Kenyan property developers are shifting focus to buyers in the diaspora as local buyers face financial constraints following the introduction of interest rate controls that have forced banks to tighten their loan appraisal standards.

According to the Kenya Bankers Association (KBA), average house prices in Kenya increased by 1.58 per cent in the fourth quarter of 2016 compared with 2.2 per cent the previous quarter due to the effects of the new law.

Property consultants said the mortgage market has been hard hit, slowing down the local demand for houses, prompting developers to re-think their target markets with a focus on the millions of dollars worth of remittances from East Africans abroad.

“With the capping of interest rates, banks have tightened up on lending rates and so we have not seen a dramatic rise in the number of mortgages. The real estate sector performed poorly in 2016 compared with 2015, particularly in the commercial sector. This can also be largely attributed to the exodus of the oil industry in the latter part of 2015,” said Ben Woodhams, managing director of the property agent Knight Frank Kenya.

According to data from the Central Bank of Kenya, East African economies received more than $3.5 billion in diaspora remittances in 2015, with the largest amounts being sent to Kenya and Uganda.

Uganda posted the highest growth at 21 per cent, receiving over $1.1 billion, followed by Kenya with an 8.6 per cent increase, pushing its remittances to $1.54 billion.

It is estimated that about three million Kenyans live abroad in countries such as the US, Canada, the UK and UAE, and diaspora remittances constitute one of Kenya’s main sources of foreign exchange, amounting to $1.7 billion in the 12 months to October 2016, up from $1.5 billion in 2015.

However, huge chunks of this money are used for subsistence rather than productive investments, according to property consultants.

Reduced demand

“This is a significant amount of money even though most of it is channelled towards subsistence, health and education. A sizeable chunk ends up in real estate,” said Reginald Okumu, director in charge of commercial service at Ark Consultants Ltd, a Nairobi-based real estate agent.

“On paper, the capping of interest rates has reduced the cost of borrowing. On the other hand, it has made mortgage lending less attractive for financial institutions as they can get better returns investing in government paper,” he added.

According to Mr Okumu, the middle income residential market, which had in 2016 been very active on the supply side, particularly in Nairobi and its environs, in Mombasa and Kisumu, is now likely to witness reduced demand for both rentals and sales due to lay-offs and closures of businesses, reduced lending, relocation of some consular services by diplomatic missions as well as restrictions on issuance and renewals of work permits for expatriates.

According to the Kenyan property agent and consulting firm Re/Max Heritage, the diaspora market has offered an alternative to developers seeking to shore up their revenues and recoup their heavy investments in the sector.

“This is also an avenue of diversifying the market and giving developers a bigger market for their products and services globally,” said Faith Mwaura, the company’s managing director, adding “We want to open up Kenya and East Africa to the world and attract investment into the country.”

The company  has held property and investment expos abroad to reach out to the East African diaspora to give them a safe opportunity to invest back home in real estate and other investment platforms such as insurance, banking  and Saccos.