Why real estate sector faces uncertain future

Property investors are under immense pressure to adapt to the destruction of Covid-19 amid unprecedented challenges for economies worldwide.

The real estate sector, already in turmoil due to oversupply in some segments and unfulfilled demand in others, is now a central feature in a pandemic that has ground everything to a halt.

And when the coronavirus storm is over, as with many other sectors, some changes caused by the pandemic in the property market will be irreversible.

Chief to be affected will be commercial rental space. Due to social distancing requirements, people have resorted to work through digital platforms, which essentially means that they can deliver away from office.

Abraham Samoei, president of the Institution of Surveyors of Kenya (ISK), feels that the onslaught on the economy fuelled by Covid-19 could change the workplace environment for many companies.

“Due to the pandemic, companies may realise that they require less office space and that people can deliver from home,” he says. “Occupancy of rental spaces for commercial tenants may end up taking a hit.”

If indeed this happens, it would deal a huge blow to many investors in real estate, with the last three years having not been particularly profitable for landlords. 

In addition, when the pandemic eases its grip, firms will have been wrung dry and top-class (Grade A) offices might become too expensive for most of them.

Thirty per cent of commercial offices in Nairobi have a first class rating. Of these, only a paltry five per cent can rightly carry the Grade A tag comfortably.

Gigiri is the only location with purely Grade A offices where 75 per cent of office stock is premium.

But then, even Grade B occupiers will most likely be seeking more affordable spaces.

“The prices of properties doubled when the economy flourished from 2003, all the way to 2012, bar for a few hitches. But when the economy tanks, then prices fall, which has been experienced lately,” Mr Samoei told Home & Away.

“The price of land in Westlands dropped from Sh500 million an acre in 2019 to around Sh350 million now.”

There has been a property glut, he confesses, with supply exceeding demand as factors such as reduced spending power due to low liquidity come into play.

After Covid-19, the demand might sink even more with people having less money to spend.

Another effect of the pandemic is that buyers might opt to go for completed units rather than off-plan developments.

University of Nairobi lecturer George King’oriah, in an interview with Home & Away, said people will be considering buying ready units in anticipation of situations such as the current global pandemic.

“There will be a scramble for single houses and flats. However, we are likely to experience a cash crunch; there will be restricted demand owing to a lack of money in the economy,” said Prof King’oriah. 

Wahoro Ndoho, the CEO of Euclid Capital also said the attractiveness of completed units will ultimately rise.

While the experts agree that ready-built houses will be in demand post-Covid-19, Samoei feels that unscrupulous developers had already ruined the attraction for off-plan developments.

He said developers who delay to honour contracts, offer less quality than promised or altogether fail to deliver are the main reason many people have lost faith in off-plan investment.

Last year, Kiambu-based Gakuyo Real Estate company was embroiled in a tussle with investors who claimed to have been swindled, with many clients demanding refunds.

Suraya Real Estate has also been battling furious investors, lenders and partners, with the fights even boiling over to reveal family wrangles.

“People should apply due diligence when signing for off-plan. They should be careful to check the dealings of the developer,” says the ISK president. 

“Sometimes, people’s emotional attachment to property leads to them being swindled. We urge the public to use professional services, and our members always offer that.”

One of the major changes ongoing in the sector is digitisation of records, which is expected to rid the system of land-associated evils.

The process of digitisation by the Lands ministry was supposed to be completed by June this year, a target that is likely to be missed. 

But the ISK chief says a digital platform will ultimately solve problems that have encumbered land registration and administration in Kenya for a long time. 

Digitisation makes data classification and management more efficient through geographical information Systems (GIS) and Land Information Systems (LIS).

When all land-related data is finally entered into a digital platform, cases of irregularities associated with land conveyancing will fall.

At the click of a button, you can get all the details about a parcel of land, from previous ownerships to lease status and current interests in the parcel.  

Bureucracies involved in transactions will also be eliminated, and forgeries will be a thing of the past. 

“We are doing very well,” says Samoei. “We have made good efforts in our digitisation and soon, Survey of Kenya and registries will be digitised. The regulatory and enabling frameworks have worked very well.”

The ISK president dismisses the idea that the property market in Nairobi is overpriced, a claim that has been a hot topic in the recent past. 

“Heterogeneity of property affects value. The markets operate on demand and supply dynamics,” he says.

“Price is market driven, there are submarkets in these markets. You cannot compare properties in different submarkets, because price is dependent on many factors such as size of property, age and location.”

The Institution of Surveyors of Kenya brings together property valuers, land surveyors, GIS experts, building surveyors and property managers, among other professions.

It has around 1,500 property managers who, according to Samoei, are likely to be directly affected by the raging standoff between landlords and tenants.

“Rent is capitalised on commercial property,” says the president. “Such property is valued on rent accrued. Owners want to preserve capital value. We thus have a mandate to ask tenants to honour contractual agreements with their landlords and pay their rents.”

He says that in the case where rents are not paid, the pensioners and retirees who might be getting their incomes solely from such investments will not have anything to support them. 

An amicable solution should be reached by landlords and their tenants, deciding to have waivers, reductions or deferrals of the rents, with the tenants to pay when the pandemic sweeps past.

Samoei says while leasing property for residential unit is a good option because of its flexibility, buying of property gives more security. 

“But it all depends on one’s financial management and portfolio balancing,” he adds. “With massive capital appreciation, many people will be considering buying property.”

It is not all gloom for property owners and developers, however, as the stabilisation of the economy after coronavirus will return the shine that has been lost in the real estate sector, according to Samoei.

The government’s affordable housing programme, for instance, is hopefully going to continue keeping property developers and investors busy.

However, government incentives are bound to change annually with budget allocations varying each year, which does not dovetail with requirements of the real estate sector, said the ISK president.

This is because property decisions take a cycle of three to four years to mature, and such government incentives spanning a year end up amounting to little. 

“Government has had incentives to promote developers to enter into affordable housing. But property decisions are more long term, and there are very many variables,” Samoei said.

“You may make an incentive now but by the time of actualisation, many factors in the market have changed. Longer term policies in property sector should be considered.”