear to the owner who are now disposing it to recoup as much as possible on their properties in order to control their possible losses, to minimize the loss of value due to high rate of inflation.
You are going to read a lot of news like this thus the need to consider that everyone has to make his own decisions. Of course you need to monitor the market in order to identify the trend and possible changes. So stay calm, watch closely and carefully the developments, value your position properly and be ready to move forward and make decisions.
Kioleoglou Kosta
Civil Engineer , Msc/DBM
REV Valuer by Tegova
RMD for APC
