Rental incomes for housing developers dropped by two per cent between July and September even as construction costs continued to rise, further depressing returns for investors in residential property.
The latest housing survey by property firm HassConsult reveals that rental returns on high-end homes were the most affected, making housing for middle income earners a more profitable investment option.
Prices of homes, however, maintained an upward curve rising by close to one per cent, driven mainly by high land prices and rising costs of construction materials.
The rise in property value also reversed what property experts had termed as a “pricing correction” first reported in the April to June period when average selling prices declined by about Sh450,000 to Sh21.2 million.
An average home in Nairobi’s upmarket suburbs such as Lavington and Spring Valley now costs Sh21.3 million and attracts a monthly rent of Sh94,549, according to HassConsult.
Farhana Hassanali, property development manager at HassConsult, attributed the dip in the rental market to a squeeze on consumer spending linked to the high cost of basic commodities like food and energy.
“Within the general picture, the squeeze on consumer spending has been greatest in the rentals market. Larger apartments came into the market at somewhat reduced rentals, but the rents of smaller apartments continued to rise,” said Ms Hassanali.
The real estate firm established that the rise in rentals from small apartments was linked to heightened demand linked to households postponing decisions to move to bigger homes- pushed by the rising inflation.
“This (the rise) may be a result of renters downsizing, which contrasts with the fall in town houses and large apartments suggesting some movement from larger to smaller accommodation as inflation bites,” she said.
Higher selling prices, even in the midst of increased supply in the homes market, revealed the “profound underlying stability of the housing market”, according to Hass Consult.
Daniel Ojijo of Mentor Holdings, a real estate firm with interest in the high-end housing market, said that the high pricing on homes was demand-driven and the situation will persist because supply still lags demand.
“We still have strong demand across the housing market which means even the increased supply is insufficient,” Mr Ojijo said, noting that business people and corporate executives were presenting the new face of home buyers in exclusive neighbourhoods.
The decline in the rentals market, he said, was associated with growing appetite for home ownership among high income earners. Mr Ojijo said that developing homes to sell was more lucrative than letting out because it allows investors to realise their returns faster.
Among housing projects the firm is developing are 10 villas in a gated community situated in Karen currently selling for Sh120 million each.
“Many people in the middle and upper income segments can now afford homes and I expect further increases on valuations, but rent will remain depressed,” he said.
Housing Finance MD Frank Ireri had dissenting views on further price hikes. “Developers have been focusing on building homes for the top end of the housing market, which now points to some sort of stability in prices.
But property targeting middle income earners still has huge headroom for further escalation,” said Mr Ireri.
“There is steady growth in both rental and selling prices in the middle income housing market, and it is where we expect the biggest capital gains,” he said.