Over the last decade, Kenya has experienced a real estate boom with prices rising rapidly amid high demand from both long-term investors and speculators.
Over the last 8 years between 2007 and 2015, the average price of a 1-3 bedroom apartment has risen from 5.2 million shillings to 13.4 million shillings, translating into a compounded annual growth rate (CAGR) of 14.5 percent.
This has led some participants in the real estate market to wonder whether the rise in property prices is a bubble that is likely to burst in the near future and this is why Cytonn Investments took on to seeking to identify whether there really is a bubble in the Kenyan property market.
A real estate bubble refers to a periodic phenomenon characterized by rapid increase in value and hence prices of property to levels that are unaffordable by the population, which results into lower demand hence prices declining tremendously.
According to Cytonn, real estate bubbles are characterized by;
- Increase in demand for property leading to overvaluation relative to fundamentals that support the pricing of property. This is due to increasing demand that supersedes supply, which eventually leads to a property bubble as the prices rise to levels that are unaffordable by the public;
- Speculation in the real estate market, which increases demand and hence rapid rise in prices, most investors become irrational believing that the high prices being witnessed will continue to prevail in the future. This environment thus creates need of acquiring property immediately for speculation hence increased demand of property;
- Easy access to credit. Most economies that have experienced property bubbles, are characterized by ease of access to credit. Access to credit also leads to excessive credit growth in the market which increases the demand for property leading to prices increasing to unsustainable levels;
- Disruption in the credit market, which leads to an increase in interest rates leading to an increase defaults levels and non-performing loans, which exposes the banking system. This results into reduced credit supply, and hence demand suddenly falls leading to a sharp fall in prices, and hence loss of value for homeowners, speculators and banks, and the bubble is said to have burst.
The company concluded that the Kenyan real estate market is still in its nascent stage and is just being institutionalized. A real estate bubble typically occurs in well-established real estate markets.
The Kenyan market is thus not experiencing a bubble but the normal real estate cycles of rising demand, peaking market, falling market then bottoming out and the rapid price increments witnessed are because the Kenyan real estate market is in the rising phase that is characterized by low supply, high demand leading to an increase prices.
When supply matches the demand, we are likely to experience cooling off of prices and higher vacancies as some sub markets have started showing. Largely the Kenyan real estate market remains a developer’s market.
This post is an excerpt from the Cytonn Report for the month of March 2017.