House prices in Nairobi's high-end estates have continued to decline, indicating a market correction as the sector grapples with the oversupply of units and poor cash flow in the economy.
Knight Frank’s Prime Global Cities Index (PGCI) for the year to September shows house prices in Nairobi’s high-end market fell by 5.4 per cent.
The price decline placed Nairobi 43rd amongst 45 cities covered by the index, demonstrating the ongoing pricing correction.
“We haven’t reached the bottom of the cycle yet and we expect to see further reductions in the near-term until the macroeconomic and local situations improve,” Knight Frank Kenya head of agency Anthony Havelock said.
He said one of the major issues in the local real estate sector right now is poor liquidity.
According to the report, the rising number of distressed properties in Nairobi has also affected prime residential values significantly, with lenders intensifying efforts to recover non-performing loans through the sale of collateral.
“Deals are happening but are few and far between, and at discounted rates. It will take time for the economy to rebound considering it’s also not immune to external shocks,” he said.
Data by the Central Bank of Kenya shows the default rate on mortgages increased 41 per cent to Sh38 billion in 2018, signaling widespread distress in the real estate sector resulting in increased property auctions.
Mortgages recorded the highest growth in non-performing loans (NPLs) last year as investors sought to entice homebuyers amid lower yields.
Unpaid mortgages increased by Sh11.2 billion or 41.1 per cent as job losses in the country saw workers who had taken mortgages on the strength of their payslips default.
The value of high-end homes has been declining at varied rates year-on-year successively since the third quarter of 2016.
This is also when the law capping interest rates on commercial loans came into effect, subduing lending to households, the private sector, and potential homebuyers.
Havelock believes the removal of the interest rate cap should see a return of liquidity to the market, which will, in turn, lead to a recovery in the medium term.
This as interest rates drive the property market in a variety of ways including mortgage rates, capital flows, the supply and demand, capital and investors' required rates of return on investment.
The PGCI is a valuation-based index tracking the movement in prime residential prices in local currency across 45 cities worldwide using data from the Knight Frank global research network.
According to the report, the change in prime prices for all 45 cities averaged 1.1 per cent in the year to Q3 2019, dropping from 3.4 per cent in a comparable period last year and 4.2 per cent in 2017, as the slowdown in global luxury residential markets gathered momentum.
