HassConsult, a Kenyan real estate firm, releases the quarterly Hass Property Index, a research tool that gives investors, home owners and the financial industry information about house price inflation. Farhana Hassanali–Hashmani, property development manager at HassConsult, tells How we made it in Africa’s Dinfin Mulupi about Kenya’s minuscule mortgage market, Nairobi’s high prices and whether there is a bubble.
How did the market perform last year and what are your projections for 2013?
Last year wasn’t the best for the industry, but I wouldn’t say it was the worst either. Overall we saw that prices began to mature and as one of the indicators of the housing market, we can say that although it didn’t go down, the prices were a bit stagnant. The key thing to note is that last year the volume of activity reduced quite substantially. A lot of this was pegged to the fact that previous activity had been very much spurred by the mortgage market, and because of the rise in interest rates a lot of the mortgage buyers couldn’t access affordable mortgages and therefore put on hold their buying decisions. As a result, the volume of sales was not so good last year, although rentals picked up because most people opted to rent instead of buy.
As is typical with any election cycle in Kenya, there has been a tendency for buyers and other investors to put on hold decisions until the aftermath. We are looking at a quiet first quarter and then depending on the outcome of the elections, hopefully things will pick up. In this quarter, there are a few spots of opportunity for investors who are willing to invest because some sellers are keeping their prices at a reasonable level. Because some developers put on hold projects last year, we expect to see climbing of prices again towards the end of the year, since units that should have been ready, will not be.
There are concerns that property prices in Nairobi are exorbitant and unsustainable. What are your thoughts?
They are too high if you look at them in isolation. But if you compare prices in Nairobi with property prices in South Africa they are at par and even higher in Tanzania. This is very typical of big cities. The prices are often expensive and a little bit more affordable as you go outside the city.
Is there a bubble or not?
I always say a bubble is associated very much with markets where the demand is artificial. Speculation is triggered very much by too easy availability of mortgages and that is not the case in Kenya. The mortgage penetration rate in Kenya is very low. Most buyers pay cash while just a handful go for the mortgage option. If money is easily available you can create artificial demand. This is what happened in Dubai where a lot of speculation led to the bubble burst, such that completed projects remain unoccupied. In Kenya, the demand for property is very high with a very small population owning their own homes while the rest are tenants. Nairobi’s population is growing very fast so I don’t think there is a bubble. There may be some areas of oversupply, where rentals take a little bit longer or landlords have to bring down their rent. This happens mostly in the upper-end of the market.
The upper-end of the market is saturated, while demand in the lower and middle class segments is unmet. Why?
The middle and lower income segments of the market are very much pegged to the interest rates. Developers in those markets have to borrow, meaning activities slow down when interest rates go up. In the upper market, the off-plan model allows developers to use the buyers’ money to build, thus developers find it easier in that market. The margins in the lower and middle income segments are also tight. Developers therefore have to be creative to make profits. They have to look for cheap land that requires as little as possible additional infrastructural expenses. These segments, however, have big volumes and potential for a lot of profits.