Top six (6) threats to face Kenya Real Estate in 2018 and risk management measures for Investors

From a gloomy 2017 that was characterized by low investment activities, and reduced investor confidence as a result of a prolonged election period, most property developers are waking up with hopes of a brighter 2018 which is expected to precede a high growth rate. Top of the expectations for 2018 includes fair prices for construction materials, tax waiver considerations, growth in the hospitality industry, and infrastructure tenders. However, as the market relaxes from a highly tensed year into a growth phase, various threats may arise. Today, we look at the top 6 threats to face the Kenya Real estate in 2018 and the possible risk management measure for investors.

Subsidized government Houses

By the year 2022, a total of Ksh 1 trillion is expected to be spent by Kenya government on construction of over one million low-cost homes in major towns to ease the housing deficit which currently stands at 160,000 units per annum. The ambitious project, which is expected to employ low-cost building technology, poses a major threat to private property developers as buyers will be inclined to invest in the low-cost houses. One of the primary reasons why the concept of low-cost housing remains unrealistic to private developers is lack of incentives and inaccessibility of modern technology. Kenya’s construction projects experience cost and time overruns whose implications are difficult to deal with for private developers. However, as most projects are meant for the high-end market, unit sales and letting prices can be adjusted to absorb the variations. This luxury of price adjustment is unavailable for low-cost developments as an increase in price, however minimal, has a significant effect on the final sale since the buyer description for this market cannot afford it. Developers may need to work their feasibility backwards from the set sale price. While the costs may overrun, price adjustments can be made to suit the middle tier market.

Oversupply of real estate

As the political heat heightened in 2017 settles, real estate investors are more confident of the Kenya Real estate market. Aggressive investment in the construction industry is expected in 2018 as new and projects halted in the second quarter of 2017 resume construction. This will more than likely worsen the current state of supply in real estate property which remains high and unmatched by Kenya’s size of the economy. To counter the threat of oversupply, investors may need to diversify into other forms of real estate investments other than the primary commercial and residential property.

Overvalued Commercial & Residential Properties

Property prices in Nairobi have risen with margins of over 500 percent the last ten years. This is according to a report by Hass Consult. Currently, the asking price for an acre of land in Upperhill stands at Ksh 542 million, followed by Kilimani at Ksh 414 million, Parklands at Ksh 411 million, while Kileleshwa averages at Ksh 293 million. There is a concern that properties in Nairobi and its environs have become overvalued leading to overpricing across real estate properties in Kenya’s capital which is quickly sprawling to other counties in Kenya as infrastructure development improves. Nairobi regions with best leases include Nairobi CBD, Upperhill, Westlands, Parklands, Lavington and Muthaiga. These regions have been flooded by investors over smaller zones in Nairobi leaving vacancies of up to two-thirds of newly built commercial property. Such investments question the capability of Kenya’s economy as speculation on the housing bubble burst continues to rise. As Kenyan investors embark on construction activities in 2018, there is the need to determine return requirements, and the benchmark on investment decisions with countries such as Ireland, China and the USA which have previously experienced real estate bubble bursts.

Capped Interest Rates & the Continued Impact of Credit Crunch

The interest rate caps bill has led to a reduced incentive to lend by banks which have consequently led to stringent qualifications imposed on credit advances. More than ever before, banks are necessitating high down payments and high credit scores before approving a loan or mortgage application. Banks being hesitant on the issuance of loans has cut down the number of properties bought. At the same time, the cap has placed constraints on the banking sector making it hard for developers to put up new projects. In the second quarter of 2017, prices of residential properties increased at a modest pace recording a rise of 0.98 percent compared to 1.10 percent rise in quarter one of 2017. According to the Kenya Bankers Association, this was the lowest price increase since the third quarter of 2016. However, despite the reduced prices, a higher number of developed units remained unsold for more extended periods of time. With a lot of construction activity expected in 2018, the demand and competition for credit are expected to increase. Investors in the sector may need to seek out equity and debt capital aggressively to sustain investment activities.

Cyber Security

 In April 2017, Kenya was named the worst hit in East Africa by cyber crime recording $171 million losses to cyber criminals with financial institutions being the most prominent victims. The Kenya Cyber Report 2016 highlighted that about 44 percent of financial institutions ran on a small cyber security budget of $ 1 – 1000 annually, while 33 percent spent $ 0 in all matters cyber security. Perhaps it is the relaxed attitude to cyber security that is a real concern because all businesses are vulnerable to cyber-attack. Perhaps the most at risk are the industries least concerned with cyber security issues. Such is the real estate industry which deems itself insusceptible from hacking as conventionally; it is not a digital industry. Nonetheless, the heightened use of digital technologies exposes, supposedly secure information and data through multiple channels: web-based transactions, the use of cloud services, smartphone and social media all represent access points through which hackers can access and leverage sensitive information. Therefore, with each new digital action, data protection becomes increasingly complex, making the reality of cyber-attack more likely. The Real Estate sector holds significant value for cyber-attacks, and its minimal cyber defenses make it vulnerable. All Real estate companies are in possession of sensitive data, whether it is in the form of building design drawings and blue prints, infrastructure design, client information, or financials. Handling significant funds makes construction companies an ideal target for hackers. Real estate investments which represent the highest risk in cyber security include smart cities and buildings which continue to gain popularity in Kenya. For real estate companies to counter threats associated with cyber crime, it is essential that communication channels are checked regularly to ensure their security. Also crucial is to conduct company-wide training on identifying online risks to prevent breaches in cyber security.

Regulation of Land Use in Counties

Developers are yet to face another political hurdle resulting from the newly constituted county governments. Changing regimes at county levels mean that a change in policies that inform businesses are inevitable. The first warning came from Kiambu County in June 2017 after the county department in charge of land, housing and physical planning announced plans to regulate land use to boost food security. The county is expected to partner with international agencies to come up with a new spatial plan for the region. In a report by Hass Consult, the expected policy shift caused ripples in the construction sector with land prices falling. Ruiru and Limuru reported a drop of 3.5 percent and 5.7 percent respectively. As land use policies in county governments change and some remain uncertain, investors may need to hold back on buying land in satellite towns whose governance is more inclined to preserve land for agricultural use, reservation of ancestral lands like in the case of Kajiado County, or other needs that are specific to the counties. This is because land for real estate commands significantly high land prices than land meant for Agricultural purposes.

Despite above threats, Kenya is expected to experience vibrant real estate investments activities and high growth rate in the year 2018. Investor are therefore encouraged to adapt risks management measures for every investment they intend to carry out. Recommended risks management measures for Real Estate Investment Projects include:

  • Conducting of feasibility studies and market research for the investment to allow decision making.
  • Investment modeling for the project to determine its financial viability.
  • Hiring of the right consultant partner.

This article is written by Buildafrique Consulting Group; a Kenya Real Estate Consultant and Development Solutions provider that offers End-to-End Financial, Development Management, and Investments Solutions to help Developer, Investors, and prospective Home Owners manage risks and realize value for their investments in a fast evolving Real Estate market.

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