Featured Issue 02 - 2020 MAGAZINE
Analysis_Kenya_realestate

How is Kenya’s real estate developing?

Despite a slump, experts believe the sector will demonstrate stable performance after it returns to normalcy

Kenya’s real estate sector was set to see a significant growth this year on the back of its growth recorded in 2019. However, the Covid-19 pandemic has dwarfed its potential to a large extent. Previously, the sector had witnessed sluggish growth in 2017 and 2018. In 2019, the real estate sector in Kenya recorded a growth rate of 5.3 percent, which is 1.2 percentage points higher than 4.1 percent growth rate recorded in 2018, according to KNBS Economic Survey 2020. The Cytonn Q1’2020 Markets Review further revealed that the real estate sector recorded moderate activity with average rental yields improving marginally in the residential and commercial office sectors to 5.2 percent and 7.8 percent respectively, from 5 percent and 7.5 percent in the fourth quarter of 2019. The retail sector, however, has registered a 0.1 percent points drop in rental yields to 7.7 percent in the first quarter of 2020, from 7.8 percent in the last three months of 2019.

Despite the outbreak of Covid-19 took place in the Chinese city of Wuhan last year, the first positive case was reported by Kenya in the month of March. In the second quarter, the sector experienced a slump as Kenya entered a state of lockdown to curb the spread of the infection. During the last six months, the pandemic has created economic distress and the pressure has been felt by its real estate sector as well. According to MySpace Properties, a real estate and property firm headquartered in Mombasa, house and land prices in Kenya are anticipated to drop by 10 percent as a result of the Covid-19 pandemic in the short-term. It was reported that the country’s real estate sector has recorded slow growth in the first quarter of 2020 as pandemic continues. Another real estate firm Cytonn Investment said in its report that the pandemic’s severe impact on the tourism sector saw hotels suspending operations and in Kenya’s real estate, commercial properties would particularly suffer from the crisis.

Lockdown measures have slowed real estate growth
To help curb the spread of the infection in the country, Kenyan President Uhuru Kenyatta implemented lockdown measures and urged citizens to stay indoors. Kenya also restricted all forms of travel including air and it sealed all borders. As a result of the lockdown measures introduced, the Kenyan real estate sector witnessed reduction in the labour force. The sealing of the country’s borders also led to disruption of supply chains, which further resulted in longer development periods. The country’s lockdown implies that all offices were closed delaying the process of approvals. Many developers in Kenya were also comprehensive about the Covid-19 crisis leading to a global recession which indirectly led to developers reserving their cash at a time when market liquidity is likely to decline. The funding that came into the sector also reduced significantly due to general risk aversion amid the pandemic.

Web traffic to real estate portals in Kenya has also dropped since the beginning of the infection spread across the country. Many ongoing projects were halted as developers struggled not only with finances but also securing materials that they need to protect to complete their projects. Developers who were willing to carry out construction activities amid the pandemic experienced a cash flow issue as many buyers held back on their instalment payments. In addition to the drop in new activities, there was a significant decline in new property sales as well. Rising fears of a recession has caused banks in the country to become more reluctant in granting new loans which has further led to a decline in mortgage uptake by home buyers.
On the rental front, landlords remain sceptical about losing their tenants. For that reason, most of them were forced to renegotiate their payment terms or agree to a lesser amount for leased properties. That said, many tenants vacated their properties due to financial constraints. It appears that there are an increasing number of reports pointing to people relocating to smaller homes even sharing spaces to cut costs. As a result, the number of vacant houses in Kenyan real estate market dramatically increased.

When it comes to commercial spaces, around 75 percent of the commercial office spaces were vacant amid the lockdown period as the Kenyan government encouraged employees to work from their homes. As a matter of fact, many private companies have even vacated their office spaces as they resort to working from home and to cut costs. Over the last few years, real estate in Kenya has been lucrative to the diaspora market. But sealing of borders and flight cancellations have further led to a number of clients investing in the Kenyen real estate sector. Also, remittances coming into the country have dropped significantly as infection has also affected Kenyans working abroad.

Government policies to support the real estate market amid Covid-19
To help the sector weather the Covid-19 storm, the government has introduced new policies and countermeasures. The Kenyan government has introduced policies or regulations such as lowering of the Central Bank Rate (CBR) to 7 percent. The apex bank also lowered its Cash Reserve Ratio (CRR) by 1 percent to 4.25 percent to increase lending activities between the bank and its customers. The government also announced a Kshs 53 billion 8-point stimulus programme which seeks to offer soft loans to hotels and related establishments through the Tourism Finance Corporation (TFC), thus stimulating the hospitality sector.

The government of Kenya also amended the Tax Laws (Amendment) Act 2020 with the Retirement Benefits Act, which facilitates the use of pension savings towards economical activities such as securing a mortgage loan to buy a new house. Similarly, the government introduced the Business Laws Amendment Act 2020 which facilitates the use of advanced electronic signatures as a valid mode of execution of documents in Kenya. This move was in an attempt to help parties in the real estate sector carry out land transactions digitally at a time when social distancing was highly encouraged. There has been a drop in prices of real estate properties already in Kenya and developers are offering discounts to encourage people to buy property during this pandemic and at the same time maintain a cash flow. Some developers are even coming up with personalised payment plans to suit their buyer’s special needs.

Rent and property prices decline
As a result of the pandemic and its economic implications, prices of houses as well as lands have dropped in Kenyan cities such as the capital Nairobi, the surrounding cities and towns such as Kiambu and Kajiado in the second quarter of the year. Kenya-based HassConsult which conducts a quarterly property pricing index, recently revealed in its report that house prices dropped 0.2 percent between April and June, compared to a growth of 3.6 percent recorded during the same period last year. According to the Hass Property Index for Quarter 2, 2020, Donholm estate recorded the biggest quarterly drop in rent at 4.8 percent. Kitisuru, on the other hand, recorded the biggest quarterly-drop on an annual basis, leading with rents reduced by 7.7 percent.

That said, other estates have also recorded a dip in rental prices. This includes Gigiri recording 2.9 percent, Ridgeways at 2.9 percent, Lang’ata at 2.3 percent, Nyari at 1.6 percent and Lavington at 1.3 percent dip in rental prices. According to the report, the dip in rental prices is due to oversupply amid reducing demand because of the pandemic. The declines are worrying for Kenya because prior to the pandemic the real estate sector was booming in the country, especially in Nairobi. It is important to note that the sector has recorded a double-digit annual increase in recent years on the basis of increased demand for real estate.
Rental prices in Kenya have increased by almost four fold between the period of 2001 and 2019. During this period, apartments represented 63.2 percent of the market, semi-detached houses accounted for 24.5 percent of the market and detached houses took up 12.3 percent of the market. The average rent collected for a property in Kenya had gone up from Ksh 38,516 in December 2000 to Ksh 153,447 in June 2020. According to the HassConsult report, the prices of land in Kenya have also dropped 0.74 percent on average in the second quarter compared to an increase of 0.6 percent in the second quarter of 2019. Land prices in Parklands and Spring Valley dropped by the biggest margin of 2.74 percent and 2.59 percent respectively.
Knight Frank’s Kenya Market Update for the first half of 2020 reveals that prime residential prices in Nairobi fell by 2.9 percent over the first half of 2020 compared to a decline of 1.8 percent in the first half of 2019, pushing the annual decline to 5.1 percent in the year to June. Prime residential rents also declined during the period by 6.55 percent compared to 1.67 percent over a similar period in 2019, taking the annual decline to 7.62 percent in the year to June.

Kenya’s economy to gradually recover from Covid-19
The IMF estimates the sub-Saharan Africa region’s economy to shrink by 3.2 percent this year as a result of the Covid-19 crisis. The recent forecast by the fund is 1.6 percentage points more when compared to its forecasts in April. The latest World Bank Kenya Economic Update (KEU) forecasts a growth of 1.5 percent in 2020. Taking into consideration that the pandemic would not end anytime soon, the World Bank forecasts a contraction to 1.0 percent for Kenya. It’s gross domestic product (GDP) is projected to decelerate substantially as a result of the countermeasures introduced to fight the virus.

Kenya’s medium-term growth is projected to rebound fast to about 5.6 percent over the medium term on assumption that investor confidence will be restored soon after the Covid-19 pandemic is contained. A more recent report released by the Central Bank of Kenya stated that Kenya’s economy is on a recovery path due to the good performance of the agriculture sector and the opening of international air travel.

It is important to note that Kenya has a large informal sector, and many in rural Kenya are engaged in it. According to experts, the pandemic has impacted the informal sector not only in Kenya, but in other parts of the world. As a result, various jobs were lost in the informal sector and its not just limited to rural Kenya. This will also impact the real estate sector in Kenya as people will lose the ability to pay rents and also many will reconsider their decision to buy new properties when there is a global economic crisis.

Market is expected to slowly pick up pace
While the sector is indeed facing hard times, it might be a good thing in disguise for some buyers. As demand decreases further and further due to the pandemic, developers are willing to negotiate further than the pre Covid-19 level as they are more eager to maintain a healthy cash flow to weather the Covid-19 storm. As a result, real estate developers are offering a 15 percent discount on selected units on their projects. Such discounts wouldn’t have been considered during pre-Covid-19 times. However, this is not expected in the long term as the many experts predict the market to pick up as soon as normalcy returns.

When it comes to real estate investors in Kenya, they too are also in a position to obtain healthy capital gains on their properties as they will be able to sell at a much better price and benefit substantially from the pricing correction obtained after normalcy. The reduction in the CBK Lending rate has led to Kenyan commercial banks lowering their interests on both mortgages and financial loans. This too is expected to favour the investors. Real Estate, being a fixed asset also creates a hedge against inflations and partly to currencies fluctuations unlike investments in financial markets as well as easing succession and retirement planning as it guarantees income stability to its investors with minimal exposure to losses as has been with most other sectors.

If we look at things sector wise, both office space and retail, which fall under commercial real estate, will experience prolonged slumbers due to the oversupply in the market and cash shortfalls. The rental market in Kenya, will also continue to suffer as the current ongoing economic distress would limit the money used by Kenyans on real estate, or rents in particular as many would like to cut cost and divert funds. As a result of the Covid-19 pandemic, rental rates in Kenya are expected to go down by as much as 20 percent to 30 percent. Industrial and Warehousing, on the other hand, has somehow managed to benefit from the whole situation.
To conclude, the actual impact of the crisis on the real estate sector could only be determined if we know the full trajectory of the damage done by the pandemic. The market however, is expected to experience a slow recovery post-Covid-19 since uptake will be subdued as a result of depressed income levels and changed priorities by prospective investors.

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