Advertisement

Kenya’s rising land prices spark fears of real estate market burst

Saturday October 25 2014
property

Cost of land has made houses expensive to the middle class. PHOTO | FILE | NATION MEDIA GROUP

The rapid rise in land prices has sparked fears that Kenya’s real estate bubble could burst soon, like the sub-prime mortgage crisis of the US seven years ago. Analysts say the property market is distorted by increased speculation and unreasonable pricing that could take it beyond the reach of the middle-income sector.

“The confidence in the market is waning. The middle class that ought to be driving the market can no longer afford the high prices quoted,” said Abdiwahid Biriq, an advocate of the High Court of Kenya.

Mr Biriq attributed the weakening demand partly to the high interest rates charged by banks.

“Land is fast becoming unaffordable for most Kenyans hoping to own a home close to the workplace and public services,” Mr Biriq added.

Average mortgage interest rates are now around 15 per cent. Deputy President William Ruto said on Tuesday last week that a deal had been struck with banks to review the rates to less than 10 per cent. He did not disclose the details of the deal but such pledges have not been fulfilled in the past.

Treasury Secretary Henry Rotich, however, said fears of a property sector collapse in Kenya were exaggerated because most of the financing came from outside the banking sector. The US crisis was sparked by high leverage between different kinds of debt, which left banks with nowhere to turn to when the contagion struck. 

Advertisement

“The real estate sector remains stable and there should be no worry of a bubble,” Mr Rotich, said. Mr Rotich said the number of mortgages was about 20,000 — suggesting that a chunk of the financing comes from other sources other than banks.

“The low mortgage uptake indicates that most of the financing is not sourced from the banking sector, which was the case in the US. The chances of Kenya experiencing a bubble are quite remote,” said Mr Rotich. Savings and credit co-operatives, for example, have been major sources of funding for the property sector, due to the attractive rates offered.

Saccos advance development loans to members at a cost of one per cent per month, which, on a reducing balance basis translates into about eight per cent per annum. This is about half the prevailing mortgage rate in Kenya.

Members borrow Sacco money to build their homes making Saccos big players in commercial space and residential apartments’ construction. These are leased out to generate more revenue for Sacco or sold to release funds for new projects.  

Latest figures from the Sacco Societies Regulatory Authority (Sasra), show Saccos grew their assets by 14.2 per cent last year, thanks to increased membership. Assets of the co-operatives stood at Sh335 billion ($3,.69 million) in December, last year, compared to Sh293 billion ($3.2 million) a year earlier.

According to Sasra chief executive, Carilus Ademba, the growth was mainly funded by member deposits, share capital and retained earnings. New lines of credit facilitated by sector organisations from overseas, chamas (investment groups) and diaspora remittances are other sources of funding for the property market.  

Concerns over the real estate sector’s health follow a finding during the rebasing of the economy that real estate contributes an average 8.2 per cent to the GDP. If turbulence hit the sector, the ramifications for the country’s fragile economy would be severe, mainly in terms of job and revenue losses.

The Kenya National Bureau of Statistics has singled out real estate and ICT (information and communications technology) as the main drivers of economic growth in the foreseeable future. With prices of land increasing by the day, analysts fear it is a question of when, not whether, the market will start correcting itself.  

An undeveloped acre of land in upmarket Upper Hill and Westlands now goes for between Ksh350 million ($4.02m) and Ksh500 million ($5.75m) and Kilimani Ksh300 million ($3.45m). In Kileleshwa, Lavington and Milimani the plots cost between Ksh200 million and Ksh250 million ($2.3m and $2.87m).

Mr Gerald Taylor of Willmary Development Company said the rising value of land posed the biggest challenge to stability in the sector.

“The cost of construction materials is not a headache for developers, the rising value of land is the greatest challenge,’’ he added.

Those concerned want the government to come up with a policy that will protect investors from worsening negative equity. Equity refers to the ratio between the income from rent over a certain period and the amount required to service the mortgage. The higher the ratio, the better for an investor because it means less top up is needed to service a mortgage.

Kenneth Kaniu, chief investment officer at Stanlib Kenya, said Kenya’s property sector was still stable despite buyers having to look elsewhere for funds to service mortgages.

“In Kenya, unlike the US, it  is not a situation where we are chasing excess credit and we start experiencing problems when it dries up,” said Mr Kaniu.

Mr Kaniu said property prices especially in urban areas have remained high because of scarcity of land suitable for development.
“So long as the demand for land remains high, the cost of properties will remain relatively high,” he added.

However, recent surveys conducted by Stanlib Kenya and Goldman Forbes Holding show demand for high-end properties in Nairobi suburbs like Gigiri, Karen, Kileleshwa and Lavington among others.

“Demand for high-end residential buildings has begun to weaken in several parts of the city. The trend may be as a result of insecurity and other factors relating to cost of living,” said Mr Kaniu.

In contrast, demand for properties targeting middle income and low-income categories is far from being met.

Advertisement