Kenya's housing market is now struggling
Lalaine C. Delmendo | December 02, 2019
Kenya's housing market is cooling rapidly, amidst falling demand caused by constrained credit access, coupled with the continued oversupply of high-end residential developments.During the year to Q3 2019, the Hass Composite Property Sales Index, a measure of asking sales prices of residential properties, fell by 3.4%, in sharp contrast to a y-o-y rise of 8.1% during the same period last year, based on a report released by HassConsult Limited. It was the second consecutive quarter of y-o-y price declines after falling by 3.2% in Q2 2019.
Quarter-on-quarter, residential property prices increased slightly by 0.9% in Q3 2019.
By property type:
- For detached houses, prices fell by 7% y-o-y in Q3 2019, in sharp contrast to an 8.8% rise a year ago
- For semi-detached houses, prices rose by 6% y-o-y in Q3 2019, a deceleration from last year's 11.8% growth
- For apartments, prices dropped 1.7% y-o-y in Q3 2019, in contrast to a 1.3% rise a year earlier
The Hass index is based on 4,000 to 6,000 properties tracked across Kenya, which are collected from multiple estate agencies and all publicly available house sales, including in property magazines, property websites and the national media.
Several Nairobi suburbs registered nominal house price rises. Nyari Estate, one of the most secured upmarket neighborhoods in Kenya and in close proximity to many diplomatic establishments, saw the biggest rise in house prices of 12.4% during the year to Q3 2019. It was followed by Ridgeways (10.6%), Loresho (9.5%), Muthaiga(8.6%), Karen (6.2%), and Gigiri (5.2%).
Modest to minimal price increases were recorded in Westlands (4.8%), Runda (4.8%), Spring Valley (4.7%), Donholm (4.3%), Kitisuru(4.1%), Lavington (3.7%), Kileleshwa (3.1%), Kilimani (0.9%), and Eastleigh (0.5%).Langata, home to many housing developments and known for its gardens and parks, was the only Nairobi suburb which registered a nominal house price decline of 3.8% during the year to Q3 2019. However when the 4.7% inflation rate in Nairobi in end-Q3 2019 is taken into consideration, real house prices have actually declined in half of Nairobi suburbs during the year to Q3 2019.
Despite the recent decline, house prices in the capital are still 4.4 times higher than in 2000. The average value of a residential property in the HassConsult database in surged to KES 31.2 million (US$304,777) in September 2019, from just KES 7.1 million (US$69,356) in December 2000. The average price for a 1-3 bedroom residential property is currently KES 14.4 million (US$140,666), while the average price for a 4-6 bedroom residential property is KES 39.1 million (US$381,948).
In Kenya, most property purchases are for cash. Because of this, the mortgage market remains underdeveloped and credit access is extremely constrained. Currently, the size of the mortgage market was equivalent to just over 3% of GDP and there were fewer than 25,000 mortgage loans outstanding - highlighting the inaccessibility of housing finance.
“The real estate sector, similar to, other segments of the economy is challenged by the lack of liquidity as a result of the amendment of the Banking Act in 2016 that introduced interest rate caps,” said SakinaHassanali, Head of Research and Marketing at HassConsult. “We have seen access to credit by developers and buyers become difficult as commercial banks have become conservative at lending.”
Property transactions are now falling by double-digit figures.
Moreover, the oversupply of high-end properties is expected to slow the housing market further. Some of the latest developments currently selling off-plan include: Cytonn Investments' Applewood property in Karen, selling at KES 180 million (US$ 1.76 million); EntimSidai's two-storeymaisonettes in Karen, selling at KES 120 million (US$ 1.17 million); and HassConsult'sEnaki in Gigiri, offered for KES 80 million (US$ 781,000).
Yet Kenya's economy remains robust. In 2018, the economy expanded strongly by 6.3%, up from a 4.9% growth in 2017 and the highest growth in eight years, according to the International Monetary Fund (IMF) – making it one of the fastest-growing economies in Sub-Saharan Africa.The economy is projected to expand by a healthy 5.6% this year and by another 6% in 2020.
Foreigners can freely buy 'commercial class' land in Kenya. This type of land is for income or revenue-making purposes.
Analysis
of Kenya Residential Property Market »
Yields are moderate to good in Nairobi, Kenya: expect around 6.5% from an apartment.
Nobody would say that Nairobi is inexpensive. A nice big house can cost $1.1 million in what is still a poor country. But the rental returns are rather good.
- A 3 bedroom apartment in an elite district of Nairobi can be bought for around US$200,000.
- A 3 bedroom house may go for US$500,000, and a 5-bedroom house may go for US$1.1 million.
- Townhouses are somewhere between these two prices.
How much will you earn? Gross rental yields on Nairobi apartments are moderately good, at around 6.0% to 7%. Townhouses yield around 5.0% to 6.0%. Yields on detached houses are lower, at 4% to 5.5%.
Conclusion: Nairobi property is attractive, with significant capital gains potential. The best combination of rental yield and capital gains seems likely to be offered by townhouses.
Round trip transaction costs are very low in Kenya. See our Property transaction costs analysis for Kenya and Property transaction costs in Kenya, compared to the continent.
Kenya's rental income tax is high
Rental Income: Kenyan gross rental income earned by a nonresident individual is subject to tax, withheld at source at 10%.
Capital Gains: No tax is levied on capital gains realized from the sale of real property.
Inheritance: There are no inheritance or gift taxes.
Residents: Residents are taxable on worldwide income at progressive rates, from 10% to 30%.
Total transaction costs are low in Kenya
In the absence of corruption (which is virtually impossible in Kenya) the total round-trip transactions cost would be around 4.76% to 6.76%, inclusive of the 1.25% real estate agent’s commission.
The whole process for the titling of the property can typically be completed in around 72 days.
Real estate transactions are normally quoted and concluded in Kenyan Shillings (KES).
Landlord's rights are strong in Kenya
Kenyan rental market practice is pro-landlord.
Rent: There is no rent control at the upper end of the market. Prior to occupancy, the tenant normally pays a quarter’s rent in advance and an additional one month’s rent as security deposit.
Tenant Evictions: Landlords carry out evictions themselves, even if the law mandates that only the courts can order an eviction. Landlords can also seize the tenant’s possessions for compensation of unpaid rents.
Economy growing strongly, but public debt also rising rapidly
Kenya’s economy expanded strongly by 6.3% in 2018, up from 4.9% growth in 2017 and the highest growth in eight years, according to the International Monetary Fund (IMF) – making it one of the fastest-growing economies in Sub-Saharan Africa.Kenya’s economy is projected to expand by a healthy 5.6% this year and by another 6% in 2020, based on IMF estimates.
In September 2014, Kenya suddenly joined the ranks of middle-income countries due to the ‘rebasing’ of its economic statistics, which resulted in a 25.3% upward revision of Kenya's GDP in 2013, from a previous estimate of US$42.6 billion, to about US$55.2 billion, according to the KNBS. The reassessment makes it the 9th largest economy in Africa, surpassing Ghana, Tunisia and Ethiopia. The country’s real GDP growth rate in 2014 was also revised upwards to a robust 5.7%, from an earlier estimate of 4.7%. In addition, Kenya's GDP per capita was also increased to US$1,246, from just US$994 in 2013. In 2018, GDP per capita stood at US$1,831.
But Kenya’s increasing public debt is a major concern. In June 2019, the country’s public debt surged to KES 5.89 trillion (US$ 57.54 billion), up 15.2% from a year earlier, as the Treasury goes on a borrowing spree to fund the government’s infrastructure projects and repay existing creditors, according to the Central Bank of Kenya. In fact, debt levels more than tripled in a span of just six years.
The country incurred KES 975.8 billion (US$ 9.53 billion) loans in FY 2018/19. Much of the debt is owed to China, which has extended loans to fund projects such as the Standard Gauge Railway. As a result, the budget deficit increased to 7.4% of GDP – higher than the Treasury’s target of 6.8%.
In October 2019, the country’s lawmakers approved the Treasury’s plan to raise the borrowing cap from 50% of GDP to an absolute figure of KES 9 trillion (US$ 87.9 billion) in the FY 2019/20, giving the government more room for additional borrowing.
Public debt currently stands at 62% of GDP and could hit 70% of GDP in the coming years if the government will continue to borrow at the current rate, said the World Bank.
The IMF warned last year that Kenya’s risk of defaulting on its debt had increased from low to moderate due to rising refinancing risks.