Kenya’s housing market is cooling rapidly, amidst falling demand caused by constrained credit access, coupled with the continued oversupply of high-end residential developments.

During the year to Q3 2019, the Hass Composite Property Sales Index, a measure of asking sales prices of residential properties, fell by 3.4%, in sharp contrast to a y-o-y rise of 8.1% during the same period last year, based on a report released by <a href="http://www.hassconsult.co.ke/" target="_blank" rel="noopener noreferrer">HassConsult Limited</a>. It was the second consecutive quarter of y-o-y price declines after falling by 3.2% in Q2 2019.

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Quarter-on-quarter, residential property prices increased slightly by 0.9% in Q3 2019.

By property type:
<ul type="disc">
 	<li>For <b>detached houses</b>, prices fell by 7% y-o-y in Q3 2019, in sharp contrast to an 8.8% rise a year ago</li>
 	<li>For <b>semi-detached houses</b>, prices rose by 6% y-o-y in Q3 2019, a deceleration from last year’s 11.8% growth</li>
 	<li>For <b>apartments</b>, prices dropped 1.7% y-o-y in Q3 2019, in contrast to a 1.3% rise a year earlier</li>
</ul>
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The Hass index is based on 4,000 to 6,000 properties tracked across Kenya, which are collected from multiple estate agencies and all publicly available house sales, including in property magazines, property websites and the national media.

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Several Nairobi suburbs registered nominal house price rises. <b>Nyari Estate</b>, one of the most secured upmarket neighborhoods in Kenya and in close proximity to many diplomatic establishments, saw the biggest rise in house prices of 12.4% during the year to Q3 2019. It was followed by <b>Ridgeways </b>(10.6%), <b>Loresho</b> (9.5%), <b>Muthaiga </b>(8.6%), <b>Karen</b> (6.2%), and <b>Gigiri</b> (5.2%).

Modest to minimal price increases were recorded in <b>Westlands</b> (4.8%), <b>Runda</b> (4.8%), <b>Spring Valley</b> (4.7%), <b>Donholm</b> (4.3%), <b>Kitisuru </b>(4.1%), <b>Lavington</b> (3.7%), <b>Kileleshwa</b> (3.1%), <b>Kilimani</b> (0.9%), and <b>Eastleigh</b> (0.5%). <b>Langata</b>, home to many housing developments and known for its gardens and parks, was the only Nairobi suburb which registered a nominal house price decline of 3.8% during the year to Q3 2019. However when the 4.7% inflation rate in Nairobi in end-Q3 2019 is taken into consideration, real house prices have actually declined in half of Nairobi suburbs during the year to Q3 2019.

Despite the recent decline, house prices in the capital are still 4.4 times higher than in 2000. The average value of a residential property in the HassConsult database in surged to KES 31.2 million (US$ 304,777) in September 2019, from just KES 7.1 million (US$ 69,356) in December 2000. The average price for a 1-3 bedroom residential property is currently KES 14.4 million (US$140,666), while the average price for a 4-6 bedroom residential property is KES 39.1 million (US$ 381,948).

In Kenya, most property purchases are for cash. Because of this, the mortgage market remains underdeveloped and credit access is extremely constrained. Currently, the size of the mortgage market was equivalent to just over 3% of GDP and there were fewer than 25,000 mortgage loans outstanding - highlighting the inaccessibility of housing finance.

“The real estate sector, similar to, other segments of the economy is challenged by the lack of liquidity as a result of the amendment of the Banking Act in 2016 that introduced interest rate caps,” said Sakina Hassanali, Head of Research and Marketing at HassConsult. “We have seen access to credit by developers and buyers become difficult as commercial banks have become conservative at lending.”

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Property transactions are now falling by double-digit figures.

Moreover, the oversupply of high-end properties is expected to slow the housing market further. Some of the latest developments currently selling off-plan include: Cytonn Investments’ Applewood property in Karen, selling at KES 180 million (US$ 1.76 million); Entim Sidai’s two-storey maisonettes in Karen, selling at KES 120 million (US$ 1.17 million); and HassConsult’s Enaki in Gigiri, offered for KES 80 million (US$ 781,000).

Yet Kenya’s economy remains robust. In 2018, the economy expanded strongly by 6.3%, up from a 4.9% growth in 2017 and the highest growth in eight years, according to the <a href="http://www.imf.org/">International Monetary Fund</a> (IMF) – making it one of the fastest-growing economies in Sub-Saharan Africa. The economy is projected to expand by a healthy 5.6% this year and by another 6% in 2020.

Foreigners can freely buy ‘commercial class’ land in Kenya. This type of land is for income or revenue-making purposes.

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<h3>A shift to smaller, lower priced properties</h3>
As the affordability of detached houses has deteriorated over the past 18 years, homebuyers have been shifting to lower priced property types. Apartments took up 55.6% of sales in 2018, sharply up from just 23.5% in 2001. Semi-detached houses accounted for 29.2% of sales in 2018 while detached houses accounted for about 15.2% of the market, a significant change from 2001, when semi-detached houses made up around 25% of sales and detached houses more than half.

According to HassConsult in its Q3 2019 report, there is “high demand for low middle-income housing in far-flung Nairobi’s metropolis as tenants opt for cheaper units in the wake of the prevailing high cost of living and uncertainty in the economic environment.”

“Continued dominance of the apartments in the housing market is a clear demonstration of the predominance of the middle-income segment of the population,” said the <a href="https://www.kba.co.ke/" target="_blank" rel="noopener noreferrer">Kenya Bankers Association</a> (KBA).
<h3>Marginal land price rises</h3>
Land prices in Nairobi rose slightly by 1.7% during the year to Q3 2019, according to HassConsult. Loresho, one of the capital city’s affluent residential area, registered the biggest y-o-y rise of 9.4% in Q3 2019, followed by Kitisuru (8.2%), Langata (7.9%), Spring Valley (5.5%), Nyari (5.2%) and Karen (4%).

Upperhill had the country’s most expensive land in Q3 2019, at an average price of KES 545.7 million (US$5.33 million) per acre, followed by Kilimani, Parklands and Westlands, with average prices of KES433 million (US$4.23 million), KES418.7 million (US$4.09 million) and KES418.5 million (US$4.09 million), respectively.

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<h3>Developers and homeowners are struggling</h3>
Real estate was among the sectors that recorded the highest growth in non-performing loans (NPLs) last year, as both developers and homeowners are now struggling to repay their loans, according to the Central Bank of Kenya. As a result, an increasing number of repossessed homes are now being sold at reduced prices.

For instance leading mortgage lender Housing Finance Group reported KES 652 million (US$ 6.37 million) loss in 2018 and another KES 97 million (US$ 950,000) in the first six months of 2019. The company recently <a href="https://www.constructionkenya.com/7151/kenya-real-estate-slowdown/" target="_blank" rel="noopener noreferrer">listed for auction KES 2.5 billion (US$ 24.4 million) worth of houses</a> in an effort to clean its loan portfolio. To entice buyers, HF Group has slashed prices by as much as 30% in a promotion called “Shika Nyumba” (get a house). Most of the houses on sale are located in Nairobi and its surrounding areas and are listed for KES 3.4 million (US$ 33,200) to KES 300 million (US$ 2.93 million).

Another embattled developer, Suraya Property Group, has recently faced a storm of complaints from buyers due to project delays. One of its flagship projects – Lynx Royal Apartments – has been auctioned. Some homeowners are demanding refunds while others have sought the help of the Directorate of Criminal Investigations for a probe into the matter. In June 2019, Suraya was able to secure KES 1.6 billion (US$ 15.63 million) financing from a consortium of four banks to complete some of its pending housing projects.

“Things got worse and the auctions were more [in 2018] compared to 2017,” said auctioneer Stephen Kang’ethe. “The irony is that there are no buyers even for property being put up for auction. Things are bad. There is no money.”

Falling demand is forcing some developers to offer promotions to attract buyers, including price discounts, reduced downpayments and other freebies.

“Demand is both constrained by oversupply in some segments and also due to would-be-buyers experiencing very limited access to credit,” said Johnson Denge of Cytonn Investments.

In Q1 2019, the total value of residential building plans approved dropped 10.3% y-o-y to KES 33.05 billion (US$ 322.84 million), according to the <a href="https://www.knbs.or.ke/" target="_blank" rel="noopener noreferrer">Kenya National Bureau of Statistics</a> (KNBS). Likewise during the first eight months of 2019, cement production and consumption, another indicator of the state of the construction sector, fell by 2.7% and 0.5% respectively.
<h3>Rents are stabilizing</h3>
Nationwide residential rents rose slightly by 0.8% y-o-y in Q3 2019, to an average of KES 149,886 (US$ 1,464) per month, according to Hass Consult. This is a sharp slowdown from annual rises of 3.3% in Q2 2019, 8.7% in Q1 2019, 8.6% in Q4 2018 and 4.7% in Q3 2018.

Rents have increased by almost four times since 2001.

Among Nairobi suburbs, <b>Westlands</b> recorded the biggest rent increase during the year to Q3 2019 of 5%, followed by <b>Kilimani </b>(3.2%), <b>Lavington </b>(2.9%), <b>Runda</b> (2.5%), <b>Eastleigh</b> (2.4%), and <b>Kileleshwa</b> (2.2%). Other suburbs with minimal rent rises included <b>Gigiri</b> (1.6%), <b>Muthaiga</b> (1.1%), and <b>Nyari Estate</b> (0.5%).

But rents are now falling in other Nairobi suburbs, particularly in <b>Loresho</b>, which recorded a rent decline of 3.5% during the year to Q3 2019, followed by <b>Karen</b> (-2.2%), <b>Spring Valley</b> (-1.5%), <b>Ridgeways</b> (-1.1%), <b>Kitisuru</b> (-1.1%), <b>Langata</b> (-0.8%), and <b>Donholm</b> (-0.6%). Though in real terms, rents are now falling in almost all of the capital city’s suburbs.

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“Asking rents for a modern apartment may cost as little as Sh23,400 and this bodes well for many tenants who are now preferring affordable units as they take caution to save in the wake of job losses cross all sectors,” said Sakina Hassanali, Head of Research and Marketing at HassConsult. “Notably, as the cost of living soars, the lower middle class is opting to pay slightly more in transport but less in rents.”

In Q3 2019:
<ul type="disc">
 	<li>The average rent for a 1-3 bedroom residential properties stood at KES 80,229 (US$784) per month</li>
 	<li>The average rent for 4-6 bedroom residential properties was KES 227,506 (US$2,222) per month</li>
</ul>
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Kenya has a large rental market, with about 84% of Kenyans are currently renting houses.
<h3>Acute shortage of affordable housing</h3>
Despite the crisis at the upper end, there is huge demand for low-end housing.  More than 200,000 homes need to be built a year, but only 50,000 new units are being built annually, according to Lands Cabinet Secretary Jacob Kaimenyi, leaving around 150,000 Kenyans un-housed every year with middle-income earners and students in urban areas most affected.

Currently, Kenya’s housing deficit is estimated at around two million units, according to <a href="http://housingfinanceafrica.org/app/uploads/V13-EAST-AFRICAN-COMMUMITY-SC-proof-read.pdf" target="_blank" rel="noopener noreferrer">Africa Housing Finance Yearbook 2019</a>.

In Nairobi, more than 67% of all residents live in informal settlements. The proportion of owner-occupied households in the urban areas currently stands at just 18%, compared to 82% in rural areas.

The huge demand and supply gap is aggravated by property developers concentrating on building houses for the high-income earners, says Elizabeth Nkulu of Cytonn Investments. Based on World Bank estimates, 83% of the existing housing supply is for high income and upper middle-income segments, 15% for lower middle income segment and only 2% is intended for the low-income population.

To ameliorate the situation, the government, with the help of the private sector, has recently launched an ambitious housing development project. In 2018, the National Housing Corporation (NHC) established the Affordable Housing Initiative, as part of the government’s ‘Big Four’ agenda. The program aims to deliver <a href="http://housingfinanceafrica.org/app/uploads/V13-EAST-AFRICAN-COMMUMITY-SC-proof-read.pdf" target="_blank" rel="noopener noreferrer">500,000 affordable housing units by 2022</a>. Prices for these units range from KES 600,000 (US$ 5,861) for a studio apartment to KES 3 million (US$ 29,305) for a three-bedroom apartment.

The <a href="https://cytonnreport.com/topicals/national-housing-development" target="_blank" rel="noopener noreferrer">housing initiative</a> includes the following components:
<ul type="disc">
 	<li>The <b>Kenya Mortgage Refinancing Company (KMRC)</b> was established with a primary function of providing long-term mortgage loans at low interest rates.</li>
 	<li><b>Stamp duty tax exemption</b> for first-time homebuyers and a 15% <b>corporate tax rate relief</b> for developers who provide at least 100 affordable housing units were year were introduced.</li>
 	<li>The <b>National Housing Development Fund (NHDF)</b> was established, which acts as a saving trust for employees who plans to purchase a residential property. Employees and employers are required to contribute 1.5% (3% in total) of the employee’s monthly salary (capped at KES 166,000 or US$ 1,622 per month) to the Fund.</li>
</ul>
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Nairobi has also introduced an Urban Renewal Programme in 2017 to redevelop several old residential estates, in an effort to improve the access to low-cost, affordable housing in the city. Accordingly, more than 100,000 new units are to be constructed through the comprehensive plan to accommodate about 650,000 people. The first phase of the programme involves the construction of about 10,200 units in various estates including the Jeevanjee, Pangani, Bachelor Quarters, and Old and New Ngara.
<h3>Mortgage market remains undeveloped</h3>
Kenya’s undeveloped mortgage market is one of the primary reasons for its acute housing shortage. Currently, its size is just above 3% of GDP and there were fewer than 25,000 mortgage loans outstanding.

In a recent report, the World Bank commended the role of Savings and Credit Cooperatives (Saccos) in providing affordable housing finance. The share of Saccos-financed housing in Kenya is estimated at about 90%, since banks do not consider housing finance to be attractive.

"Saccos provide a credit for housing finance that is much more accessible and is provided at a cheaper rate as compared to what many banks can offer," said Mehnaz Safavian of World Bank.

Source : https://www.globalpropertyguide.com/