Insights into the future of Kenya’s Real Estate sector
The Real Estate market in many cities across the world is facing unprecedented challenges. The prices have risen so high that most of the buyers have been priced out of the market. The sellers have somehow anchored themselves to these irrational prices. The end result is that prices do not seem to be coming down. However, at the same time, there are almost no transactions in the real estate market.
Globally, millennials are getting into the habit of buying houses. With increased incomes and other favorable factors such as low-income rates, older millennials are ready to retire from the renting life, which is resulting in increased demand for homes, in various markets.
With such a trend, it would be obvious that there is a need to build more houses to cater for the demand, but there are certain considerations that need to be met to satisfy the demand while maintaining profitability for investors.
Zeroing in on the Kenyan market, the demand for urban housing was estimated at around 80,000 units a year in 2010, with demand projected to increase to nearly 300,000 units a year by 2050.
The supply in Nairobi was at 15,000 units in 2013, which catered for only 18 percent of the demand.
How can an investor take advantage of the projections for the long-term?
Already the government has embarked on providing housing through the Affordable housing program which targets the low-income earners in major urban nodes as only two percent of formally constructed houses are targeted to the lower-income segments of the market, who accounts for the largest share of demand.
Homeownership in urban areas is affected by the high prices which are out of reach for low-income earners and as such Nairobi is largely a rental driven market.
As an investor, it is advisable to embark into the real estate market only after assessing the trends in the market, housing demands and neighborhood projections. Most people focus on affordability, however emerging trends such as work home proximity and desire to live in an all-encompassing neighborhood also come into play.
The current interest rate cap debate will also have a significant effect on the real estate market in terms of mortgages. If scrapped as recommended by the President in the Finance Bill 2019, banks will be at liberty to adjust the rate caps as per the market forces. This could have a negative or positive impact depending on how the economy performs.
The annual inflation rate in Kenya declined to 3.83 percent in September 2019, from 5.0 percent in the previous month. World Bank Kenya Economic predict that Kenya’s inflation rate is projected to trend around 6 percent in 2020.
Other factors come into play as continued subdued private sector investment could drag down growth in the near-term, leading to fewer jobs and less income which will reduce demand in the real estate sector.
Taking into account the trends in the Kenyan real estate market and the economy as a whole, strategic investment in houses supported by improving infrastructure is a necessity.
As population grows, so does the demand and as such more houses should be built to cater for the potential homeowners. At the same time, mortgage rates should also be affordable. The houses sector should also be inclusive of all income earners catering for medium to low-income earners depending on the investors’ target market.
The sector should also take into consideration the changing preferences of the market, inclusion of shopping centers and wellness areas which are proving to be gaining popularity.
Under the new devolved system of government, housing delivery is the responsibility of the county governments, but the private investor can also opt to cash in on the development of new urban areas by building houses.
Managing the Downside
The problem with engineering a fall in property prices is that there will be casualties. People who have previously borrowed huge sums of money to buy real estate at inflated prices will be negatively impacted. Hence, it is the government’s responsibility to ensure that the property prices do not plummet abruptly.
Instead, the fall must be gradual and should not trigger panic in the investment community.
The real estate is dependent on other forces in the market such the family income, mortgage rates among others, as long the economy remains stable with an upward projection, the real estate market will gain from the growth.
Perhaps it’s time the current government really pushed the supply side accelerator. That would do more to get first-time buyers on to the housing ladder than any subsidy.