Kenya Real Estate; Boom or Bubble?
The face of real estate in Nairobi has undergone a drastic change. Choose any Nairobi suburb. Stand atop any high rise building. Look around. The skyline has changed. From what were once green and leafy suburbs or tracts of grassy savanna, from Kileleshwa to Kilimani, Westlands, the stretch down Mombasa Road all the way past Athi-River now stands mushrooms of concrete real estate. Turn a corner and there is bound to be a construction site.
In the past decade, there has been buzz about a Kenyan real estate boom. But this buzz has also been accompanied by loud whispers about a likely bubble and an eventual bust.
What is real in the Kenyan real estate market?
To answer that, let us define a bubble.
An economic bubble is an explosion of activity in a market caused by speculation regarding a commodity, which in turn causes vastly overinflated prices. A bubble cycle is typically characterized by the following:
- Speculation that an industry is headed for more growth triggers a demand. Think about the Tech Bubble of the 90’s; new dotcom companies were floated in the market, their shares bid up to extremely high prices making them worth a ton of money before they had yet to produce actual earnings. Eventually, people realized the companies were not profitable and pulled out their money, rendering the start-ups valueless and triggering the bust.
- In a real estate bubble, an increase in the (inflated) value of a commodity is triggered by a demand. This demand usually supersedes supply. Remember, speculation that the high prices will prevail in future drives the need to acquire more property immediately. In this case, investors buy assets because of strong psychological pressures, ignoring the fundamental value of the asset and with the belief that it will keep rising.
- Ease of credit leads to excessive credit growth (i.e. increase in the amount that financial institutions lend). When credit is increasing, businesses can borrow and invest more. A bubble is created when uncontrolled money is supplied and the market experiences credit expansion.
- But a disruption in the credit market can turn things around. For example, in 2016, the government imposed a credit rate cap. Under the new law, lending rates are capped at 4 percentage points above the central bank’s benchmark rate of 10.5%. When this was passed into law, investment analysts speculated a market collateral damage in terms of credit rationing to private investors. As of January of 2018, lending growth had slowed to 2 percent, as compared to 20 percent in April of 2015.
- In a bubble, speculation leads to demand, which leads to value increase. This in turn leads to extremely high prices that the population cannot afford. This conversely leads to a decline in prices – which means the bubble has bust.
What is a real estate boom?
Booms are stocks that suddenly become very popular and gain strong elevated market profits. Booms generally result in an increase in output, jobs and investments. Booms are good for market expansion. A boom is normal in the sense that when there is a huge demand for a commodity, the market expands because everyone loves the product. Demand increases and in turn many other investors get into the market. Booms are however not sustainable.
But unlike bubbles, when booms end, the market does not necessarily crash. The industry experiences a minor setback but things level out. Important to note is that every credit induced boom comes to an end when one or more important sectors in the economy becomes incapable of repaying interest on their debt.
So is the Kenyan real estate market in a boom or a bubble?
Over the past decade or so, the average price of a 1-3 bedroom apartment has risen from 5 to 13 million shillings (a compounded annual growth rate (CAGR) of 14.5 percent) while that of a house has risen from 7 to 31million (a CAGR of 9.7 percent). It’s no wonder many have wondered whether this is a bubble.
However, market experts Cytonn Real Estate reckon the industry is not in a bubble but rather in a ‘normal real estate cycle of rising demands, a peaking and falling market…then bottoming out’. The cyclical nature of the market in general is such that growth (boom) happens in a bull market, which is usually followed by a sluggish low growth bear market.
A report by the investment firm ascertains we are now at the rising phase. The rapid price increments are as a result of low supply and high demand. The Cytonn review found that real estate is still the ideal investment portfolio for Kenyan investors. The sectors expansion is illustrated by, among other things, a 128% rise in high value building approvals since 2012. But when supply and demand evens out, price surges are likely to cool off, and more vacancies likely to emerge. This is already being experienced in some submarkets.
Real Estate Consultancy firm Knight Frank concurs Cytonn’s views by indicating a re-balancing in supply and demand in the high-end market. The prime property segment is undergoing a ‘normal property cycle’. While prices have largely remained unchanged, declines in rent for prime residentials (normally targeted to expatriate and multinational occupiers) are shrinking due to oversupply. However buyers’ long term capital gains continue to be attractive; values have increased by as much as 40 percent over the past 5 years.
With Nairobi still remaining a promising regional hub, interests by international firms and brands for retail space and the scarcity of industrial property presents an opportunity for development of the real estate market. Other than a higher value of approved building plans, data to support this claim shows indicators such as a significant improvement in cement production and construction.
The normal ups and downs of a vibrant market
No doubt, a prolonged election period has seen an extended hold on new business and slowed payments. A poor business environment saw the proportion of non-performing loans (NPL) touch one tenth of all banks (at 9.91 percent at the time of writing this article). Economic uncertainty and NPLs mean that lenders generally adjust their models to mitigate risk. Any NPL in the range of 10-20 percent are a material risk to economic performance. The credit cap in Kenya also means that credit is being redirected from viable private sector investors towards the public sector.
Nevertheless, in spite of the political uncertainty, the sectors performance has remained resilient. On the question whether this is a bubble that’s about to bust, experts say no it isn’t. A strained bubble is only defined as such when growth in prices is in the triple digits and decline is at least 14 percent over a period of 16 quarters. In Kenya, the prices are growing but as mentioned earlier, they are softening.
Rachel is a prolific Kenyan writer, with over 15 years’ experience in the print media industry and has been part of editorial teams in major publications. Her specialties are health, community development, children and women’s affairs, global current affairs and lifestyle. She currently runs a content and creative consultancy outfit and holds an almost full-time gig at Kenya’s leading Newspaper, The Nation. When she is not creating content for her clients and has finally caught up with newspaper deadlines, she can be found at home reading or trying to (finally) work on her ‘Great African Novel’.