The real estate industry, much like any other industry, is continuously evolving. A report in 2015 indicated that the key drivers for the real estate sector ranges from prospect for profitability to the changing face of space complimented by the uncertainty surrounding the sector.
However, as Nairobi and major towns in Kenya continue experiencing rural-urban migration (which is driving growth in demand for both residential and commercial property), property supply is struggling to the demand arising. This has been to some extent as a result of the below 10 main contributing factors.
Table of Contents
Demographic Shifts:
Two key groups will have the greatest impact on real estate through the lifestyles they choose in coming years;
- Large numbers of retiring “Baby Boomers” (born between 1946 –1964), and;
- the next large population wave, “the Millennials” (born between 1980 – 2000)
This casts a spotlight on housing in all its forms:
- for Baby Boomers, the homes in which they choose to age-in-place, downsized homes, senior communities or assisted living;
- for Millennials, the decision to buy or postpone buying, and location most often being driven by amenities, such as urban walkable communities.
The real estate and service sectors targeting each group are adapting too – medical facilities, retail, office and entertainment venues, to name a few; as well as infrastructure and distribution.
Rising Interest Rates:
Uncertainty over high interest charges has brought mortgage business to a standstill as customers shy away from loans to service their dream homes. A spot check nationally reveals that interests charged on retail mortgages have been reviewed from an average of 15.45% to 18% with a further review currently underway to determine the final figure to be announced soon with estimations pointing to 21%. Construction mortgages are up to 21% from 17%.
Analysts say high rates are not expected to ease out soon as a tight Central Bank Monetary Policy aimed at containing inflation and addressing foreign exchange volatility remains in place. Banks are reviewing their rates to reflect the tight monetary policy Until CBK is able to ascertain that everything is under control, my take is that the tight monetary policy shall stay’
An interest rate rise could spur short-term commercial development and slow home sales. Rising rates cause higher mortgage payments, thereby decreasing homebuyers’ choices. But if Millennials jump in and buy before interest rates rise too far, it could create a second wind for the residential market.
Urbanization:
Urban population growth is a global phenomenon. An increasing desire to reside in “live-work-play” and “walkable” communities is not limited to young professionals; older generations are also drawn to such locations, which affects housing choice for all age groups. Shopping malls must adapt; many have skewed to one of two successful models – luxury or discount offerings. Urban vertical shopping configurations are gaining traction. Some suburbs are feeling residential pressure, with home resale not easy when younger families don’t want the kinds of homes that are in plentiful supply from a past generation of suburbanites. The past few years have also seen a rise in corporate relocations to cities from the suburbs as a strategy to attract younger, urban professionals.
The Gap between Rich and Poor:
Income inequality is widening worldwide, this issue deserves a close look relative to real estate. On the commercial side, it drives new opportunities to serve diverse markets with discounted retail offerings, while at the same time, contributing to a rise in luxury retailers.
There are also development opportunities in high-density multi-family and affordable housing, and in “place making” which can transform a vacant lot or an undesirable neighbourhood into an appealing urban “destination” to serve diverse populations. Yet the gap has arguably impacted purchasing power, diminishing housing choices and home ownership and contributing to the delay in new household formation among Millennials and certain immigrant groups.
The shift from home ownership to renting, and a decline in local small business ownership, contributes to fewer jobs and a lack of investment in communities, increasing the potential for the social unrest, we are seeing in cities and towns throughout the world.
Infrastructure:
The condition and development of Kenyan infrastructure lags behind than of a number of other countries. Aging roads, bridges, and power/gas/water lines no longer satisfy the needs of a highly connected populace, let alone businesses and world economies.
This impacts existing buildings and entire neighbourhoods, where energy or water infrastructure cannot be readily improved. Development, too, can be limited because existing streets and bridges cannot accommodate increased traffic flow if denser housing or mixed-use developments are built. The situation is further complicated by citizens unwilling to live in locations where the distance is too great to travel to work or shopping on crowded roads in disrepair.
The Changing Retail Model:
Merchandise offerings are subject to the preferences of demographic groups in transition. The sector is skewered by decreasing consumer purchasing power, often hampered by aging infrastructure, subject to steep declines in spending if an adverse event (think terrorist attack or cyber security breach) occurs. Yesterday’s best location may be today’s or tomorrow’s worst as urbanization draws more households into cities.
On the bright side, despite steady increases in online shopping, there is still a role for physical presence, where shoppers can browse and try products. Retailers that incorporate e-commerce elements, including fast delivery options, are well positioned, at least in the short term. There is continued pressure on existing properties to keep occupancy strong and adapt logistics. Store sizes — particularly within live/work/play, walkable, and transit oriented developments — are shrinking, but many of the attractive amenities of such “urban” shopping districts are now being incorporated into suburban shopping areas.
Financing
Real estate finance plays a crucial part in the development process. Obviously, there is a requirement of huge sum of capital to start a housing project. And as such borrowing has been a very significant feature of residential development as a consequence of its high unit and the value-huge capital outlay. Unfortunately, large traditional lending institutions particularly banks and other major lenders hardly want to get involved in giving acquisition, development and construction loans to private estate developers. In other words, major banks and other financial institutions somehow reluctantly give these loans or render credit facilities to these estate developers. And even those banks whose offer these loans tend to have high rejection of applications. Thus, there are obstacles to the free flow of funds from major lender and banks to the private estate developers. Hence the private estate developers in Kenya in the midst of performing their roles in curbing housing problems are found wanting in terms of funds.
Land
Land and finance have been identified to be the two major problem areas affecting Real estate development in Kenya. Planners are constantly being faced with a number of challenges relating to Land Use Management bearing in mind that In Kenya, land and property regulations have been inherited from colonial times and involve a rather complex tenure mechanism framed in many difference laws. These challenges are having a direct impact on Property Developers and if not well mitigated can impact on development when it is least expected with possible major effects on the feasibility of the project. One indication of the complexity and multiplicity of regulation is highlighted by the number of days required to register property which is not only cumbersome, but also lengthy and expensive. Beyond property registration and tenure, one other most important aspects for property development is trunk infrastructure provision. The development of such infrastructure is highly linked to price since as developers buy land and service it with infrastructure, land prices rise immensely and the increment is passed on to the buyers.
For instance, according to the National Housing Agency of Kenya, in 2005, prior to the beginning of the Mombasa Road construction in Nairobi, surrounding land was sold at roughly KSH 2.8 million an acre (or KSH 3.8 million in today’s prices). As the road developed, prices reached KSH 10 million.
The market stakeholders: who puts the property in the market?
As the demand for Rental property continues to put pressure on property developers, their capacity to execute projects as well as to bring well-built units at reasonable costs into the market is becoming a question. In Kenya, majority of property developers are family-owned businesses that grew from an initial one or two housing unit’s investment into Small and Medium Size Enterprise (SME) types of businesses capable of delivering a sizable amount of units yet they put to the market large developments with 200 to 250 units. Such growth has implications not only in terms of financing (as established SMEs with a track record can afford to find better funding)but also to the extent that most of these SMEs may still lack adequate capacity in terms of financial management, safety and occupational health, marketing and sales, and relationship management with contractors. This has in-turn induced a degree of execution risk like inability to keep the projects within the stipulated time or even escalated budgets.
Miscellaneous problems:
- Substandard constructions;
- Collapsing buildings;
- Delay in project completion;
- Delay in getting the necessary consents, approvals and/or documentation;
- Financial loss (deposits or entire amounts);
- Unplanned estates and urban sprawl;
- Irregular acquisition of public land;
- Undocumented investors;
- High property prices;
- Bad investment decisions as a result of limited information or poor advice;
- Disputes and protracted litigation.
Is it time the government steps in and sets up a regulatory body that will act as a reference bureau and also provide guidelines for orderly, transparent and efficient management of the sector? If constituted, such a body should be an independent entity with representatives from all stakeholders and be charged with the responsibilities of ensuring that:
- Buildings are constructed and completed as per approved plans and specifications;
- New developments have the required approvals before construction commences;
- All constructions are supervised by registered and licensed professionals;
- Developers meet completion timelines;
- Scrutinize title documents and provide advice to potential buyers;
- All service providers are registered with respective professional organizations;
- Standard operating procedures are set;
- A website is set up where service providers are listed;
- All agents are vetted and all properties being offered for sale;
- Data on property transactions and investors’ details are kept;
- Research on real estate is carried out and a journal produced periodically;
- A property market performance index is prepared;
- Complaints in the sector are attended to expeditiously;
Some members of the public believe the establishment of such an authority will ease public anxiety and restore confidence to the sector.
Professionals agree that research and preparation of a property market index will make property investment decisions more analytical and economic fundamentals oriented rather than market perception driven as is the case today. Some are of the view that a regulator is critical for the success of the proposed Real Estate Investment Trust companies in Kenya because investors will require comprehensive information from trusted sources; otherwise they may shy away.
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