Kenya’s Real Estate Performance Under The Microscope

During the 22nd Kenya Homes Expo held at the Kenyatta International Convention Centre (KICC) in Nairobi last month, a strange feeling clouded the atmosphere. There was something missing from this year’s expo in comparison with the last 5 years. For the first time since the Real Estate Market started its amazing course, producing millions of profits, there was a new feeling in the air, a true representation of the current reality of the market. The agony of investors and developers trying to sell and the disappointment of the visitors’ realization that the dream of a house ownership is becoming more and more unreal.

After walking around the expo for a few minutes, visitors came face-to-face with the sad reality of Kenya’s real estate market. Most of the new housing projects coming up are out of reach of millions of Kenyans, including those who are well-paid and in the fabled ‘middle-class.’

The top-end developments costing tens of millions, high interest charges bringing mortgage business to a standstill has created a very complicated environment for all interested parties. Developers are offering options that are completely out of range for this market and without the support of the mortgage industry, it is impossible to sell them.

The recent Kenya Bankers Association Housing Price Index (KBA-HPI) unveiled the hard reality of the market. Average house prices in Kenya increased by 1.26 per cent during the third quarter of 2015 following previous quarter’s 0.2 per cent increase. These numbers are clearly calling the passengers to abort the ship before it is too late. The 1.46 per cent increase of the house price index in 8 months while currency lost over 15% of its value the same period.

Inflation running officially (CBA data) with over 6% already make the real estate sector not the most lucrative to get involved with. If we add to all these the cost of borrowing money  and of course the alternative investment options in the market like the country’s treasury bills that offer over 21% per year, one can understand that the market is about to face a big turbulence.

The one million dollar question that everyone has is simply “and now what?”

Well I keep saying that all markets fluctuate and all investors have to be aware of that fact before rushing to enter in any “crazy” market. Trying to predict what is going to happen in the near future one can easily get confused. Looking back in the recent history around the globe, we will find markets which had periods of amazing real estate price increase and finally collapsed, losing 30 – 40 and sometimes up to 70+% of their value within very few months.

Then again, every market has its own characteristics and it is affected from several macroeconomic factors, but there is a pattern that all the markets around the world are following. This pattern is affected from the traditional rule of gravity. Whatever goes up will come down, that is a rule! That change from market to market is the real strength and sustainability of the market. It is that simple.

Kenya is globally known for its amazing marathon run champions. These people are winning most of the races they participate in, not because they are lucky, but because they have a plan and they are prepared. It takes years of practice, training and sacrifices for one to start competing on a champion’s level. Unfortunately, every race ends up with only one winner. The talent is obviously very relevant but the amount of effort one is putting makes the difference.

In order to keep winning the races, one has to continue giving 100% before, during and after each race. Still there will come a moment when the champion cannot compete anymore as the environment has changed and he/she is not getting any younger. It is up to every champion’s strategy to identify the right moment as when to leave the races while still a winner or to stay longer than he should and be remembered as a loser.

Unfortunately, the real estate market in Kenya seems to be following the same pattern. Investors need to identify their position and exposure to the market. Being prepared for every scenario, positive or negative, is vital in minimizing any possible risk of losing money. Investors must always focus on their initial objective which is to realize profits with the minimum risks. As long as they stay on this course and they do not become greedy, then they should be ready to buy or sell anytime depending on the market conditions.

Currently, there are several warning signs concerning the sustainability of the real estate market. They include facts such as the currency sliding, the growing account balance deficit, the reduction of the expected growth of the country’s GDP, the increasing unemployment, the growing external debt, the huge need for money that forced the government to offer treasury bills with over 21% interest rates, banks going down etc.

The amount of available information and data is very important in order to follow a market. To better guide policymakers and investors on the trends in the housing sector, the banking industry’s umbrella body Kenya Bankers Association (KBA) launched the KBA-HPI in February 2015. The Index has quickly been recognized as a credible analytical tool that is useful for tracking housing sector dynamics and price movements. Published on a quarterly basis by KBA’s research center, the KBA-HPI analyses industry’s housing data based on locational, qualitative and quantitative characteristics that influence pricing.

According to the available data from KBA-HPI, during the fourth Quarter of 2014, house prices increased by 2.18% (overall price change %). The house price change for the first Quarter of 2015 was 2.75%, the Second Quarter of 2015 was 0.2% and during the third Quarter 0f 2015 prices rose by a marginal 1. 26 percent, albeit representing a relatively faster increase compared to the 0.2 percent increase during the second quarter.

On top of that, if we add a negative performance during the 12 months period of 2013(Q3) – 2014 (Q3) by -0.47% we will get a final +5.92% price increase over the last 24 months in the real estate market. In reality this simple analysis shows the fact that real estate market cannot even sustain its value against inflation which during the same period increased in total by over 10% over the 2 years period.

Comparing the above returns over a period of 2 years with other available alternative low risk investment options in the country like fix deposits or treasury bills, one realizes that real estate is not exactly performing as good as he possibly thinks.

According to the Kenya Bankers Association Housing Price Index (KBA-HPI), the observed modest price movement signals the softening of the overall house prices in line with the demand and supply conditions. For a given level of supply of housing units, demand seems to be responding according to both the prevailing and expected overall economic conditions. The economy’s real output growth of 5.5 per cent during the second quarter of 2015 represented a slowdown from a 6 per cent real growth realized during last year’s corresponding quarter and that was reflected to the Real Estate Market too.

Neither do these facts mean Kenya has no future nor disaster is on the horizon. We should otherwise be aware that every time the market is going down, some people are losing everything and others are minimizing their losses. There are those who sell at the right moment and liquidate their investments with profits. The only difference between these three categories is how prepared and how exposed each investor is. Staying up to date with all the related data and news of your investment will make you profits and save you from possible losses.

Within the last few years, globalization has had its own role and markets can be affected from any market turbulence around the world. A terrorist action in France, a war in Syria, an explosion in Lebanon, a financial crisis in Greece, a war in Ukraine, a stock market collapse in China, a currency devaluation in Russia, oil prices fluctuation, an interest rate hike in States (amongst others) can directly affect the market and your lifetime savings.

The property market has traditionally been one of the most favorable around the world. Investing our family’s savings and future in real estate requires a lot of attention and proper knowledge. I always recommend that if you feel you cannot follow up with all the above requirements, either use a professional accredited advisor or skip the investment. Remember opportunities appear every day. We need to identify the one that fulfills our requirements and not rush into any quick high risk decisions.

By  Kosta Kioleoglou
Directοr of Engineering & Valuations
Civil Engineer Msc- MBA
Recognised Expert Property Valuer (Tegova)
Member of ELIE , AVAG, TEGOVA, TEE

KOSTA_KIOLEOGLOU

source :http://www.africanexecutive.com/modules/magazine/articles.php?article=8712&magazine=581