At the start of a New Year, most people embark on strategic planning as they seek to maximize the opportunities and prepare for the risks that may take place as the year winds down. However, 2019 started on a rather low–key and as we dig into quarter two, the marketplace appears not yet settled. Most enterprises and organizations alike are still preparing their foresight plans. In real estate just like in any other sector, having a reliable outlook can be determining factor when it comes to success or failure.
Performance in 2018
In 2018, Kenya´s real estate sector recorded sustained investments in all clusters. This was driven by political stability thanks to the handshake between the opposing political sides, positioning of Kenya as a regional hub that saw increased investments, rolling out of affordable housing initiative (part of the “Big Four Agenda”) by the government, and lastly, improved economic conditions which saw the GDP grow by 6%.
In terms of performance, however, the sector recorded an average total return of 11.2% in 2018, 2.9% points decline from 14.1% in 2017. This was attributable to a decline in effective demand for property amid the growing supply, evidenced by the 3.0% points decline in the residential sector occupancy rates. The increased supply of units dampened occupancy and annual uptake rates, resulting in softened annual residential market´s investor returns, which came in at 8.9% (price appreciation of 4.2%, rental yield of 4.7%) in 2018, in comparison to 10.3% in 2017 (price appreciation of 5.1%, rental yield of 5.2%). However, it is important to note that the development returns for investment grade real estate continue to average at above 20.0% p.a.
The 2019 Outlook
In 2019, the sector´s performance is anticipated to remain flat with occupancy and uptake rates to stagnating at 81.0% and 22.8%, respectively owing to continued supply. Additionally, the continued housing deficit in the lower middle to low–end markets and expected improvement in the mortgage market are set to boost market uptake. Prices will remain largely flat. Key factors expected to shape the real estate sector in 2019 include;
- Affordable Housing Initiative – The Kenyan Government´s affordable housing initiative focused on delivering 500,000 units by end of 2022, with a price range of Kshs 0.6 mn – Kshs 3.0 mn, to address the large housing deficit of approximately 2.0 mn units, according to National Housing Corporation, is expected to push developers´ effort towards provision of more housing for the lower middle– and low–income earners´ segment. The government allocated Kshs 6.5 bn in the Kenya National Budget 2018/19 and an additional Kshs 21.0 bn in the supplementary Appropriation Bill No. 2 of 2018, in support of the initiative. In addition, the government has provided incentives such as 15% tax relief on developers who deliver 100 units p.a. and policy reviews in support of affordable housing initiative;
- Increased Traction in Mortgage Market – Subject to its successful launch, the Kenya Mortgage Refinancing Company is expected to increase mortgage uptake in Kenya by boosting the local mortgage market by creating liquidity for primary lenders. Mortgage home buyers will access mortgages with long tenor, pay affordable instalments and thus it will reduce the financial burden for buyers thus scaling up the rate of housing uptake; The KMRC is expected to boost the local mortgage market by creating liquidity for primary lenders.
- Government Partnerships – The government is expected to enter into various partnerships such as Public–Private Partnerships (PPPs), County Government & National Government partnerships and government & government partnerships in development and financing to support the real estate sector, mainly in the housing sector and in infrastructure to open up areas for development;
- Government Incentives: With the growing focus towards plugging the housing deficit, we expect to see more government incentives geared towards creating an enabling environment for home–buyers and developers such as the introduced 50.0% corporate tax cuts and scrapped levies, as well as statutory reforms aimed at improving the land sector´s efficiency thus cutting developers´ costs;
- Devolution – Devolution has led to an increased population at County Government headquarters and neighboring towns through the relocation of County Government officials and businesses hence created demand for office space, retail space and residential units and thus increased real estate development. In addition, the government increased its budget allocation to county governments to support infrastructural development as well as the growth of other sectors including housing. In 2018, the government increased county budget allocation by 8.9% from Kshs 345.7bn in 2017/18 to Kshs 376.4 bn in 2018/19; and
- Sustainable Developments & Technology – Developers will adopt sustainable development practices such as green buildings and embrace incorporation of technology such as alternative building technology (ABT) and virtual reality (VR) as part of value addition to differentiate their real estate offering to remain competitive.
Challenges Expected in 2019
- Increased Supply and Competition – The real estate sector has witnessed increased space supply over the last 5–years with the market recording surplus space, which is likely to constrain market returns in 2019;
- Development Costs: land prices in 2019 will grow at 4.9%, 1.6% points higher than the 3.3% recorded in 2018. This, coupled with the expected rise in construction materials as a result of inflation is expected to curtail supply due to the increase in construction costs. This will have a multiplier effect of pushing up the unit prices;
- Inadequate and High Cost of Funds – Banks have reduced credit advancement to small and medium–sized companies as a result of the interest rates cap that stands at 13.0% (CBR rate at 9.0%), hence private sector credit growth came in at 4.4% in October 2018, compared to a 5–year (2013–2018) average of 14.0%. Despite the capping of interest rates, the actual cost of credit is still high averaging at 18.0% due to additional administration fees, which then raise the cost of development, thus making development expensive;
- Inaccessibility and Unaffordability of Off–take financing/Mortgages – Access to mortgages in Kenya remains low mainly due to (i) low–income levels that cannot service a mortgage, (ii) relatively high property prices, (iii) high interest rates and deposit requirements which lock out many borrowers, (iv) exclusion of the informal sector due to insufficient credit risk information, and (v) lack of capital markets funding towards real estate purchases for end buyers. According to Central Bank of Kenya, there were only 26,187 active mortgage accounts in Kenya as at December 2017 against a total adult population of approximately 23 mn persons, thus low real estate uptake using mortgages;
The outlook of the residential real estate market in Kenya is largely neutral with a positive bias on demand and a neutral outlook on supply. It is expected that there will be reduced developer activity in high and middle–upper markets and, limited to undersupplied segments such as low–cost housing and selected markets with relatively high returns. The performance of the sector is likely to remain flat with occupancy rates and transaction rates stagnating.
The views expressed here are of the author and does not necessarily represent position of Sultan Palace Development Ltd and as such does not warranty any particulars. Click here to read our Terms & Conditions.