Is Kenya’s real estate balloon popping? A look at Kenya’s real estate sector

Kenya's real estate sector contributes over 15% of the country’s GDP

The roars of earthmovers and a gang of workers shatter the peace of Githurai, a bustling suburb of Kenya’s capital city, Nairobi. A ten storeyed residential flat is quickly and steadily going up. The building owner, John Kamau, believes this is the best investment for his retirement benefits after 40 years of government service.

This is not John’s first rodeo, and he’s an experienced hand in the world of real estate. He owns several properties in Kiambu, Dagoretti, and along Thika road. All his rental houses are fully occupied with an even longer waiting list of eager tenants. Kamau swears by real estate, and his only regret is that he didn’t discover this gold mine earlier.

Investors, this article is for you. The article will walk you through the following,

1. Why real estate is slowing in some areas.

2. Things to avoid on your real estate journey

3. Ways to guarantee the most significant ROI on your investment

Real estate investing is nothing new in Kenya. Adverts of “prime” parcels of land flood mainstream media. Millennials and the growing middle-class insatiable appetite for land means that property values have skyrocketed.

A spot check across most major towns in Kenya confirms an increase in the price of land of between 50% to 400% over the last 20 years. Real estate contributed 6.2 billion USD to Kenya’s GDP in 2019.

But what drives people like Kamau to invest in real estate? Is it the security that comes from holding an asset that can be quickly liquefied, or is it due to the constant land appreciation? One thing for sure, though, the demand for real estate is ever-increasing.

High fertility rates, improved healthcare, and reduced infant mortality mean Kenya’s population has exploded. Demand for housing has never been this high. A 2019 government census puts Nairobi’s population at 4.397 million residents with a housing deficit of over 2 million units.

Nairobi started as a remote outpost along the Mombasa-Uganda railway route. A century after the man-eaters of Tsavo wreaked havoc on Indian coolies building the railway line, Kenya’s capital has transformed into a regional hub. The Maasai word for Nairobi, Enkare Nyirobi, or the place of cool waters, has undoubtedly changed. Now it’s not so cool, and water, just like space, is at a premium.

Nairobi’s metropolis is growing at a fast pace. Satellite towns of Ngong, Kitengela, Ruai, Syokimau have mushroomed due to the high demand for housing.

However, amidst these positives, all is not well in paradise.

Rental income is an excellent source of passive income; at least, it was in the not-so-recent past. However, things are slowly changing, and the housing landscape is shifting. Kenyans penchant for duplication means that almost everybody invested in the real estate sector. This massive investment trend led to a glut in housing, with fewer tenants seeking houses, especially high-end ones.

The downward spiral in the real estate sector can be attributed to many reasons, including;

1. Numerous failed housing projects.

Ponzi schemes have dealt heavy blows to this sector. Names like Goldenscape housing projects, ekeza real estate holdings, and many more are sure to send some investors into panic attacks or ICUs, considering the money they’ve lost in dubious deals.

The weak regulatory framework, corruption, and Kenyans peculiar habits of running to get-rich-quick schemes mean shady business people have had a field day with investors hard-earned dollars.

2. A slowdown of Kenya’s economy.

High taxation, poor weather, locust invasion, and COVID-19 drove the real estate sector to its knees in 2020.

In the second quarter of 2020, Kenya’s GDP fell by 5.5%, the biggest fall in recent times.

This has negatively affected the ability of Kenyans to pay rent. Most Kenyans have downgraded their living standards, and some have opted to relocate back to the villages where life is cheaper.

3. Low uptake of mortgages.

Mortgages mean a loan against a house or property.

Kenya’s mortgage sector is severely underdeveloped. High costs of servicing the loans have been touted as the main reason for this.

As of 2020, Kenya had 26504 outstanding mortgages compared to South Africa’s 1699634.

Kenya’s mortgage market penetration stands at a paltry 4.3% of its GDP compared to above 50% in developed countries.

Perhaps the single most devastating of this long list of calamities is COVID-19. Mass layoffs, a contracting economy, and a free-falling local currency has meant that the real estate sector has almost ground to a halt.

Is it safe to invest in Kenya’s real estate sector?

YES and NO

It boils down to a few factors to either make it or not in this cut-throat Industry. The following factors play a crucial role in the profitability of real estate.

Location.

Areas like Lavington, Karen, and Kitusuru are synonymous with affluence. In these upmarket areas, posters for houses to let are a dime a dozen, vacant homes abound, yet the fish aren’t biting. The reverse is true in regions like pipeline, Kikuyu, and Githurai, where tenants outnumber the empty houses.

According to a Statista report of March 2020, a one-bedroom house within the city center costs 434.76USD compared to 191.21 USD in the city outskirts. Location determines how profitable your investment will be.

Informal settlements and low rent areas are densely populated compared to high-end areas.

Research

Wanjiku, a 32-year-old banker, is counting her losses after falling victim to title deed fraud. She bought a 50×100 piece of land in the upmarket, leafy suburbs of Kitusuru to find out later that the land belonged to another person.

After spending loads of time and money in the police station and courts, she finally throws in the towel and lets the matter go.

Title deed fraud isn’t new, and thousands of Kenyans have fallen prey to these schemes by dealers and corrupt government officials.

Due diligence will save you tears and a broken heart. Invest in a reputable realtor firm to avoid such pitfalls.

Financing options

Kenya’s financial sector is robust. As an investor, it will be wise to consult widely to get the best investment partner to actualize your real estate journey.

It’s an open secret that buying land and building houses is a capital-intensive venture.

On average, constructing a modest house in Kenya’s major towns is approximately 350USD per square meter. Adding the cost of land to the equation is why a good investment partner is vital to your journey.

A good investment partner is;

• Alive to the realities on the ground. Tenants default or refuse to pay rent. A good financial institution should be open to discussions towards loan restructuring etc.
• Listed with the CBK as a financial institution and complies with all government rules and laws.
• Excellent track record in the real estate sector. An institution with a rich portfolio of successful projects is better than one without.

The real estate sector’s growth is expected considering that the population is ever-increasing with finite land size. More innovative and better ways of investing in real estate are coming up daily.

Better eco-friendly designs such as bamboo and soil blocks are increasingly being adopted to build houses. To stay relevant as an investor, you must keep abreast of real estate trends and best practices.

The real estate balloon might be popping in some areas due to the above reasons, but generally, the sector is robust and growing daily.

Real estate is a terrific investment if you conduct due diligence and are patient enough; after all, you may take a while before recouping all your investment.

Borrow a cue from the experts like Kamau and give real estate a shot.