Monday, April 05, 2010

Nairobi Real Estate bubble bursts

It happened sometime towards the end of 2009.The bubble was concentrated in the upper to high end property market.i.e. houses above Ksh 10 million.Unlike, other markets Kenyans have never experienced a large scale property price decline or slump.
Signs of the high end property slowdown are:

-Property sellers not providing indicative prices

Take a look at the property supplements in the thursday newspapers in early 2009 and 2008.Sellers provided indicative prices for every property offered.Currently, property listings beyond Ksh 10 million have Price on Application(POA) instead of an actual price.POA indicates that the sellers are unaware of the ruling prices for the relevant property prices.Hence, they wont quote an indicative price for fear of over bidding the market and failing to sale or underbid the market and sell for less than the market rates.

-Compression of rental yields
Looking at the indicative rents around Kilimani,certain areas in Lavington such as Valley Arcade you can see that indicative rents have stagnated around the Ksh 60,000-65,000 range or lower for the desperate landlords.Areas, such as South B/C,Langata and West are seeing a stagnation of rents i.e. rents rising at less than 10% per annum.

-Rise in furnished apartments
To counter falling/stagnant rents savvy landlords are offering furnished apartments and houses.Ideally a furnished apartment rents at least 30%-50% higher than a similarly unfurnished unit.To furnish an apartment that you can go for Ksh 70,000-Ksh 90,000 a month wont cost you more than Ksh 200,000.The extra Ksh 20,000-Ksh 30,000 from furnishing can be recouped in less than 12 months.Furnished apartments have also seen a decline in rents a furnished 3br unit in Upper Hill used to be Ksh 120,000 now its around Ksh 90,000.

The factors that led to the real estate slump were:
-Oversupply to a narrow market segment
Most developers were focusing on the Ksh 10 million and above units because thats where the high margins were.In the end they oversupplied it.The slump has led developers back to the Ksh 5million-Ksh 8million segment.VillaCare and all those high rollers have projects for that price range on going.

-Consumer sophistication
Property buyers in the late nineties and early 00s were thrilled by the property location they didnt care about the finish or quality of the property.i.e. people were happy to buy property in Kilelelshwa it didnt matter if the finish was poor.Thats how the area around Kileleshwa Police station and Kenton College ended up looking like Umoja with a lot of flats/apartments.

Over the past three years people buying/renting high end apartments have developed minimum requirements.i.e. if someone is going to buy a Ksh 10 million apartment or rent it he requires: at least two allocated parking spaces,back up water supply e.g. borehole or large reserve tanks, large living space, good security lay out and recently a servants quarter is a must.If your apartment doesnt have these facilities, renting/selling it at the higher end of the market ruling price is tough.

-Alternative choices
Real estate buyers in Nairobi started questioning the wisdom of buying an apartment at Ksh 9,10 or 15 million when that amount could buy an acre or more of land around the city.The odds of land values rising are higher than a Ksh 10 million apartment doubling in price to Ksh 20 million or even rising to Ksh 15 million.

-Bank lending
The risk aversion among local banks led to a slow down of lending for mortgages and development towards the high end units.Leading to fewer clientele for the finished property.By the way i see banks fronting for several property sales through newspaper ads.does that indicate their exposure to the sector?

-Normal supply of units for sale
Regardless of existing market conditions(whether boom or slump) property is always on sale.People who need to sell property are ready to take lower prices because they need the cash.On the other hand existing property owners who have a large capital gain will sell to cash their gains.e.g. if you bought the first Apartments in Lavington/Kileleshwa in the late nineties you got in at between Ksh 4million-Ksh 6 million.Even if the current market is tough, Ksh 8 million to Ksh 10 million can be raised.

16 comments:

MainaT said...

Interesting article pesa-tu. I actually thought the bubble burst kitu earlier in the yr when you could lots of rental signs...

Kellie said...

Another indication is the length of time it's taking developers in the upper market segment to sell the units. In the past, the units would be sold out pre completion, now it's taking almost a year.

I'm not sure about the slowing down in the middle market segment though. Case in point, a renovated apartment in Madaraka 9 months ago was going for Kssh 28,000. Right now, they're going for Kshs 37,000 - Kshs 40,000.
I think the mid level's still booming, trying to catch up on quality, but charging lower because of location.

Man143Steph637 said...

It's about time. Two things have contributed to this. First over development, two diversion of diaspora remittances which used to fund half of these housing developments.

Now it is 90 per cent mortgage, 10 per cent cash in all new developments.

Banks will have a good lesson to learn from this after going after this sector relentlessly even as they cut funding to other economic sectors.

Only thing is you cannot grow one economic sector in isolation so as wages and income have stagnated amids the high inflation we saw, the global crisis and general lack of credit, the general lack of people with money to buy these properties has affected their uptake.

A few of the high end developers are opting to rent out rather than sell because they are taking too long to find buyers and mortgages have to be serviced.

Check out the Office Space bust which is coming soon with 2.5-4million sq ft of space coming to a market that has an annual absorption capacity of just 500K sq ft.

Again banks which funded these foolishly while starving the potential businesses which would occupy these premises are going to pay. Silly buggers!

pesa tu said...

@Mainat:Yes, the slowdown started much earlier but desperation set in during Q4 2010.

@Kellie: good to have you drop by.the middle market should be split in two Ksh 25000-Ksh35,000 and Ksh 35,000-Ksh 50,000.The first is booming, the latter is holding steady.

About the Madaraka flat.If its the NHC ones, i think its unwise to pay above 32K for one(even a renovated one).No proper parking-u wade through pools of water when it rains.No well fenced compound.If u add 5K-10K to that price u can get a good 2br anywhere else in Nbi.The only plus is location.

pesa tu said...

@Man143:the Commercial crash could hurt people.BTW downtown nbi has a lot of space i.e. buildings that couldnt do exhibitions have a bit of vacant space.

I think Commercial property is all about location,location and location.Commercial space thats poorly located will suffer.

Mohamed said...

I think real estate and the economy move in tandom!

Inflation levels have come down to levels of 5% so have interest rates! To me that just means banks are on a credit expansionary stratergy, cause income from government treasuries are no longer...for the next 2 quarters at least!,
Hence, I'm my view I expect banks to lend out more, stimulate economic growth, and in turn stimulate the real estate market.

I agree with your view that property prices in the high end of the market have and will continue to stagnate, that's cause the day of cash buyers is slowly dying...though not forgeting our neighbours from the "greater east african" region!

The property market will remain vibrant, as more and more young generation kenyans see the benefits of owning a property.

Look at property as a long term investment, not a speculative investment like shares!

Real estate in Kenya offers great oportunities!

pesa tu said...

@Mohamed:Real estate offers opportunities as long as you buy right priced assets.

Aly-Khan Satchu said...

The Cost of Money is simply collapsing and I have found The Magic Tipping Point to be when rates fall before 10% for the likes of you and me.

The Magic Tipping Point
http://www.rich.co.ke/media/docs/017NSX1204.pdf

Regards
Aly-Khan Satchu
www.rich.co.ke

amarinvestments said...
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Calculator Careers said...

I look forward to reading your blog, because its full of information that I can put to use. Thank you.

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biggyo said...

This is the first serious blog that I stumbled on that somewhat gives an informative analysis about the impending housing bubble in Kenya. For the last 6 years I have been a bubble junkie as I tracked the US housing market. In the middle of last decade everybody that mattered would assert that a bubble bust “would never happen here”- i.e. US. Even though real estate is not my cup of tea, I have learnt a lot mainly from three blogs that I credit for saving me from plunging into the US housing market as a buyer in 2006. Most of people that I know who bought in the last 15 years lost fortunes because middle class in US tend to invest all their savings into housing. Today those who bought in the last 12 years owe more than their houses are worth by factor of 40%. The blogs that I am referring to are; Patrick.net, doctorhousingbubble.com, and thehousingbubbleblog.com
It has been my intention to re-enter the Kenya housing market as a buyer but I have remained on the sidelines in amazement as the bubble has grown in leaps and bounds. I was last in Kenya early last year and came to the conclusion that the housing bubble inflation is unsustainable in the long run because the fundamentals of incomes on one hand and housing cost and economy are way out of sync. For example, condos in parklands were retailing for 10m ($123k) whereas the same condo in a generic suburb in US were going for $80k early last year. Today the same condo in US is going for around $60k. The inflow of capital from diaspora, money laundering or piracy will not sustain the housing market if ordinary Kenyan do not have the incomes to rent/buy those houses.

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Buy House said...

Appreciation for great content. I’m certainly glad I had taken the time to learn this.

Tiago said...

While bubbles collapse in many countries, in other regions prices rocketed. I have bought apartments in buenos aires and Río de Janeiro in 2009 and I have made a good profit.

mboya said...

nice article