Ronald G. Nyairo
16 November 2009
opinion
Nairobi — Recently, a major real estate brokerage house in Nairobi released an index that showed a decline in house prices in the city for the first and second quarters of 2009.
This announcement was one of those events that cause a stir and speculation was rife over whether the so-called real estate bubble had finally burst.
Some even went a step further, prophesising a catastrophic crash, a la the 2008 frenzy in Western Europe and North America.
For those outside the country (and those within it who have not been fully attentive the past five years), Kenya's real estate sector, and economy in general, have experienced unprecedented growth.
The city's skyline has been transformed completely by a plethora of developments -- ranging from luxury condominiums in the city's west end to lower end residential units and commercial space in the Eastlands neighbourhoods.
In Nairobi's central business district, former banking halls have found themselves converted into an array of curious little premises called "stalls".
Even places like Kitengela and Athi River have been sucked into the activity; these once contiguous townships have seen property values appreciate exponentially and have been galvanised by an influx of commuters who now live in these "bedroom communities" and travel to work in the city.
Most people who characterise the appreciation of property in Nairobi as a "bubble" often point to the foreign currency remittances from the populous Kenyan diaspora as the reason for what, in their eyes, is a distorted market.
However, the fine-print of the report indicated that the index focused on data from the top end of the market with the average home value being Ksh20 million ($266,667).
A lot of people however missed (or chose to miss) that detail and perhaps with a tinge of Schadenfreude proceeded with the assumption that the index was indicative of the wider Kenyan market.
I beg to differ.
Despite the sizeable amounts that Kenyans living abroad send home each year, it would be folly to believe that remittances alone can finance payments on a significant portion of the $250,000-plus mortgage market.
You see, Kenya's economy had been growing steadily and, for the most part, organically, until the warlords of the post-election violence intervened.
What this means is that 90 per cent of Kenyans are earning considerably more today than they earned five years ago, which would, in turn, suggest that they devote more of their spending to basic needs such as housing and groceries -- hence the massive expansion of supermarket chains.
My argument is that it is the local middle class, and not the diaspora, who have been responsible for the vast majority of home purchases.
And even in the cases in which the diaspora do invest, they then lease out these properties to Nairobians who are willing to pay more in rent now than they were a decade ago.
Quite simply, there is an increased appetite and competition for space.
It may be that not as many members of the middle class are joining the ranks of homeowners.
But this is not a manifestation of a recession; it is more a reflection of a sluggish economy -- call it a reduction in growth but not a recession.
What this means is that middle tier home values will not necessarily decrease but will probably increase less rapidly. Well, what is up with the index then?
Let us be brutally ho-nest: a Ksh20 million home is not for the majority of those in the middle class.
Consider that for one to qualify for a mortgage of 80 per cent of Ksh20 million the gross household income would be in excess of Ksh700,000 ($9,333) a month.
The section of the population that earns that kind of income -- who have an annoying penchant for roping in the middle class into their argument so as not to feel too isolated -- are not in a rush to sell.
This dip in prices will discourage them from selling now and, according to the laws of supply and demand, fewer properties being listed will only increase the competition for, and therefore the value of, those that do come on the market for sale.
This will in turn open the door for more developments.
So what does this mean for the property market in Nairobi?
My take is that, in the absence of government intervention, there will be fewer developments targeting the lower rungs of the ladder, mainly due to the cost of construction and lack of availability of cheap financing for prospective homeowners.
Instead, in their quest to maximise their returns, developers will begin to target more specialised "niche" segments, a far cry from the one-size-fits-all approach that currently dominates the industry.
Soon, we might have bungalow- and entertainment-filled communities for retirees, or high end downtown high-rises for double-income couples without children, and maybe even adjoining townhouses for polygamous families!
Unfortunately, while this will bring added creativity to the real estate industry in general, it will not do much for its future growth.
Not having an adequate supply of homes accessible to first-time buyers seriously limits the market for property in general (including high-end ones) as well as stifling the transformative nature the real estate sector can have on a developing economy like ours.
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