Is There a Real Estate Bubble in Kenya?

It is evident that the property market in Nairobi has been burgeoning, with buildings stretching far and beyond. In the recent years, the Nairobi Metropolitan Area has recorded increased development activities, and the same is evident throughout the country.

The Kenyan market was thus, not experiencing a bubble but the normal real estate cycles of rising demand, peaking market, falling market then bottoming out. The rapid price increments witnessed were attributed to the real estate market being in the rising phase that was characterized by low supply and high demand leading to an increase in prices.

This week, we revisit the topic by reviewing the current state of the market.

In the recent years, the Nairobi Metropolitan Area has recorded increased development activities, and the same is evident throughout the country. According to Kenya National Bureau of Statistics (KNBS), the real estate sector grew by 4.8 percent on average from Q1’2019 to Q3’2019, 0.3 percent points higher than the growth rate recorded over the same period in 2018.

In terms of performance, the sector continues to record relatively high returns with the 5-year average coming in at 20.1 percent p.a., compared to traditional assets at 8.7 percent p.a.

Despite this, real estate firms have been reporting decline in residential units’ occupancy rates especially in the high-end market segment, while the commercial office and retail sector have continued to record an oversupply estimated at 5.6 million and 2.8 million SQFT, respectively.

This has resulted in speculation that Kenya’s property market is having a bubble or headed there.

A real estate bubble is defined as a run-up in property prices fueled by demand, speculation, and exuberant spending, bringing the sector to the point of collapse.

It usually starts with an increase in demand for property, in the face of limited supply, which takes a relatively extended period to replenish and increase. Speculators bring in money into the market, further driving up demand.

At some point, the demand decreases or stagnates at the same time supply increases, resulting in a sharp drop in prices, and the bubble bursts.

A housing bubble has been witnessed in mature, first world economies such as Japan, Poland, United States of America, Australia and China.

For the Kenyan market, we believe this is not the case, and this is supported by;

1.Inaccessibility and Unaffordability of Credit – In the Japanese market, at the time of the bubble, there was excessive lending with credit being extended to un-creditworthy individuals as long as one had property to use as collateral.

In Kenya, there are stringent underwriting rules and credit is extended to only creditworthy individuals. Mortgages constitute 1.0 percent of banks loan portfolios, an indication that the current demand for real estate is not driven by access to credit. According to the CBK’s Bank Supervision Annual Report 2018, Kenya has few mortgages –with only 26,504 mortgage loans recorded by December 2018, slightly up from 26,187 recorded in December 2017, out of a population of 47.6 million Kenyans as at 2019.

Additionally, In Poland, the interest rates averaged at approximately 5.8 percent, which was a 2.3 percent points decline from 8.1 percent in 2006, leading to increased mortgage loan uptake with speculators paying as much as 10 percent – 20 percent as deposits and taking up entire phases of off-plan developments.

On the other hand, in the Kenyan market, interest rates on loans have remained relatively high, over the last couple of years averaging at approximately 13.5 percent, with the interest rate cap, and are expected to go even higher following the repeal of the cap in 2019. It is thus high enough to prevent excessive borrowing from financial institutions or individuals to fund speculative purchase of property that may result into unsustainable demand,

2. The Huge Housing Deficit– Unlike in a bubble, where most of the demand is driven by speculators, Kenya has a genuine demand of approximately 2.0 million housing units, and has been growing annually by approximately 200,000 units, according to the National Housing Corporation with majority of the demand mainly in the low and middle-income levels.

Additionally, uptake of housing units remains relatively high at approximately 20.9 percent per annum on average, according to Cytonn Research, whereas, on the other hand, a bubble is characterized by poor property uptake of as low as 0 percent – 10.0 percent,

3. Positive Demographics – Kenya has a relatively high annual population growth rate estimated at 2.2 percent, compared to the global average of 1.2 percent, while the annual urbanization rate has averaged at 4.3 percent over the last five years, compared to the global average of 2.0 percent. In addition, Kenya has also seen exponential middle-class growth, which comprises of people who are able to access financing for real estate acquisition and are able to construct their own homes.

We expect this to enhance demand and thus, a resultant supply aimed at serving the population, thus deepening of the real estate market and enhancing its ability to absorb temporary supply shocks,

4. Availability of Development Class Land – There is availability of development class land in Kenya especially in the satellite towns at relatively affordable prices and in bulk, and this continues to allow for development activities outside the Nairobi CBD, and thus cushion the real estate market from unsustainable demand for property that would otherwise cause the prices to skyrocket,

5. Regulatory Measures – In the Kenyan market, there exists the Capital Gains Tax which pressurizes land owners to release land for development rather than hold on to it, while awaiting its appreciation. Other policy reforms include the adoption of a new valuation method in 2019 by the Nairobi County, which adjusted the land rates to 25.0 percent of the current property value as opposed to the previous unimproved site value based on the 1980 valuation roll. These measures continue to support real estate development and thus, eliminate the chances of the demand for property outdoing supply, and

6. Entry and Expansion of Local Firms and Multinationals – The Kenya commercial office and retail market has continued to record entry and expansion of both local and international firms, resulting in the continued uptake of commercial spaces. Therefore, despite the current oversupply, which has continued to result in marginal decline in rental prices as landlords seek to attract tenants and maintain their occupancy rates, we do not anticipate property prices to drastically drop, as the continued entry and expansion of international retailers and multinationals continue to enhance uptake of commercial space and thus, cushion the sectors.

To read more on this, read this week’s Cytonn Report here