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Hyper supply of houses in Nairobi may lead to glut: reports

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garden city village in Nairobi kenya

garden city village in Nairobi kenya

Housing in Nairobi is nearing “hyper supply” in the real estate cycle.

Housing in Nairobi is nearing “hyper supply” in the real estate cycle after more than a decade of super growth, new reports indicate.

Hyper supply is the third stage of the property market cycle after recovery and expansion.

It is a critical phase as the actions of developers determine whether the property market could crash, slide into recession or hold on in anticipation of future growth. It occurs when supply starts to exceed demand.

With recent reports indicating that there could be an oversupply, experts, while ruling out a bubble burst, say investors should think of diversifying. Housing is a key driver of the economy.

Real estate agents appear to be making a killing in the construction boom, which has led to a glut in some areas. Many landlords are turning to these agents to woo tenants.

Most agents are now charging about 10 per cent of a month’s rent to get a tenant for a landlord, up from Sh1,000 a few months ago, according to a spot check by the Sunday Nation.

Agencies also appear to be sprouting all over, especially in Nairobi where almost every apartment has a vacant house.

Three separate reports released in a span of four months highlight this change of fortunes in the industry, which has witnessed a long phase of exponential growth characterised by massive investments and a surge in property prices.

OVERSUPPLY

Last week, Britam’s Real Estate Tracker indicated an oversupply of all types of retail space in Nairobi and in big malls countrywide.

“Beyond the Two Rivers Mall expected to open by the end of this year, no further retail space will be required in Nairobi as there will be an oversupply,” said Mr Kenneth Kaniu, chief executive officer of Britam Asset Managers Ltd, during the East Africa Property Investment Summit.

A few weeks ago, two reports showed a drop in rent prices and a slowdown in housing prices. Hass Consult, in their report, indicated a 0.1 per cent drop in rents for the first time in 15 years during the last quarter of 2015, while the cost of purchasing apartments during the period dropped by 2.3 per cent.

The Kenya Bankers Association’s House Price Index, also released at the same time, showed housing prices in 2015 slowed to 1.14 per cent from 1.25 per cent due to a surge in construction of apartments.

Developers insist the units whose prices are on the decline are those mainly put up years ago while the new ones are attracting potential tenants as soon as construction is complete.

“The old ones are not moving, unless you renovate them, which is costly. But rarely is any new unit empty; just ask around,” said Mr Anthony Mugo, the chief executive of real estate firm Falcon Development.

Experts say the oversupply being witnessed is as a result of investors commencing construction without doing market research. “There is too much construction going on, a lot of it is by investors who are building without knowing what the market wants,” said Mr James Hoddell, chief executive of Mentor Management Ltd.

“People with money just decide to construct at the nearest available piece of land. The result is an oversupply in certain sub-sectors of the market,” he added.

In its report, Hass Consult indicated a general freeze in the prices of apartments in upmarket areas like Kileleshwa, Lavington, Ngong Road and Kilimani because the supply was not relative to demand, leaving many units unoccupied for long periods.

MARKET DEMANDS

Failure to consider market demands, according to Mr Hoddell, is also behind the saturation of malls. Nairobi and its environs alone has at least 32 malls, with another five slated for completion by the end of this year.

These include Two Rivers in Ruaka, The Hub (Karen), Uni City (Kenyatta University), K Mall (Komarock) and The Point (Buruburu).

According to Knight Frank’s 2016 sub-Saharan Shopping Centre Development Trends, Nairobi with its 391,000 sq metres of existing mall space and an additional 470,000 sq metres in the pipeline, has the largest market by existing shopping centre floor space outside South Africa in the whole continent.

This is 4 sq metres of shopping space for each of it 3.8 million citizens.

By comparison Lagos, a city of 12.6 million people according to the report, has an existing mall space of only 121,000 sq metres and another 240,000 sq metres in the pipeline.

Analysts are, however, concerned that this availability of floor space does not correspond with demand, with several malls, especially those opened in the past one year, having empty stalls. This has forced the owners to fill them with their own businesses.

“There is no doubt that the market is currently over-supplied,” Rich Management CEO Aly Khan Satchu said.

“I am not sure we will see a crash because real estate remains under-leveraged. It is leverage which forces people to sell,” he said.

REAL ESTATE GROWTH

The real estate industry has enjoyed phenomenal growth since the Narc government came to power in 2003 and turned the economy around.

Today, it is the fourth highest contributor to Kenya’s Gross Domestic Product (GDP), at Sh5.36 trillion last year, up from Sh4.73 trillion the previous year.

Last year, the Nairobi county government issued record levels of planning approvals for multi-unit and developer-led industrial/warehouse developments, at 280,000m², the majority of which are expected to be complete in the next two years.

Signs of trouble started showing in November when MML released an index that predicted a glut in office space by about 2.8 million square feet in Nairobi by the end of this year.

Both Mr Satchu and Mr Hoddell said those intending to construct right now should not expect immediate returns.

“Our construction industry is not tied a lot to banks, so it is unlikely to slow down. There will be a slowdown in growth and a drop in rents but the market will not crush,” said Mr Hoddell.

Britam, Liberty Holdings, Home Afrika and Pan Africa – which are listed companies at the Nairobi Securities Exchange, with property within their portfolios – issued profit warnings before releasing their full financial results whose deadline was March 31.

Mr Kaniu of Britam says developers should take advantage of devolution to look beyond Nairobi.

“In Naivasha, Kisumu, Nakuru, Nanyuki and Mombasa, there is a lot of opportunity for strip malls that range from 1,000 to 10,000 square feet,” he said.

 

-Nation.co.ke

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