Kenya Shilling Devaluation Compels Developers to Embrace USD Transactions

As of 1^st November 2023, the US dollar is trading at Ksh 150.45 compared to 4^th October 2023 when it was trading at Ksh 148.4.
According to the Central Bank of Kenya, Kenya has over Ksh 922 billion deposited in dollars by wealthy companies and individuals to protect their deposits from the Kenya shilling devaluation.
Capital spending by the government on infrastructure projects has also led to increased outflow of US dollars from Kenya.

In the last few months, Kenyan real estate developers have resorted to quoting the price of their houses in USD in an effort to manage financial risk that may result from further devaluation of the Kenyan shilling.

The quotation of property prices in US dollars helps developers to protect their profit margins. A stable price based on the US dollar helps to ensure that the return on investment after the deduction of construction costs is satisfactory.

Real estate professionals in Kenya on a development project

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Why Are Kenyan Developers Selling Houses In USD?

To understand why setting the prices in dollars is necessary, we must first understand the impact of the devalued Kenyan shilling on the real estate industry. The devalued Kenya shilling affects Kenyan real estate developers in two ways;

Cost Of Dollar-Based Loans

Let’s say a real estate company borrows money from an international financier and are lent USD 100 million for a development project. In March 2020, the loan amount was equivalent to Kshs 10 Billion at the exchange rate of Kshs 100. In today’s exchange rate of Kshs 151.08, the same loan principal is equivalent to Kshs 15.1 billion.

This means the real estate developers owe more to their financier if they pay in Kenya Shilling.

And if they sold the house when the Kenyan shilling was stronger, they still bear the cost of the devalued shillings when they pay their financier in USD. As such, setting prices in US dollars ensures they are protected from further devaluation of the Kenyan shilling.

Cost Of Imported Building Materials

In some cases, developers import some building materials to reduce construction costs. Most of these imports are priced in USD due to its stable value.

When a developer buys building materials at Ksh 151 per dollar, they have to be able to cover the cost of the raw material when they sell the house.

As such, selling the house in Kenyan shillings may affect their profitability if the value keeps deteriorating. To prevent this from happening, pricing the houses in USD helps to ensure they are not operating at a deficit once the real estate development project sells out and they are ready to pay their lenders.

Why Is the Kenyan Shilling Losing Value in 2023?

One of the main reasons why the Kenyan shilling is losing value is the decreased dollar inflow into the country. During a meeting with the Finance and National Planning Committee of the National Assembly, the CBK governor Kamau Thugge stated that the demand for US dollars outweighed supply, which led to the depreciation of the Kenyan shilling.

The issue is based on the higher demand for US dollars compared to the Kenyan shilling. According to Chris Muiga, a senior trader at National Bank of Kenya “It looks like one-way traffic”. This increased demand for the US dollar has led to a weakened position of the Kenyan shilling.

What Is the Forecast for the Kenyan Shilling to USD?

According to intelligence firm Stears, the US Federal Reserve will keep raising the dollar rates, devaluing the Kenyan shilling even more. “The US raised interest rates by 500 basis points,” says Dr Thugge the current CBK governor.

Is Kenyan Money Losing Value?

Yes. The current exchange rate of dollar to Kenya Shilling is considerably worse than ever. Over the last two years, the Kenyan shilling has lost more than 25% of its value.