Elections Effects on the Real Estate Environment in Kenya -Cytonn Report

This week, Cytonn Investments focused on the upcoming general election and the election season and the effect it could have on the performance of the real estate sector in Kenya.

They analyzed key activities that will characterize the election season that included Infrastructural development, Increased expenditure in the economy, Enforcement and passing of new regulations, Constrained performance of other asset classes, and Political uncertainty. 

The company went ahead to correlate the above events to the real estate investment climate stating whether they expected each factor to influence the real estate market positively or negatively and concluded by giving their expectations of the effect the 2017 elections will have on real estate market in Kenya and recommendations for investors to consider.

Infrastructural Development

The election period is characterized by increased construction activity due to rolling out of several CDF and infrastructural projects as incumbent leaders seek re-election by selling a track record to endear themselves to the electorate.

In 2007, for example, the funds allocated by the Kenya Roads Board increased by 49.5 percent compared to 7.3 percent in 2006 while wage employment in the building and construction sector increased by 2.5 percent in 2007 compared to 1.9 percent increase in 2006. These funds are allocated to construction and rehabilitation of roads, bridges, electricity, water and sewer connection. This has a positive effect on the real estate sector in the mid to long-term.

Source: Kenya National Bureau of Statistics

Increased expenditure in the economy

In election periods, typically, an increase in expenditure is witnessed as a result of increased in money supply. This is due to increased spending on social projects and campaigning by election aspirants.

In 2007, Broad Money Supply increased by 20.4 percent compared to a 16.6 percent increase in the previous year, while in year ending 2012, money supply increased by 17.2 percent compared to a 14.1 percent increase in the year ending 2011.

According to Cytonn, increased liquidity is a recipe for increased investment in the real estate sector and hence leads to an increase in property values. This has a positive effect on the real estate sector.

Implementation of favorable policies

The incumbent government is likely to enforce populist regulations that will have a positive impact on economic development. Currently, the country has a huge housing deficit approximated at about 2,000,000 units and it continues to grow close to 200,000 units annually.

This is mainly caused by high development costs, and the fact that most development is done by the private sector who are mainly profit-oriented. The government has already enforced various policies to boost real estate development including (i) scrapping of NEMA and NCA fees, (ii) Tax incentives for mass development, and (iii) Issuance of title deed to streamline land ownership. This will result in lower costs for development and possibly make housing affordable. This will have a positive effect on the real estate sector.

Political Uncertainty

Cytonn Investments stated that investors have a tendency to take a wait and see approach during the election period. This may be attributed to the uncertainty of the transitioning to a new government as well as the possibility of political instability and violence following disputed elections. This is likely to have the following effects;

Low credit advancement- According to KNBS, there was a 4.5 percent growth in the value of bank loans advanced to the building and construction sector in 2007, compared to a 41 percent growth in the preceding period. In 2013, credit advancement grew by 2.3 percent compared to a 36.2 percent growth in 2012. This can be attributed to low credit demand from home-buyers as well as reduced willingness of financial institutions to issue credit as they wait to see the outcome of the elections. While few home-buyers rely on mortgages and bank loans, low credit generally has a negative effect on real estate development and uptake

Slow real estate activity- In 2007, the contribution of real estate to the country’s GDP declined marginally by 0.05 percent from 6.178 percent to 6.175 percent, while in 2012, the same declined by 1.6 percent from 6.2 percent contribution to GDP in 2011 highlighting reduced real estate activity during that period.

This could be attributed to slower uptake due to market uncertainty. According to Hass Consult, the housing market generally experienced a slow down during Q1 2013 as purchasers held off from concluding house moves with townhouses and apartments recording a 1.5 percent and 0.2 percent fall in prices, respectively during that period. Asking rents only increased by 1.9 percent from Q4/2012 compared to 4.4 percent increased recorded the previous quarter. A slow-down in real estate uptake in 2017 will have a negative effect on the performance of the sector.

Constrained performance of other asset classes

In 2016, the equities market recorded poor performance with NASI losing 8.5 percent as a result of decline in large cap stocks. In addition, NASI has lost 5.8 percent YTD.

Cytonn states that the market is likely to remain flat or decline in 2017. Real estate will thus be positioned as a safe and stable haven for investors through stable yields and prospects of long-term capital appreciation and a hedge against interest rate and inflation risk, which in turn will have a positive effect on real estate

Related: Real Estate Sector Emerges as Best Performing Asset Class in 2016