Kenya:The second CBR increase rings the bell to Kenya’s economy and real estate market.


The Kenyan shilling is following a negative route against most of the foreign currencies. With the exchange rate touching the 102.5 mark to the USD and the 158.84 to the GBP and without even being able to sustain a strong position against the weak and challenged euro, CBK was forced to take more action in order to try and stop the KES from sliding further as well as try to slowdown the fast raising inflation. Kenya’s central bank raised its benchmark Central Bank Rate (CBR) by another 150 basis points to 11.50 percent to anchor inflationary expectations, noting the “elevated risks to the inflation outlook mainly attributed to pressures on the exchange rate over the last few months.”

The one million dollar question for the Kenyan economy is, ‘is that the last CBR increase, is it enough to change the current negative status of the economy or further measures will be required in the near future’.

Kenya’s inflation rate rose to 7.03 percent in June from 6.87 percent in May, mainly due to higher fuel prices,(although the oil prices still remain very low), pass-through effects from the weaker shilling and moderate demand pressure. Kenya’s government targets inflation of 5.0 percent, plus/minus 2.5 percentage points. The current inflation is not very promising.

Kenya’s shilling has been under pressure due to increase of imports and a decrease in exports. Declining revenue from tourism in light of attacks by insurgents against a backdrop of a general rise in the U.S. dollar is not helping matters either. However, the CBK said diaspora remittances remain resilient and intervention by direct sales of foreign exchange had helped dampen volatility but that alone cannot provide currency stability.

The shilling’s depreciation started accelerating in March this year and it has now fallen to levels not seen since 2011 when it fell to 106 to the U.S. dollar, forcing the CBK to raise its rate to a record 18 percent. Last week the shilling continued losing its value against foreign currencies. On Friday June the 10th it traded at 102.48 to the dollar, down more than 10% percent this year.

Analyzing the current situation, the obvious fact is that imported products are becoming more expensive as the KES is sliding pushing final consumer prices to higher levels and shrinking the buying power of the average Kenyan family. Same time, the increase of the CBR will lead to an even higher increase of loan interest rates directly resulting to an immediate decrease of consumption. Consumers who already have loan responsibilities will have to be paying more now for their existing loans, and for those who were thinking to ask for finance, the higher cost and the current fear of interest instability will cause a decrease to the actual loan activity in the country. This will have a direct negative effect to the most vibrating part of the economy, the Real estate market.


Kenya through a very challenging period has been trying to achieve economic growth and better standards of living for its citizens. It takes more than the will of a few in order to achieve such a target.

For some time now, the center of the Kenyan economy has been the Real Estate Market which saw its biggest increase within the last few years, representing today over 10% of the GDP. That increase had at the same time some serious negative effects on the economy. Construction in Kenya requires a lot of imports. Same time the real estate industry of Kenya is not attracting foreign investors. Properties are mainly traded between Kenyans. There is of course a small part of the market that is attracting money from the diaspora but that is not big enough and part of that money would have been invested in Kenya anyway in other sectors of the economy.

The key question now is how is the new CBR increase (if this is going to be the last one) will affect the main sector of the economy, the one that most of Kenyans have trusted their life time savings with, the one that has been giving hope for a better living the last 5 years to all Kenyans, the Real Estate.

I have been writing and debating that macroeconomic factors affect directly the Real estate market and investors should be following up with all the economic facts of the country in order to take proper decisions. Lately, experts have come out of their silence to warn about the high interest rates which are hurting Kenya’s real estate investment. It is obvious that the move by the Central Bank of Kenya (CBK) to increase the cost of credit is likely to affect both developers and buyers of property, especially those in the low-cost housing segment, but not only them. The recent decision to increase the Central Bank Rate (CBR), for the first time in almost four years by three points,(1.5% June +1.5% July) will negatively affect price growth trends. Historically, high lending rates have led to market stagnation and a rise in demand for rental property. A market that has been facing challenges already over the last few years is now facing a grey period coming in the following months.

The real challenge for the Kenyan proprietors is to remain calm and not to panic. A possible further increase of the interest rates and a further decrease in sales could trigger a tsunami of owners who will try to sell ASAP in order to avoid further losses. This is to achieve liquidity as they need to pay loan liabilities and other obligations. It does not take too much time for a domino effect to take place and that will cause a serious damage to the country’s fragile but still promising economy.

The Real estate sector in Kenya was seeking an interest relief over the last few months. If that was to be, it would boost again the market as the market characteristics were looking more and more stagnant. It is also important to mention that we need to understand that any price growth below inflation means losses and not profits. In order to create real capital growth, any investment has to achieve returns that annually produce more than the cost of invested money and inflation. It is also very important to separate and understand the difference between asking prices and real market values.

The asking prices make a small difference to the actual market trend as the most important fact is the real market value which is determined from the actual property transactions. The actual deals that went through and the real prices achieved.

The Kenyan Real estate market is based in rumors and lack of knowledge. Investors need to understand the market rules, they need to know how the game is played in order to have a chance to finish the game without losses.

The big signs stating 85% sold out, and the crazy prices some developers are still asking is not the market out there. The fact that rentals go high is the first sign that the prices are not affordable and people have no choice but to rent, pushing the demand for rentals up. Eventually, that will result in price decrease as most developments are not done for rentals but for sales.

Developers have obligations to banks. The financial exposure becomes bigger as the interest rates go higher and the duration required in order to sale a project. Entrepreneurs have no option but to drop the prices in order to meet the real affordability and adjust to the current market conditions.

Unfortunately, the actual cash affordability in Kenya is very low and with the option of finance becoming more difficult the market challenge is even bigger. The tricky part for such a period is if the developers and the rest of investors have the knowledge, the financial equity and the patience to control the price drop. If not, then we will see the market collapsing in a few months as in several other countries around the world. (Although the cause was different, the result was the same).

I believe that Kenya needs to plan afresh its strategy. Infrastructure is important but so is a sustainable economy growing with tempo. Making secure steps and not rushing while to make circles that lead nowhere. The country needs to focus equally to all the main sectors of the economy. Agriculture has to be the back bone of the economy and needs to be supported as much as possible.

The country needs to invest in manufacturing and that requires it to secure enough energy at reasonable prices. The country’s overall financial performance amongst the global and regional challenges is a big task. This bears a lot of heavy weight for all those who are involved. A strong healthy and sustainable economy is needed to cover the needs of its 45 million people. This will also help in fighting the huge unemployment, maintain a strong and enough currency, keep inflation under control and provide a descent life to all the inhabitants.

It is time to realize that we cannot hide behind our finger. Changes are already happening. The second increase of the CBR, the inflation increase, the unemployment, the soaring external debt, and the continuously sliding of the KES should put everyone under major alert.

By Kosta Kioleoglou  REValuer,(Tegova)
Civil Engineer Msc – DBM
Chief Strategist (CSO) for the East African Region
Director of Engineering – Property Appraisal & Valuations

for Taylor Scott International PTE.