Wednesday, 8 August 2012

Kenya’s Bubbly Real Estate Sector Heading For The Rocks?

VENTURES AFRICA – The year 2011 brought solid growth for the real estate industry, but an erosion in profitability that now sees it preparing for a bumpy year ahead, exacerbated sharply by a tripling of interest rates on efforts to uphold the shilling.

Real estate had been accounting for more than 5 cent of Kenya’s GDP and had enjoyed a boom in the last decade. However, the last two years brought a slowdown in the sector’s growth as it became progressively ensnared between galloping rises in the prices of land and construction materials, and slowing demand at the top-end of the market – where construction has been concentrated.

All of those trends became more marked in 2011, but the body blow for the industry, now threatening developers with bankruptcy and signalling a dramatic slowdown in the sector, has been the government’s shift in monetary policy in the second half of last year.

Kenya runs a large and lately ballooning balance of payments deficit, fuelled recently by a surge in government spending and debt. In 2011, these imbalances began to put pressure on the currency, leading to some knock-on inflation, based on rising import prices.

In an effort to support the shilling, the government moved from September to one of the most radical monetary policies in the world, tripling interest rates in a matter of weeks, and effectively suspending private and consumer borrowing. The result has been commercial borrowing rates of 30 percent or higher, and a standstill in new mortgages.

This blow to the real estate market comes at a time when the rapid growth in mortgage activity was providing a new source of middle-income housing demand that was underpinning the sector’s growth prospects.

More importantly, for real estate fortunes, the radical shift in financing rates has put in place a new burden for developers, who most often depend on finance, themselves, during the construction phase.

With many now unable to demonstrate any possibility of delivering the 20 to 30 percent return sufficient to cover the cost of finance, and additionally often needing extra finance on cost over-runs, developers are now finding they can no longer finance or refinance their projects.

Some have turned to their own shareholders for more funds, or found other ways of raising temporary cash to keep building. Many more have already downsized their building programmes and shelved future phases.

“The ceiling interest rates scare off developers and potential home buyers, both,” said Mr. Ben Woodhams, Managing Director of property management firm Knight Frank.

Real estate activity is thus set to be greatly reduced in 2012, even as Kenya continues to grapple with ongoing housing shortages, consistently calculated as requiring the building of hundreds of thousands of homes a year.

At its peak, the country’s real estate industry was building tens of thousands of homes a year, but this level will now be far lower.

In time, the sharp contraction in building could set in train a new round of house price rises, putting properties out of reach for even more Kenyans – following reports last year from the World Bank, that fewer than 7 percent of Kenyans can presently access housing in the current real estate and mortgage market.

In the short-term, however, all eyes are turned to the impact on the market of the current crisis for construction projects already underway.

Many will be suspended or stop mid-stream, suddenly reducing the flow of new properties to the market. These failures will have no negative impact on housing prices, and will even shorten the time until buyers start to realise fewer options as they search for properties.

But they will cause a great deal of pain to off-plan buyers, and could fundamentally undermine confidence in a sector that has achieved as much of its activity from presales, as through institutional finance.

The long-term impact of a loss of buyer confidence in developers’ ability to assuredly complete their projects could be massive: damaging the country’s growth in housing stock for as much as a decade ahead, as Kenyans shy away altogether from offplan purchasing of new properties.

Little attention has turned to this setback as a game changer in Kenyan real estate.

Instead, commentators have looked for news that the housing market crisis will lead to a sharp fall in housing prices. Fourth quarter data from real estate consultancy Hass Consult confirms that this is unlikely to be the outcome. Price drops at the very top end of the housing market, of some 1 per cent in the fourth quarter, were accompanied by ongoing rises in the prices of the mid-market properties that typically sell in the 6 million to 20 million shillings ($71,000 – $237,000) range.

But there will certainly be some developers who opt to get the funds they need to complete by discounting for cash. This will see a few home buyers pick up bargains, from developers who take losses on their projects just in order to stop clocking up further interest bills.

However, profoundly, there is nothing in situ in Kenya’s housing market to trigger a dramatic fall in house prices. The total number of mortgages in the country numbers but a few thousand, new building has already slowed down, and many property buyers at the very top of the market continue to be based outside Kenya, either as Diaspora or as foreign nationals.

A double-digit collapse in house price of the type seen in western markets was triggered by defaulting home loan borrowers pushing swathes of existing properties onto the market, in a trend that simply could not be replicated in Kenya, even if every mortgagee in the country now defaulted. Moreover, the existing mortgages are with a very narrow pool of suppliers, all geared towards renegotiating the period of loans in preference to triggering defaults.

For those developers who find ways to reach into this much lower end of the housing market, working beside mortgage financiers now structuring housing loans also pitched to the lower middle classes, building work may yet commence this year.

But for all others, 2012 is set to be a fallow period, with activity so down-sized, once the initial scurry for the exit door has been executed, that many will be considering what business to enter instead.

For some, the call of politics will be very loud indeed, with little on their mind but a policy environment geared towards stimulating rather than suspending the country’s once vibrant real estate industry.


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