Real estate brokers ease fears of sector crashing even as property prices fall

Developers in the real estate industry have quelled fears of an impending crash to one of Kenya’s key economic segment even as property prices remain on the decline.

After consistently growing year over year over in the past decade, growth in property prices began to falter first in 2017 in a regression that has continued to shadow the industry in 2019.

According to the Nairobi Metropolitan Area Residential Report by Cytonn Real Estate, average returns to investors in 2017/18 financial year fell to 8.2 percent as price appreciation and rental yields slumped to 2.8 and 5.4 percent respectively from 3.8 and 5.6 percent.

Data from the Kenya Bankers Association (KBA) Housing Price Index in quarter one, 2019 is meanwhile indicative of a 2.78 percent dip in property prices around the country, the first recorded slump by the index since the third quarter of 2014.

Further, Knight Frank’s Prime Global Index and the Hass Consult land, house price indices expound further on the collapse of property prices in recent times, fueling the conceived fears of an impending collapse.

Bubble burst?

While all indicators point to an imminent crumble of the construction based industry, Knight Frank Managing Director Ben Woodhams terms the slide as a mere price correction to challenge the notion of a total collapse on intact external factors.

“What we have been experiencing is an oversupply situation and I wouldn’t believe we have the ingredients for a bubble to burst as there would be external factors leading to the burst which we are yet to see,” he said.

However, Woodhams expects the retreating prices to leave some investors with burnt fingers in a play out which will see a number of developers fall by the wayside, as those with a stronger footing and experience ride the growth-resistance wave.

The sub-prime mortgage crisis between 2007 and 2010 in the United States represents the most recent and outright collapse of a real estate industry but had its causes sitting beyond just demand and supply forces.

Under the then financial crisis, low quality mortgages soared to more than double the historical average reaching 20 percent between 2004 and 2006 on lowered lending standards which escalated households debt over the period.

The weighted credit risk would then come crashing down on the real estate market at the on set of the 2008 financial crisis to see a surge in home foreclosures by banks to eventually lead to the devaluation of properties and related securities.

Kenya on its part is however composed of a limited mortgage market with a mere 26,000 accounts, subduing any risks to a mortgage backed crisis.

Further, commercial banks and their respective regulator in the Central Bank of Kenya (CBK) have cracked down on risky lending in recent times as the asset value of lenders deteriorates further in the face of rising non performing loans (NPLs) which hit 12 percent in the first quarter of 2019.

Credit crunch

While the forces of demand and supply have played their part in price correction, credit constrains to stakeholders in the sector have emerged as an even greater challenge to the continued creation of value.

The constrains in financing have been characterized in great part by a downturn in private sector credit growth which sits under the grip of loan pricing controls by the Parliament sanctioned interest rate cap regime.

Private sector credit has fallen to the low single digits in the last five years from a high of nearly 13 percent in the last decade leading to a dip in demand represented by low purchasing power on both the part of developers and potential home off-takers.

“Banks are not advancing credit to individuals under strict underwriting terms. With capping, lenders view the majority of debtors as high risk and would hence hesitate to advance credit and hence this is manifested in reduced uptake of properties and the stalling of construction projects,” said Jennifer Kendi, an analyst from Cytonn Real Estate.

The lower purchasing power has seen a decrease in the volumes of buildings with data from the Kenya National Bureau of Statistics (KNBS) indicative of a 10.3 percent slide in the value of approvals in the first quarter of 2019.

Buyers Market

While the pricing of real estate may at the moment represent an all out doom and gloom at the moment, prospective home owners can beam on the availability of options.

With a hold on the increment of property prices and a mass of vacant units in the majority of property segments, buyers have the luxury to hop from house to house with an additional advantage of bargaining power to scoop units at modest costs.

“With contained demand, it is the real estate agents with the tough task to sell. This represents a buyers market where the consumer is spoilt for choice and can negotiate to the best of their ability. We are already seeing slashes in a number of mortgage products,” Regent Group Chief Executive Officer Stephen Katei said.

Even so, the buyers will like their counterparts in development run into credit headwinds as the majority of households’ incomes remain constrained by an ongoing tough economic environment composed of tightening credit availability to the private sector and spillover effects from prior economic hurdles.

According to Katei, the spark of growth in the sector will come from the lift of caps to interest rate allowing for the flow of crucial credit to the private sector affiliated economic segment.