Posted Thursday, February 9 2012 at 00:00
Eric Mudamba was a happy man a year ago. His accountancy job at a multi-national company with offices in Nairobi afforded him the good life, and so he moved into a house in the exclusive neighbourhood of Kilimani, a walking distance from the city centre.
Just as he was settling down to start enjoying the fruits of his labour, the shilling started tumbling down, heralding one of the most tumultuous months in the history of the nation.
All of a sudden, businessmen started quoting their prices using the US dollar.
The cost of living soared through the ceiling. Mudamba was hit hard, and so he retreated into his cosy abode, did the maths, called his agent and relocated to the relatively cheaper neighbourhood of South B.
“I had stayed in Kilimani for a decade,” he says, “and had even started entertaining ideas of buying a house there. But as things stand right now, I may have to wait quite longer to realise that dream.”
With a modest two-bedroom flat going for as much as Sh40 million in the area, his goose seems cooked.
He had noticed a gradual appreciation of property prices in the neighbourhood, especially over the last five years, but he attributed this to a growing middle class living beyond its means and hoped things would cool down within a year.
But they didn’t. “When the shilling took a beating last year even as rent and general living costs shot up, I realised living the high life was no longer economically viable for me unless I owned the house, so I packed and left,” he says.
Mudamba’s story illustrates the instability of the burgeoning property market in the country today.
Everywhere you turn modern-ish flats are coming up by the hundreds to take advantage of a housing boom never experienced in this country before. But that boom, analysts warn, is riding on a pretty unstable wave. People are spending money the do not have.
But Haron Nyakundi, chairman of the Joint Building Council, says the exodus to lower-income zones is just a reflection of the pessimistic attitude of most Kenyans.
“Out attitude has always been that cheaper is better, therefore when prices rise by even a very small margin, everybody panics,” he says. “This can only hurt the industry.”
The best way forward, he advises, is sobriety by developers, builders and buyers, because only level-headedness can ensure that the industry remains stable and balanced.
“When you are in a ship and there is a problem, the worst thing is to cram yourselves into one place because that will sink the ship. The same applies in any industry, including the property market,” says Mr Nyakundi, who is also the Chairman of the Quantity Surveyors Chapter of the Architectural Association of Kenya.
Any artificiality caused by the property boom, he adds, will heal itself in the course time.
“No business environment is static, therefore there should not be any massive movements, especially now that the shilling is slowly stabilising. Panic will lead to a lot of damage,” he says.
The runaway inflation that bogged down Kenya’s economic growth forecasts may have ebbed away by the time January gave way to February, but the effects of that financial turmoil still maintain their vicious grip on the market.
For developers, the high cost of raw material means they have to transfer the burden to the buyer or tenant, a situation that, when compounded by the immoral price of land in most urban centres, has resulted in property prices beyond the means of many.
A quarterly report by Hass Consult, a property consulting firm, recently indicated that many Kenyans in the middle class are shifting into cheaper housing areas as the twin effects of inflation and the realisation that they are not as rich as they have been thinking they are finally hit home.
Property price indices for the fourth quarter of 2011 indicate that the shift comes against a backdrop of squeezed household budgets on inflationary pressures and near static pricing in housing.
Hass Consult Property Development Manager Farhana Hassanali says that, as developers continue to seek coverage of higher construction costs, asking prices keep creeping up for town houses — and move up even more strongly for apartments, a sector still recovering from the over-supply of two years ago.
“Overall, the dip in house prices in areas such as Muthaiga and Runda, and the ongoing climb of prices in areas such as South B, confirms the overall shift down-market of families looking for new home options,” says Ms Hassanali.
Middle income areas such as South B, South C, Nairobi West, Doonholm and Buru Buru, among others, have become the most favourable refuges for the middle class and have recorded a rise in both property prices and rentals of close to 20 per cent.
The report indicates that the biggest rises in average prices over the last 15 months were recorded in South B and Tena, where the averages rose by nine per cent, followed by Fedha, Nairobi West and Nyayo, all of which recorded eight per cent increases.
This has pushed selling prices higher, with analysts saying that, generally, property prices in these suburbs are now more than three times higher than 11 years ago.
That might sound like good news to developers, but beyond those shiny apartments along Thika Road and the maisonettes in Migaa lies a worrying trend.
The statistics speak volumes on the mismatch between housing demand and new construction, with an ongoing tendency to over-deliver at the very top of the market and to build too little further down the property chain.
Ms Hassanali says that, in the rentals market, rents grew “most strongly at the base of the property pyramid” — read apartments.
This could be explained by the fact that many people have suspended their plans to purchase properties as they wait for the industry to stabilise.
“Rents in top-end housing have also climbed after a long period of relative price stability, which is indicative of buyers delaying their purchases,” Ms Hassanali adds.
The middle-class is bearing the brunt of this unfortunate turn of events. Recently moneyed and eyeing the good life, most Kenyans in this segment do not want to be caught living in the dusty suburbs of the city.
They would like to buy the house they live in at Pangani, but because they can’t afford the Sh7 million the developer is asking for, they opt to rent it and pay Sh40,000 at the end of the month.
For those in the high income bracket, however, things cannot be rosier. Prices of standalone houses fell by 1.8 per cent between September and December last year, according to various estimates.
Thus the middle market continues to ask and achieve higher sales prices as developers recoup the extra costs of land and construction materials in a market where demand remains solid.
At the very top of the market, for villas and standalone houses, there is currently no buyer appetite for further price rises, and sometimes stiff negotiations on closures are dampening prices marginally, the Hass Consult report reveals.
The apartments market was the main beneficiary from the move down the property ladder, with the asking prices for apartments rising by 1.4 per cent and asking rentals by 2.1 per cent between October and December, 2011.
For those building in Westlands, Brookside, Runda and Muthaiga in Nairobi, and in Thika town and its environs, the outlook does not look that encouraging though, with prices taking a tumble in the last four months.
Analysts blame this on an unhealthy demand-supply mismatch, with developers building far too many houses that are highly priced for a market segment that only so many people can afford.
“Only a few people can afford to buy or rent high-end properties,” says Nathan Luesby, a consultant with Hass Property. So, has Kenya’s property market finally reached the much-anticipated plateau? Is the prevailing price fluctuation likely to end soon?
Many remain pessimistic about that happening, arguing that the huge demand in the sector is likely to sustain the high prices for the foreseeable future.
Should things, however, take a tumble, developers still have the option of introducing bargains, offers and discounts as investors look for ways to off-load the properties into the market.
But there is a rider. Investors cannot continue ignoring the low-income segment if they want to make money in the next 10 years.