The housing bubble: How close is it to bursting?

If only the developers of the 70 storey building — Pinnacle Towers in Upper Hill, Nairobi — knew how inactive single or two-storey buildings have been, they would stop the building’s frantic clamber for the heavens and bring it down to earth, closer to reality.

It is not only developers of this skyscraper expected to be Africa’s tallest building by 2021, that need a dose of reality, the entire real estate needs to be shaken out of its self-inflicted illusion of grandeur. 

The alarmist type will see a bubble that is about to “burst.” Those who are not as hot-headed will see a price correction in the offing as the supply of houses exceed demand.

But to everyone else, things are simply bad across Kenya’s housing market. So bad that this year, even the numbers have refused to join in the sing-song of ‘real-estate is the hottest investment.’

While many analysts believe that the correction in prices is overdue, the housing industry has been facing a mountain of challenges in the past months.

There was a time, not long ago, when the path to every Kenyans’ rich-land was blandly predictable. If you randomly asked any of them what they would do if they hit a jackpot, the response you would get would be a hint to what can as well be Kenyans’ fear-of-missing-out): Buy a plot, preferably in Nairobi or its environs and put up an apartment.

And while away, the rest of the years in some beach house at the Coast as millions poured in every month in rental fees. Of course, you can still do this with free cash — some of which, as the ongoing war against graft in Government agencies has increasingly revealed, is looted from State coffers. But for those who borrow billions from banks or earned their money by the sweat of their brows, real estate is not necessarily the beaten path to rich-land. Demand for both residential and commercial housing units has sagged with spaces staying unoccupied for an unusually longer period of time.

Spaces in most malls mushrooming in Nairobi are being doled out for free and adverts on expensive rooms in Nairobi’s Central Business District are screaming: NO GOODWILL. 

Suddenly, tenants, realising that they have the bargaining power, are aggressively pushing for lower prices.

With unexpectedly lower rental fees hitting their bank accounts, developers who took out loans to build the houses are falling out with lenders. Real estate’s share of non-performing loans (NPLs), loans which have not been serviced for at least three months, has risen the fastest compared to the other sectors in the quarter ending June.

Also, a big fraction of the listed firms that projected their profits to dwindle by at least 25 per cent this year are somewhat involved in the property value-chain.

Some of the firms in the property value chain are either dead; others are fighting for dear life.

Some though not in the red, have been humbled by reduced profitability. Between April and June, real estate was the worst defaulter with its share of bad loans increasing by 16 per cent — the highest increase according to data by the Central Bank of Kenya (CBK).

“The Real Estate sector registered the highest increase in NPLs by Sh6.1 billion (15.8 per cent) due to slow uptake of housing units,” reads part of CBK’s Quarterly Economic Report for the second quarter of 2018.

With the effects of 2017 fast receding after a protracted electioneering period which kept investors away and a drought that crippled the agricultural sector, most economic sectors have recovered.  So impressive has the recovery  been that sectors such as mining, construction, tourism, transport and communication and private households have significantly slashed their stock of bad loans.

Those that did not cut down on their share of NPLs such as agriculture, energy, trade and manufacturing, however, tried to limit their growth during this period compared to second quarter of 2017 (see graph).

Not the real estate, which saw its share of NPLs increase to Sh44.4 billion as of June 2018, up from Sh38.3 billion between January and March 2018.

The streak of bad loans has had its victims. A Sh1 billion estate in Kitisuru, a Nairobi suburb, is just one in a string of posh houses that have been put under the auctioneers’ hammer for failing to pay their bank loans this year.

Until recently, Peter Muraya and his wife Sue Muraya — the co-owners of Suraya Property Group — exemplified the dazzling success of Kenya’s real estate market. They were always in the limelight, unveiling one project after another.

Suddenly, this veneer of success was peeled off after a contractor dragged them to court seeking liquidation of one of its properties. Eternal Foundation Construction wanted Sucasa and Encasa West Ltd wound up after the Murayas failed to pay them Sh53 million.

No wonder most of the firms listed at the Nairobi Securities Exchange (NSE) which issued profit warnings — expect their earnings to dip by more than 25 per cent — are deep into the property market.

Virtually all of them trace their woes to the turbulent property market. They include Housing Finance Group, Centum Investments and Bamburi Cement.

The promised gush of dividend is yet to materialise for shareholders of Stanlib Kenya, an asset management firm listed at the NSE.

Mortgage lender, Housing Finance Group, projected its profits by the end of December 2017 to decline by more than 25 per cent, in what the lender blamed on, among other things, slow property transactions.

“Further, the year experienced unfavourable macroeconomic environment resulting in a slowdown in major economic activity, adversely affecting credit growth,” explained the outgoing Housing Finance Group’s Managing Director Frank Ireri, in a statement. Poor credit uptake as a result of the law that puts a ceiling on the rate that banks charge for a loan has been blamed for the low uptake of houses.

The company said the slow processing of transactions at the Ministry of Lands Registries resulted in slow-selling of some of its new houses. After a dazzling performance, Centum Investment might realise that of its myriad investments, the property might be its Achilles’ heel.

The high-flying investment firm, majority-owned by tycoon Chris Kirubi, found the going tough this year owing to the changes in the housing market.

After helping put up the grand Two Rivers Mall, one the biggest in Eastern and Central Africa, things might have started unravelling for Centum.

Real estate market

Earlier this year, Centum warned its investors that it expected its profits for Financial Year ending March 2018 to decline by at least 25 per cent, sending a chill down the spine of its shareholders as its share-price at the Nairobi-bourse dropped by Sh2.50.  

 “Although our investment properties recorded a gain in value in the year ended March 31, 2018, this gain was lower than that recorded in the year March 31, 2017, which is consistent with the performance of the Kenyan real estate market,” said a notice signed by Group Chief Executive James Mworia. The firm’s net profits for the year ending March 2018 did plummet to Sh2.7 billion, down from a towering Sh8.1 billion last year.

“The combined effect of the lower property valuation gains and deferral of recognition of realised gains on the disposal of GenAfrica asset managers was a decline in the group’s consolidated net profit by 67 per cent,” said Mworia.

Besides Two Rivers Mall, Centum’s other real estate include Pearl Marina, Vipingo and Athena — luxury villas and apartments — which together make up half of its investment portfolio.

Centum’s property lost Sh2.3 billion of its sale price signalling depressed demand in the housing market.

Stanlib Kenya, the only firm with an Income-Real Estate Investments Trust (I-Reit) at the NSE, might have hoisted its hopes too high when it sank the first cash it raised into Greenspan Mall.

The allure of shopping mall that seemed to have caught on by the time Stanlib’s Fahari I-Reit started trading at the Nairobi bourse is fast fading, leaving the South-African based financial provider, alongside hundreds of other investors, in a nerve-racking financial position.

Stanlib’s rental income declined from Sh135 million to Sh132 million in the first six months of this year, with their net profit dipping by 16 per cent from Sh78 million in the first-half of 2017 to Sh65 million by June this year.

Besides Greenspan Mall in Nairobi’s Eastlands, the investment firm also owns Bay Holdings and Highway House, all of which received lower rents in the period under review.

The only consolation to the company’s streak of lower rents was a one-month booking of new property, Starling Park Properties, in Nairobi’s upmarket Lavington area for Sh850 million.

“Rental income has come slightly under pressure due to a temporary increase in vacancies coupled with some tenants bargaining for reduced rentals upon renewal of leases,” said Stanlib in a statement.

Malls, such as Greenspan have in recent times sprung up with such ferocity in Nairobi, with some observers concluding that Kenya is ‘over-malled.’

Today, of the ten biggest malls in sub-Saharan Africa, three are in Nairobi. Two Rivers Mall, Garden City Mall and The Hub are ranked second, third and fourth largest malls respectively behind South Africa’s Mall of Africa, which is the largest mall in Africa.

“Outside of South Africa, Nairobi has the greatest volume of modern retail floor space in Sub-Saharan Africa, and it continues to be a development hotspot,” according to the 2017 Africa Report by property consultancy Knight Frank.

But the premise of a fast-growing consumer class which was supposed to undergird the construction of these malls is but a facade.

As they struggled to increase footfall, malls such as NextGen along Mombasa Road, Nairobi, offered free parking to shore up the traffic. But as desperation has crept in, the offer has been pushed up to some unbelievable heights.

In addition to free parking space, Rosslyn Riviera Mall along Limuru Road is also offering new tenants who take up space at the mall free rent for the first six months and a half rent for the next six months. And you have until December 31.

It might be argued that the projected reduction in profitability by Bamburi Cement, another NSE-listed firm that issued a profit warning, is due to a slump in the building and construction sector than real estate.

While it is true that reduction in construction activities, particularly after the completion of the Standard Gauge Railway affected cement consumption, a passive real estate sector has also played a role.

Other cement manufacturers are even in worse position. Athi River Mining is on a life support machine, having been placed under receivership. East African Portland Cement, which lost a suit by its former workers for a Sh1.4 billion payout has sunk further into the red. It needs a Sh15 billion bailout.

Consumption of cement has generally been unimpressive.  Cement consumption, one of the economy’s pulse rates, declined in the first six months of the year — by seven per cent in the period between January and March 2018 compared to the same period in 2017; and 6.8 per cent in the second quarter of 2018 compared to the same period in 2017.

Generally, the volume of imports of construction materials such as iron, steel bars, and rods declined during these quarters, pointing to struggling construction and real estate sectors.

Housing units

It is not that there are no more people in need of houses or offices — Kenya’s annual demand for housing units is still massive at 250,000.

However, experts reckon that both commercial and residential units that have sporadically sprung up across the country are too expensive for the majority of Kenyans, a situation that has seen the State plunge headlong into the housing sector.

But, if the majority of Kenyans are poor with less than 80,000 taking home over Sh100,000 in a month, who lives in these high-end houses? True, the cost of putting up a house in the country is quite prohibitive (thanks, mostly to the speculative prices of land), making it almost unattractive to build for the low and middle-income Kenyans.

And so, developers have restricted themselves on high-end apartments, not with the local buyer in mind, but foreigners. Knight Frank in a 2016 report, noted that a large portion of high-end residential tenants in Nairobi houses expatriates.

Thus, in early 2015, as the country continued grappling with the effects of sporadic terrorist attacks and budgetary limits imposed on an expatriate staff, demand for luxury homes declined.

“Expatriates have housing budgets, beyond which they must seek approval from their head offices for extra rental expenditure,” said Knight Frank Kenya Managing Director Ben Woodhams.

But it appears it is time for developers to build for ordinary mwananchi. Kenya Bankers Association (KBA) Director of Research and Policy Jared Osoro, while unveiling their house price index last year noted that many of the homeowners had become sensitive to cost.

They were thus moving away from such high-end houses as bungalows, maisonettes, and townhouses to cheaper apartments. “Thus, upper-end prices are muted,” said Osoro. He said the market might be witnessing a re-organisation as developers aligned their investments in areas with high demand, noting that developers will concentrate on the low-end and middle markets.

Various indices, including the KBA Housing Price Index overseen by Osoro, have shown that prices of houses have either declined or stagnated, pointing to an oversupply.