Wahinya Henry PeopleDailyKe
The residential sector in the Nairobi metropolitan region has suffered a jolt after the value of approvals in the sector dropped to Sh33 billion in the first quarter of 2019 compared to Sh36.8 billion for a similar period last year.
The Nairobi Metropolitan Area (NMA) Residential Report 2018/2019 by Cytonn Real Estate developer blames the negative performance of the residential sector on decreased building activity in the city. The demolition of several buildings in the city on claims that they were built on riparian or public land is also making investors hesitate.
Nationally, the entire real estate market posted a decline in contribution to the national GDP, which came in at 11.3 per cent in the first quarter of 2019, down from 14.4 per cent in a smilar period of last year and 12.4 per cent for full year 2018, according Cytonn.
The research was carried out in 41 estates to gauge the residential performance in 2018/2019. High-end segment suburbs of prime city suburbs such as Karen, Runda and Kitisuru and the upper middle-income Segment of suburbs such as Kilimani, Lavington, Kileleshwa, Loresho and Ridgeways, among others were sampled.
Also surveyed were lower middle-income segment consisting of suburbs in Nairobi habited by middle class such as Kahawa West, Imara Daima, as well as satellite towns such as Ngong, Ruiru, and Juja. Detached units and apartments were also analysed separately.
The housing deficit in the Nairobi is estimated at 2.1 million units in 2019, compared to two million in 2018. This is due to a rapid population growth and high urbanisation rates at 2.6 per cent and 4.3 per cent, says demographer Peter Nyakwara.
High land prices
Speaking at a forum to mark the World Population Day on July 11, Nyakwara said the rising population is expected to continue sustaining demand for more dwelling units, with 97.1 per cent of the demand being in the lower mid-end and low-end segments.
While it chooses to maintain a neutral outlook for real estate development in the city, Cytonn says real growth is being impacted against by high land and financing costs.
A survey towards the end of last year by Hass Property placed land around Upper Hill area of Nairobi as most expensive at Sh558.3 million per acre and Kiserian lowest at Sh7.1 million per acre.
An acre in Donholm costs Sh70 million, Eastleigh Sh293.9 million, Karen Sh59.8 million, Lang’ata Sh61.2 million, Kileleshwa Sh306.3 million, Lavington Sh237.8 million, Athi River Sh12.6 million, Syokimau Sh20.4 million, Ruaka Sh86.8 million, Thika Sh18.1 million.
Additionally, despite continued infrastructural improvements, developers are facing challenges in form of insufficient sewer lines, access roads and water supply.
According to the Kenya Bankers Association Housing Price Index (KBA-HPI), average house prices declined by 2.78 per cent in the first quarter of 2019.
KBA Chief Executive Officer Dr Habil Olaka says introduction of interest rate caps has seen banks shift from segments considered risky. “This has led institutions to shift resources to low and risk-free assets,” says Olaka (such as Treasury Bonds and Bills).
“Credit advanced to the construction sector declined by one per cent in the first quarter of 2019, reflecting a general slowdown in construction activities,” says the Kenya National Bureau of Statistics (KNBS) in first quarterly GDP report 2019.
Reviews indicate that with the interest rates cap law still in effect, developers are not yet out of the woods, but are expected to continue experiencing barriers to adequate financial access, which will impact on housing supply this year.“Developers can only overcome this hurdle if they seek alternative sources of finance such as Real Estate Investment Trusts,” says Cytonn real estate analyst, Juster Kendi.
More partnerships with foreign investment institutions seeking to enter the market, and local pension funds seeking to diversify their investments their growing portfolio of assets under management are the other alternatives if real estate development is to assume a positive growth, says the report.
“We expect reduced supply in the high-end and upper mid-end sectors given the existing supply against waning demand. Developers are likely to shift focus to differentiated concepts such as mixed-use developments, especially in the upper mid-end markets, as well as niche markets in the lower mid-end and low-end segments, which have the highest uptake, thus potential for better returns,” says Cytonn.
According to the research, prices in the NMA region appreciated marginally by 0.3 per cent in 2018/2019, which is 2.5 per cent points lower than the 2.8 per cent growth recorded in 2018.
The sluggish growth in capital gains could be attributed to excess supply of homes, especially high-end and upper mid-end segments, which has slowed down the rate of price appreciation, as demand remains suppressed.
Still, Kendi says all is not lost. “We expect the residential sector to keep growing, with growth in prices to pick up on the back of improved mortgage market following the launch of Kenya Mortgage Refinancing Company,” she says.
“Whereas developers will shift focus to the lower end market segment, in a bid to tap into government’s initiatives amidst a tough financial environment, and differentiated concepts in the upscale markets, especially as mixed-use developments in an attempt to diversify their returns from the real estate sector.