Activity in Kenya’s real estate sector that has been a key driver of growth in the past five years cooled off in the first half of this year as inflation picked pace and the local currency came under severe pressure from local and external shocks.
Cement consumption, an indicator of activity in the sector, declined by 6.5 per cent to 256,326 metric tonnes in the month of June compared to 274,073 tonnes the previous year, according to the latest data from the Kenya National Bureau of Statistics (KNBS).
Cement producers predicted a further decline in demand for construction materials – citing the continued erosion of the shilling’s value and its impact on the cost of imported raw materials. The shilling continued its slide in Monday’s trading breaking the psychological ceiling of 100 units to the dollar – the first in its history.
The number of approved building plans by Nairobi City Council in the first eight months of the year also dropped 9.7 per cent to 2174 from 2407 during a similar period last year showing a degeneration in market conditions as inflation rose to 15.25 per cent and the shilling slid to about 95 units to the dollar.
“Inflation has pushed up the cost of doing business contributing cutting down the number of applications as developers shelve or postpone their plans,” said Mr David Gatimu, an assistant director Development Control at the department of City Planning.
Manufacturers said there has been a general decline in sales since April, a trend that is expected to continue to the end of the year.
“We have seen a slowing down in sales as people as consumers grapple with rising economic challenges. This month we were about 20 per cent down but we expect it to dip further to about 30 per cent,” said Mr Raval Narendra, the CEO of Devki Steel Mills.
Devki is one of Kenya’s largest producers of construction materials including steel, cement and galvanized sheets.
Mr Narendra said cement production was down by approximately 10 per cent in the first eight months of the year while the output of steel and galvanized sheets was 20 per cent less than a similar period last year.
Mr Narendra said the decline is mainly the result of exchange rate loses that have seen the shilling shed 24.4 per cent of its value since the beginning of the year to close at Sh101 against the dollar Monday from 81.2 in January.
The decline in the number of investors seeking approval for construction of new buildings is an indicator of low economic expectations that many economists expect to persist in until both inflation and shilling change direction of movement.
Uncertainty over the economic prospects in the coming months has seen many investors in the real estate sector shelve their plans for fear of starting projects they may not complete because of large variation in costs.
Kenya imports the bulk of construction materials or the raw materials used in making them such as steel, clinker for cement making the exchange rate a critical determinant of activity in the sector.
“The slowdown should be a red flag not only to the industry but the entire economy because construction has been the locomotive of growth,” said Mr Hussein Mansi, the managing director at Bamburi Cement.
Inflation rose from 5.42 per cent in January to 16.67 per cent in August forcing producers of consumer goods to increase prices ultimately raising the cost of construction.
The sector has also been under intense pressure from land price inflation that is up more than 20 percentage points since last year.
Though KNBS data indicates that production of galvanized sheets rose by 54.5 per cent in the first six months of the year to 24,000 tonnes, industry players said demand has declining steadily since April.
Cement producers have yet to review their prices fearing its possible impact on demand. “Ultimately, inflation will impact on cement pricing as producers move to protect their margins,” said Mr Pradeep Paunrana the MD of Athi River Mining Limited.
Analysts said inflation has had a deeper impact on construction but sector has benefited from the big projects that are still running such the building of Nairobi’s Thika Road.
Data from the banking sector also show that the non-performing loans associated with building and construction rose by 13.3 per cent to Sh1.7 billion, a development that has been attributed to a flattening of property prices with the rise in the cost of living.
Though there was a decline in the number of plans approved, the value of approvals rose marginally indicating that prices have not collapsed and that the sector has not lost its attractiveness to investors.
The value of approved buildings rose by 57.8 per cent since January even as the number of buildings for approval declined.
Industrialists believe that the sector is far from going into a slump citing ongoing infrastructure projects that are expected to continue supporting growth.
“The sector has not been growing too fast to warrant concern of a possible burst. It has only been noticeable because we began from a very low base,” said Mr Hansi.
Paint maker Crown Berger said except for Mombasa where sales are a bit subdued sales have remained robust in major towns such as Kisumu, Nakuru and Eldoret this year compared to the same period last year.
The Central Bank of Kenya’s half year report shows that demand for construction sector loans remained strong with real estate portfolio and that of building and construction rising by 41.9 per cent and 45.4 per cent respectively over the period ended June 2011.
Loans to real estate sector stood at Sh130.8 billion while the building and construction portfolio accounted for Sh33 billion.
The government’s investment in infrastructure has not only supported the construction but also opened up new areas for real estate development. Developments in other East African economies has also attracted investments from the Kenyan market supporting the country’s construction sector.