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Kenya faces housing glut crisis

Kenya’s real estate industry could be on the verge of a crisis amid reports that many developers are unable to sell off houses due to unaffordable prices.

Industry players single out Kilimani, Hurlingham, Chaka Road, Kileleshwa, Kiuna and Runda estates in Nairobi as the worst hit by the housing glut after developers took expensive mortgages that forced them to inflate the asking price.

A spot check by the Sunday Nation established that several houses in the said estates remain unoccupied many years after completion.

A real estate agent, who did not wish to be named so that he can speak freely because his firm has been contracted to offload some of the units, said developers are paying more to service their mortgages than the prevailing rental prices in the areas.

“Even those who have rented out their houses are forced to go back to their pockets to top up the mortgage,” said the agent.

The agent added that speculation by developers for the luxury houses was to blame where supply has nearly outstripped demand.

“Truth be told, the number of people in Kenya who can afford a house worth Sh30 million and above is very small. Yet, the houses are sprouting left, right and centre,” added the agent.

Mr Gideon Ngure, assistant marketing manager at real estate agent, Villa Care Kenya, said that some developers have been left holding dead stock saying this was due to a failure to conduct proper research before constructing.

“These are people who for instance build a high-end house in a middle class estate and expect to sell it for millions. Engaging a consultant can avoid such scenarios,” said Mr Ngure.

Besides the luxury houses, some middle-class estates in Nairobi are also experiencing housing glut where tenants are being put off by high rental prices.

Mr David Githinji, a caretaker in Roy Sambu, says the flat he is managing has more than 30 units but only six have been occupied since its completion six months ago.

“Most people enquire the charges, take a tour around the house and do not even ask for the landlord’s phone number. I don’t foresee this situation changing in the near future because there are three houses coming up around us and several others in the neighborhood,” Mr Githinji said.

Rental prices along the Thika superhighway have more than doubled since the road was completed a year ago.

This has forced tenants who could not cope with the higher rents to move to more pocket-friendly estates in Eastlands area. Mr Ngure, however, sought to play down the magnitude of the problem saying the country’s real estate sector was on a steady rise.

“Dubai’s bubble has just burst after so many years. Kenya is yet to get there,” he said. Mr Daniel Cheruiyot, head of property valuation at the Regent Management, says a property price bubble comes about if prices rise above rental income or development cost.

“In such markets, prices are usually driven up by over optimistic buyers who often borrow more than what can be supported by their earnings. Market analysts use a number of financial ratios to identify bubbles,” said Mr Cheruiyot.

When prices and mortgage debt are rising faster than the rate of rent increase and income growth, Mr Cheruiyot argues, a bubble could be developing, but the phase, size and extend can only be determined through econometric analysis.

“There is growing concern about the possibility of a bubble in the Kenyan property market today, but no clear answer has so far been given because information is lacking,” he said.

Due to the confusion and uncertainty in the real estate sector, a majority of the middle class Kenyans, who should ideally own the apartments through mortgages, have opted to construct their own houses in the peri-urban areas of Nairobi.

Mr Robert Nyamu, the director of forensic and litigation support services at Deloitte East Africa, says concerns over possible links to money laundering were valid.

According to Mr Nyamu, contrary to expectations that enactment of the Proceeds of Crime and Anti-Money Laundering Act (2009) in June 2010 would result in immediate cessation of rampant money laundering in the country, this has not happened.

“The reason for this is that it took more than two years from June 2010 to implement the necessary regulatory framework that needed to be in place in order to enforce the pertinent provisions of the Anti-Money Laundering legislation,” he added.

“It is therefore widely believed that in the two years since June 2010 that it has taken to implement the requisite AML regulatory framework, and even then only partially, money laundering has continued unabated and could possibly even have increased.”

Nyamu says that the booming real estate sector could be one of the key beneficiaries of the ongoing money laundering and other related activities in the country, especially given the mismatch between the mortgage uptake rate and the rate at which new residential properties are shooting up everywhere in the city.

But Ngure argues that the high interest rates which keep fluctuating were to blame.

“Most Kenyans prefer to borrow from Saccos and build their homes slowly or simply talk to a developer to pay 50 per cent deposit and agree on a more friendly way to settle the balance,” he said.

Nation

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