19 March 2019

Kenya: New House Approvals Dip to Four-Year Low

The value of new building plan approvals fell by Sh30.5 billion last year to a four-year low of Sh210.3 billion, indicating difficulties facing real estate developers and holding down job creation in the sector.

Fresh Kenya National Bureau of Statistics (KNBS) data shows that last year's approvals were the lowest since 2014, when they stood at Sh205 billion. Developers blamed a misfiring economy that hurt demand for housing and office space.

Consumption of cement also dropped by five percent to 5.49 million tonnes last year from 5.79 million in 2017, reflecting the reduced pace of putting up new buildings in the country.

The number of building plans approved has an influence on cement consumption since construction only starts after regulatory approvals.

A drop in consumption of construction materials and new building approvals is a bad signal for job creation in the labour-intensive construction sector, which employs both skilled and unskilled workers.

"Last year the economy was not doing well, therefore eroding purchasing power. As a result developers shied away from new projects hence the lower approval applications and cement consumption," said Daniel Ojijo, a Nairobi-based property developer.

"In the property development industry, just like any other sector, when there is an imminent threat there is less opportunity for jobs, with a multiplier effect touching on lawyers doing conveyancing, construction material suppliers, artisans and consultants such as architects and structural engineers." The sector is cooling off from a heady boom that had seen house prices rise steeply in recent years, elevating the construction sector's contribution to GDP to as high as 15 percent in 2015.

Although the headline economy growth number in the first three quarters of 2018 averaged six percent compared to the 4.7 percent growth recorded in 2017, businesses still struggled and thousands of jobs were lost robbing the real estate sector of potential home buyers.

Commercial space

Businesses were mainly hit hard by credit constraints, thus putting a dampener on demand for commercial space.

The KNBS data shows that the slowdown in construction hurt both the residential and commercial segments of the building industry.

Approvals for new residential buildings fell from Sh150 billion in 2017 to Sh132 billion last year, a 12 percent drop.

Commercial building approvals in the same period fell by 13.4 percent from Sh90 billion to Sh78 billion, which has been largely blamed on lower demand as many firms controlled expenditure as a survival strategy during the lean period.

Realtors reported that the industry then sought to fill up unused space before committing funds to new units.

Property manager Knight Frank said in its Kenya market update for the second half of 2018 that office rents stagnated last year due to oversupply and lack of growth in demand, while residential house prices fell by an average of 4.5 percent last year.

"The decrease in cement production, cement consumption and the value of building plans approved is attributable to the current oversupply and lack of transactions... additionally, the interest rate cap has hindered many developments as commercial banks became increasingly cautious in lending to the private sector," said Knight Frank in the report.

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