Low inflation a boon for real estate sector

By Morris Aron

The high inflation trend witnessed for the better part of 2009 that dented growth prospects for the real estate sector is slowly easing off, raising hopes of a rebound in property business if it continues as forecasted.

Figures from the Kenya National Bureau of Statistics (KNBS) indicate that month-on-month overall inflation dropped to 4.7 per cent in January 2010 compared to 5.3 per cent in December 2009.

Year on year inflation has also dropped from to 5 per cent around the same period compared to a high of 7 per cent in September 2009.

Analysts say that falling inflation trends means that the cost of living is easing off, leaving many with substantial disposable income to invest in longterm projects such as housing as opposed to pre-occupation with immediate needs such as food and clothing.

"Inflation has been pretty high for the better part of the last two years meaning that people have had less to save for longterm investments such as buying a house," says Reginald Okumu, a director of Arc Consultants.

Double-edged sword

Third quarter economic growth figures by KNBS released at the start of the 2010 show that high inflation was eating into the average level of savings by the middle class who have fuelled housing demand. This in turn dampens future growth prospects of the real estate sector.

The report noted: "Construction was negatively impacted on by diminishing household savings thereby slowing the housing boom that has been witnessed since 2005."

As a result, construction fell by 1.1 per cent after expanding by an average of 9 per cent in 2008. This casts doubt if the sector will grow as per a recent World Bank forecast that predicted the sector would expand by 15 per cent in 2009.

Property analysts say the emerging trend is a double-edged sword for the real estate sector.

On one hand, falling inflation increases the level of savings for new investments such as housing as spending priorities shift from more immediate concerns such as food and clothing. The other, positions real estate — being a sector that is more immune to seasonal increases in the costs of living presents investors with the best investment opportunity to cushion against income erosions in case inflation trends change to the upswing — if one is seeking to cushion themselves from possible erosion of real returns on investment.

CBK statistics indicate that inflation — the general rise in the cost of goods and services due to a number of factors — was at 2 per cent between April and May 2007 before shooting to 19 per cent a year later.

It then declined substantially from 19.5 per cent at the end of 2008 to below 5 per cent at the end of 2009 fuelled by the onset of rains expected to boost food production and ease high-energy costs, the two key drivers in 2008 and 2009.

Upward bias

The drop was also as a result of a decision by KNBS in October 2009 to revise the method of calculating inflation that corrected an upward bias in relation to food price volatility in line with international standards.

Statistics also indicate that persistent high inflation has reduced the level of household savings as the economy slumped due to combined effects of post election violence, drought and the effects of the

Global credit crunch.

"We expect inflation to ease off as we move on as rains continue to fall, reducing pressure on the cost of food, water and electricity," said Professor Njuguna Ndung’u

Players are, however, hopeful of the year’s out look given the high level demand for middle income housing units. Going forward, property players are optimistic.

"We will still continue to see a robust growth in demand for middle income units in the coming year as supply is still far less than what the market needs," acknowledged Caroline Kariuki managing director of S&L in an interview towards the end of 2009.

Approximates indicate that fairly priced houses selling at between Sh3 million and Sh7 million targeted at the emerging middle class will drive demand.

And the changing demand is beginning to reflect in house sales according to a number of property sales agents who talked to Home and Away.

Despite the slow down in the number of new houses being constructed towards the end of the year, there still appears to be some good tidings in the sector that have fuelled economic growth since 2005.

The third quarter results indicates that real estate renting and business service continued on an expansion mode with the sector growing by 2.7 per cent in the third quarter, giving a sneak preview of what might happen this year.

Renting and business service captures the level of activity in the letting business in retail, office and industrial property sectors.

Demand for offices to fall

Property experts and investment analysts have, however, forecast that though renting business will remain robust in 2010, rentals in the office sub-sector may stagnate or fall due to an oversupply.

It is expected over 15,000 metres of lettable space will enter the market before the end of the first quarter after completion of a number of office apartments currently underway and nearing completion in various parts of Nairobi alone.

For the better part of 2009, rents for upper middle and upper income residential areas and office spaces have stagnated due to an oversupply and stagnation in the level of income of the targeted group due to the poor economy.

A property trend report released by Stanbic Investment Management Services towards the end of 2009 indicated that: "Even if property prices have held, and in some cases rose, rents have remained stagnant, and in some cases come down, meaning that the rental yields have been under pressure."

Investment experts say the development was as a result of many companies postponing their expansion plans and shelving new plans for start-ups to survive the economic slowdown.

"There are some sectors of the real estate market where we are witnessing the hangover effects of last year’s slow economic growth that have resulted to price corrections," said Okumu.

"In other areas, especially the low-middle and middle income where demand is still very high, we expect continued growth," he said.