•The construction boom in the country has inadvertently led to an oversupply of homes and office spaces, even as the low-income segment of the market remains unattended to
According to the World Bank, Kenya has a housing deficit of over 2 million units, with nearly 61 per cent of urban households living in slums
Over the past few years, the number of both residential and commercial buildings going up especially in the cities has increased exponentially.
This, as developers compete for a share of occupants in what has now turned into a harsh economic environment, marred by increased job losses and company shutdowns.
The construction boom in the country has inadvertently led to an oversupply of homes and office spaces in the country, even as the low-income segment of the market remains unattended to.
According to the World Bank, Kenya has a housing deficit of over 2 million units, with nearly 61 per cent of urban households living in slums.
This deficit continues to rise due to fundamental constraints on both the demand and supply side, with Kenya’s urbanization rate growing 4.4 per cent, equivalent to 500,00 new city dwellers every year.
While government beat its drums for the affordable housing pillar under the Big Four agenda, the message seems to have fallen on deaf ears, as private developers show no interest in getting on board.
Although the state initially talked of partnering with financial institutions, private developers, manufacturers of building materials and cooperatives to deliver homes faster and reduce the cost of construction by at least 50 per cent, developers are yet to see any initiative taken.
An indicator that the target of developing one million low-cost homes by 2020 may not be achieved in time, as private developers stick to the high and middle-income segments to capitalize on profits.
The aim is to deliver units under the affordable housing programme ranging from Sh800,000 for a bedsitter to Sh3 million for a three-bedroom unit.
“It is very hard for private developers to establish houses going for below a million and make a return meaning it will not be viable,” Karibu Homes founder and MD Ravi Kohil said.
Other local private developers who deem the project as unprofitable have reiterated this.
“Developers are not actually able to build low cost housing because it is expensive as they will be taking on a lot of government’s work including infrastructure development,” Hass Consult research analyst Sakina Hassanali said.
Compromise for gains
2019 proved yet another tough year for real estate developers with yields in both commercial and residential real estate prices dropping.
Although yields from real estate have been on a steady decline throughout the year, house and office prices, especially in Nairobi and satellite towns remain higher than they were in the preceding years.
In an effort to gain new tenants and retain existing ones, a number of investors resorted to offering discounts on rental prices with some even going to the extent of reducing rents for tenants.
“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,” Knight Frank Kenya head of agency Anthony Havelock said.
Some landlords are providing concessions such as longer fit-out periods, partial contributions towards tenant fit-outs, or giving discounted rentals so as to retain existing tenants and attract new ones.
“We thank you for being our valued customer over the period. We have noted a serious business fall months. We, therefore, extend our support to your business by reducing rents,” Sion Realtors said in a notice to tenants.
Despite retail space being at the centre of new real estate developments in the country, mall owners have had to reduce rent prices to stay afloat in the highly competitive market.
The economic downturn also saw an increase in the number of distressed properties, as lenders intensified efforts to recover non-performing loans through the sale of collateral.
Financing for homes
Although there is an oversupply in real estate, investors still seem to be pumping more units into the market, evidenced by the number of buildings under construction, especially in Nairobi.
The real estate bubble is expected to pop soon house prices are expected to decline further as the market continues to correct itself.
“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,” Havelock said.
On the affordable homes front, the High Court suspended the implementation of 1.5 per cent housing levy in May forcing the state to go back to the drawing board to come up with alternative funding for the project.
This gave birth to the formation of the Kenya Mortgage Refinance Company (KMRC), a public-private company that will provide long term funding to financial institutions offering housing loans.
KMRC’s shareholding structure shows that the upcoming lender has received funding from the National Treasury, eight banks, 11 saccos, the International Finance Corporation, Shelter Afrique and KWFT (a microfinance firm).
The World Bank also approved a $250 million (Sh25 billion) International Bank for Reconstruction and Development (IBRD) loan to enhance access to affordable housing finance for Kenyans who are unable to access long-term housing finance.
Other than this, the repeal of the rate cap law which had tightened credit to risky borrowers including homeowners and developers is set to spark a positive impact on the sector moving forward.
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.