Some buildings in Nairobi have not been occupied more than a year after completion.

The red drapes running top to bottom on a building in Nairobi’s Upper Hill area screaming “To let” point to a vibrant real estate industry.

A massive excavation next to the banner carries the foundations of Africa’s soon-to-be tallest sky scraper.

By the year 2020 when The Pinnacle is completed at a staggering height of 300 metres, three out of the five tallest buildings in Africa will be in Kenya, placing the country at the apex of the continent’s renewed battle for the sky.

The top five has been a preserve for the two richest nations in the continent, South Africa and Nigeria, since the 223-metre Carlton Centre opened its doors for business in Johannesburg in 1973.

That is until Kenya, a country whose economy is not pushed by oil or mineral dollars, spoilt the party.

Today, the 223-metre high Britam Tower in Nairobi that opened last year is the second tallest man-made structure in Africa while the 163-metre UAP Towers just a stone’s throw away is the fourth tallest.

But it is the commissioning of The Pinnacle three weeks ago that has drawn the world’s attention to Kenya and in the process raised several questions on whether the dream roller coaster will end.

The massive complex will be home to a 45-storey Hilton, 42 floors of residential apartments, 20 floors of offices, a five-storey mall and three floors of underground parking, adding more glitz to Nairobi’s ever-changing sky line.

“A thriving property market has underpinned growth, particularly in Nairobi. But there are indications of a slowdown,” said global news network CNN on Monday.

International business magazine The Economist even questioned last week, “Could Nairobi be the next Dubai? Does the start of Africa’s tallest building signal the end of Kenya’s boom?”

Unfortunately, the impressive streak of real estate development in Kenya that has defied predictions by doomsayers on an impending bubble burst has now hit a down cycle.

This has left investors in a tricky situation and, although few of them would openly admit it, the increasing size of unoccupied space is now haunting a sector credited for pushing the country’s economic growth when the rest of Africa is in trouble.

And the signs are everywhere. The building with red drapes next to The Pinnacle’s site, more than 10 storeys high, does not have a single tenant more than a year after opening and it is alleged the owners are looking for a buyer.

The 33-storey UAP Towers is just 40 per cent occupied after a similar period and Britam Towers is also not doing well, although it can be excused since it just recently opened its doors.

Property firms admit there is oversupply in certain areas, but insists that it is not that gloomy.

The big question is whether the glut that has hit mall and office space will also extend to the residential housing sector.

Kenya has an office space oversupply estimated at 3.2 million square feet and is expected to hit 3.9 million by 2018.

At the same time it has 391,000 square feet of shopping space and a further 470,000 feet are in the pipeline.

“There is still the right market for a good product at the right price,” says James Hoddell, chief executive of real estate firm Mentor Management.

“What is going on in the property market is what has been happening in the whole world. I think it is good for the buyers,” he says.

It is such optimism that is believed to be behind the prolonged surge in investments in the real estate sector.

Every so often, the big players in the industry that have their own research arms produce studies about the market situation. And because they have a stake in the industry, over time their observations have become predictable or conflicting, according whoever is releasing it.

The most recent was Cytton Investments, which released a ‘Nairobi Metropolitan Land Report’ on June 17.

“Land prices had positive growth rates across all areas in the Nairobi Metropolitan Area, growing with a five-year Compounded Annual Growth Rate (CAGR) of 19.4 per cent and a five-year price change of 2.5 times over the same period,” said the financial services firm.

A few weeks before, a first-quarter index by Hass Consult had an almost similar observation.

“Land in Nairobi’s satellite areas continues to be the best performing asset class, returning over 20 per cent per annum as other asset classes continue to register low or negative returns,” said the property firm.

“Returns at the Nairobi Securities Exchange were down in the first quarter while Treasury bills are at 8.78 per cent.”

But when you drive on Mombasa road which serves Mlolongo, Athi River and Kitengela satellite towns, the number of huge real estate projects with almost zero per cent occupancy rates is frightening.

Some owners have resorted to dropping the prices after realising their properties are not attracting tenants.

At Sunset Boulevard, a gated community development in Athi River, a two-bedroom apartment that was costing Sh40,000 a month in rent has now dropped to about Sh18,000.

Economists say the downturn in fortunes has been caused by over-estimation of the market by industry players.

“Many Kenyans are unnecessarily living in informal settlements because developers have decided to be blind to the low-income segment where there is huge demand and are instead chasing a non-existent middle class,” says Dr Samuel Nyandemo of the University of Nairobi’s School of Economics.

“In Nairobi, more than 60 pe rcent of its residents live in informal settlements but less than 10 per cent of new developments head their way,” he says.

According to the African Development Bank, about 16.8 per cent of Kenyans are in the middle class, majority of them in Nairobi.

However, there is another class referred to as the “floating middle class” which are not poor but can fall into poverty courtesy of a small disturbance on their economic well-being.

Anthony Kinja of Wealth Inc Realtors traces the current housing problem to the rezoning of Nairobi and the construction hype that followed.

“A majority of real estate investors make decisions based on emotional appeal and not intrinsic value,” he says.

“When Nairobi was rezoned, areas where you could get a maximum return on investment were suddenly opened up to investors who for years had been locked out. This created a herd effect that created demand for land and subsequent investment,” he says.

In December 2012, Cabinet approved rezoning of Nairobi and other major towns to open up more areas for high-density development.

The idea at that time was to enable developers to set up high-rise flats in previously exclusive neighbourhoods to slow down the cost of homes - which had doubled in just six years.

Before then, areas such as Kileleshwa, Kilimani, Lavington, Upper Hill and Westlands were classified as residential areas with developers allowed to put up a maximum of four floors for apartments.

Only two areas were spared from this rezoning; Runda and Muthaiga.

Developers managed to convince the Government that by allowing them to put up high-rise, mixed-use apartments in leafy suburbs, the land costs would be distributed evenly over more units and ultimately pull down land prices.

What followed was the opposite. A mad rush by investors to acquire land pushed prices through the roof. Where land was unavailable, old buildings were bought off, demolished and in their place high-rise structures put up.

Soon, speculators, Saccos, real estate companies and deep-pocketed insurance firms who were afraid of investing their money in the Nairobi Securities Exchange pumped it in real estate.

Such abnormal emphasis on investing in real estate has seen the rich in Kenya invest more money on houses than anyone else in the world.

“High-net-worth individuals (HNWIs) in Kenya have allocated the largest portion of their wealth, 28 per cent, to real estate investments, which excludes primary residences and second homes,” says the Knight Frank Wealth Report 2017 released recently.

“Globally, HNWIs allocate 25 per cent of wealth to investments, 24 per cent to real estate investments, 23 per cent to personal business, 16 per cent to primary residences and second homes, six per cent to collectables and six per cent to other categories of investments,” it says.

So huge has been the investment in real estate that by mid-2016, just four years after the rezoning exercise, the price of land in Nairobi had risen by a staggering 535 per cent, according to real estate investment company Stanlib.

In those four years, the contribution of the real estate industry to Kenya’s gross domestic product rose by 4.9 per cent from 7.4 per cent in 2012 to 12.3 per cent last year.

Only agriculture at 32.6 per cent and retail (7.9 per cent) contributed more to Kenya’s economic growth last year than real estate, whose total output was Sh532 billion.

But beneath the glossy picture being painted on Kenya’s open spaces and skylines are investors and property managers suffering because of an oversupply in the market.

“I think there is every sign that something terrible is just about to happen but the building does not seem it will stop,” says Anthony Mugo, chief executive of real estate firm Falcon Development.

“Some of the developments coming up defy commercial logic. You need to follow the money and find out who is behind most of the stock coming up, then you will have your answer,” says Mentor’s Mr Hoddell.

Knight Frank Africa says an oversupply of office space has seen the cost of leasing prime space drop by 20 per cent to Sh1,658 per square foot.