High interest rates impacted market liquidity negatively affecting demand for house purchases in the quarter to September, according to a report real estate consultancy firm HassConsult.
Commercial banks have in the past months raised their base lending rates for the seventh straight month to hit an average of 13.3 per cent, pointing to costly credit for borrowers in the wake of the Central Bank of Kenya (CBK) rate hikes.
Latest data from the CBK shows the average lending rate rose from July's 13.21 per cent to continue the upward trend that started in December when rates jumped to 12.67 per cent from 12.36 percent.
This is despite the regulator market defying speculations to retain the benchmark rate at 10.5 per cent in the October review.
According to HassConsult, sales and rental price indices for the third quarter of 2023, revealed a drop in average sales prices of 1.1 per cent in the quarter, resulting in a 3.7 per cent drop in the year to September 2023.
Prices of detached and semi-detached houses fell by 1.7 per cent and 0.9 per cent in the quarter, while apartments recorded a 1.5 per cent growth in prices as buyers look for value in a challenging economy.
"Banks are also exercising stringent lending, mitigating the risk of loan defaults in a tightening economy that is characterised by inflation and higher taxation,'' head of Development, Consulting and Research at Hass Consult, Sakina Hassanali said.
The rental market, in contrast, experienced price growth of 0.4 per cent on average over the quarter, backed by the outperformance of apartments compared to detached and semi-detached units.
Suburbs such as Riverside, Langata and Westlands, which are in close proximity to the city's main economic hubs performed best in rental price growth of between 1.5 per cent and -3.4 per cent.
The same was witnessed for middle-income estates near the capital's CBD.
This means, the rental price for a two-bedroom house in middle-income areas closer to Nairobi CBD like Donholm rose from an average Sh30, 000 in the second quarter to Sh31, 120.
Apartment rental prices grew 3.2 per cent in the quarter, with affordability a key consideration, while prices for detached and semi-detached houses fell 0.7 per cent and 0.4 per cent respectively.
Apartments therefore continue to offer the best value for money for investors, both in rental yields and capital gains.
“The apartment market is seeing a price resurgence backed by renewed demand for inflation-beating investment assets in a period where the Kenya shilling is losing value,” Hassanali said.
Among satellite towns, those with the best access infrastructure (Thika, Syokimau, Ngong, Limuru, Juja) continue to outperform the market average.
Compared to other asset classes, overall property rental returns have outperformed the equities market on an annual basis, but trail the returns on offer on Treasury bills.
“Apartment returns of 5.9 per cent in the year to September are however higher than those in savings, which averaged 4.05 per cent by the end of August,” Hassanali said.
In the land segment, price indices for the third quarter of 2023 show prices in Nairobi's suburbs increased by 0.4 per cent in the quarter and by 0.8 per cent in the year.
Land in the city showed signs of price recovery with only three out of the eighteen suburbs witnessing a price fall in quarter three, compared to fourteen in the previous quarter.
Recovery of land prices is heavily attributed to the resurgence of development activity post-Covid.
Land in Nairobi's satellite towns, however, was quicker to rise, up 2.7 per cent in the third quarter of 2023 and 6.3 per cent annually.
The growth in price of land in satellite towns was almost 7-fold that of land in the city, bolstered by improved infrastructure and affordability opening it up to a wider demand base.
Ongata Rongai was a front-runner in quarterly price growth at 8.2 per cent, displacing quarter two leader Thika as developers anticipate improved access due to the resumption of the dualing of the Bomas-Rongai-Kiserian road.
Ngong had the highest increase at 21.3 per cent over the year to September, followed by Thika at 18 per cent and Athi River at 13.5 per cent.
“Improved road infrastructure has maintained price growth in Ngong, Mlolongo, Athi River Thika and Syokimau by attracting both commercial and residential developers to the satellite towns with the benefit of easing the strain of congestion in the city,'' Hassanali said.
Langata remained the suburb with the highest land price growth on higher density development potential, easy access to major economic nodes (CBD, Upperhill, Mombasa Road) and lower land price per acre compared to neighbouring suburbs.