At Week #15 of 2021, the following are factors that will shape the Kenya Real Estate and Development Market in the next one week, for your Investments Risks Management:
i.) Anticipated increase in petroleum prices
International oil prices edged higher on 7th April 2021 on the prospects for stronger global economic growth amid increased Covid-19 vaccinations and a report that crude inventories in the United States, the world’s biggest fuel consumer, fell. Brent crude futures rose by 16 cents, or 0.3 per cent, to $62.90 a barrel by 0657 GMT, while U.S. West Texas Intermediate crude for May 2021 was up 14 cents, or 0.2 percent, to $59.47. That combined with the pressure from the International Monetary Fund (IMF) to the Kenyan Government to double the value-added tax (VAT) on all petroleum products in an effort to cut the budget deficit and tame public borrowing, is expected to further increase the price of fuel in the country. The IMF reckons that Kenya should impose a 16 percent VAT on fuels from the current eight percent when crude oil prices fall.
In Kenya, the increase will have a far-reaching effect on Kenyans who are struggling to survive due to the negative effects of the Covid-19 pandemic on the economy, as most of them have lost their jobs or have suffered pay cuts, leading to more lease breaks. Furthermore, the knock-on effect that the high cost of fuel has on transport will be transferred to the price of goods and consequently impact this negatively. As a result, more money will be spent on food and transportation and less on household expenses such as rent. Businesses like construction that depend on transportation of goods are expected to adjust their cash flows to cater to the expected high cost of production amid a slowed economy attributed to the coronavirus pandemic. As a result, the cost of related items like building materials will go up as transporters load the extra charges on traders.
Furthermore, construction cash flows are expected to be adjusted in anticipation of the increase in prices. Procurement of construction materials is also expected to rise in the next few weeks in anticipation of this increase to reduce construction costs and, hence, real estate prices.
ii.) Strengthening local currency
The Kenya Shilling strengthened against major international and regional currencies during the week ending 8th April 2021, on the back of increased forex inflows. The local currency, which strengthened to an eight and a half month-high against the US dollar on 8th April 2021, was spurred by inflows from foreign investors interested in investing in a government infrastructure bond. The Kenyan shilling is now trading at its highest rate against the United States dollar since December 2020, signaling easing pressure on the local unit, which had come under pressure from major world currencies in 2020. Optimism on the rebound of the macroeconomic environment this year has, however, served to anchor the shilling despite the prevalence of volatility from the evolving Covid-19 pandemic.
The strengthening of the local currency is expected to accelerate a strong rebound in the export and import market, thereby boosting economic recovery in the country. A stronger shilling is expected to cut the cost of imports for construction raw materials, building materials, fittings as well as consumer and capital goods while serving to trim the cost of external debt service, which is largely biased towards dollar-denominated repayments.
Also, the strengthening of the local currency is expected to reduce electricity costs as the forex levy will be passed to consumers, who are majorly the tenants and households. Consequently, the reduced cost of power is expected to reduce lease breaks in the commercial, industrial and retail sectors, as tenants’ cash flow will be boosted. The strengthening of the local currency against the dollar is also expected to attract more small-scale tenants and contribute to a reduction in retail goods prices, which is expected to increase retail footfall as the cost will be passed to consumers. That is expected to increase retailers’ income and hence reduce the possibility for lease breaks.
As a risk management measure, Real Estate Investors are advised to use this window to import construction raw materials, fixtures, and fittings more conveniently at a lower price. Investment Opportunities are also expected to emerge to large retail space owners who could remodel their store spaces to smaller spaces to attract high tenancy, taking advantage of the reduced retail cost.
Writer of the Article:
This Article is written by Buildafrique Consulting Group, Kenya multi-disciplinary consultancy, that offers END-TO-END DEVELOPMENT CONSULTANCY, REAL ESTATE, and PROJECT FINANCE solutions through specialized subsidiaries. Among our solutions includes:
- Feasibility Studies and Market Research.
- Project Finance and Capital Raising.
- Joint Venture & Finance Structuring.
- Project Management.
- Investment Design Appraisal.
- Quantity Surveying
- Construction Cost Consultancy
- Physical Planning and Planning Permissions
- Environmental Management and Impact Assessment
- Real Estate Development and Structured Investment Solutions
- Property Valuation
- Marketing and Property Sales Agency
- Property Management and Facility Management