Do homebuyers buy to let or to occupy?

Sector players say many first time homebuyers buy to occupy.

By AUSTINE OKANDE

With the majority of Kenya’s middle class yearning to own a home, the property market across the country’s major towns has seen a major growth over the last few years.

The mortgage report for the third quarter of 2013 released recently by The Mortgage Company (TMC) points out that more Kenyans in urban areas live in rented or leased houses.

According to the report, only a fifth or 20 per cent of urban households live in their own homes, as opposed to 70 per cent in the rural areas who own homes.

Despite this dismal number of homeowners, some players say the situation is improving. Daniel Ojijo, the chairman of Mentor Holdings and the founder and organiser of the Kenyan Homes Expo, says Kenya’s property market, in the recent past, has witnessed an increasing demand for buy-to-occupy properties mainly among first-time homebuyers.

Buying to occupy

Ojijo’s arguments are echoed by Abdullahi Dahir, director of Imara Gardens Apartments, who points out that many of their buyers are the actual occupants of the apartments.

“Eighty per cent of the 240 units at Imara Gardens are occupied by their buyers while the rest are rented out,” says Dahir.
At Donholm’s Greenspan, things are not any different. Veronica Thama, who is the head of sales and marketing, says about 50 per cent of those living in the estate’s 420 units are their buyers, while the rest are rented out by the owners.

Whereas most of the real estate experts we interviewed across major towns in the country indicated that many individuals buy properties to live in, these experts also noted that a good number of entrepreneurs, who are mostly second-time home buyers, often purchase properties as a form investment.

Ojijo notes that investors are now purchasing homes as a form investment because property investment is considered a lucrative business because of high capital appreciation associated with real estate, which is normally a hedge against inflation.

He, however, points out that some homebuyers have since opted to rent them out after they were unable to service their mortgage payments mainly due to financial constraints.

One such individual is John Mwangi, who took up a mortgage to buy a two-bedroom apartment worth Sh6.8 million in one of the city’s estates. He has since opted to rent the house after he realised he could not service his Sh50,000 monthly payments after losing his job.

Dahir also argues that owning a home is cheaper because of the increase in rent in the city compared to the early 1990s when mortgages were only feasible among top-ranking government officials.

Comparison

For instance, a three-bedroom house with servant quarter in the middle-class Imara Daima estate goes for Sh7.8 million. Rent for such a house is usually between Sh40,000 and Sh50,000 per month.

If the house was bought on a 15 per cent mortgage to be repaid over 20 years, the monthly repayment would be about Sh102,709 plus insurance. Some people would rather go for the mortgage and own the house instead of paying rent.
The mortgage report points out that low mortgage uptake centres around affordability and eligibility.

Caroline Kariuki, the managing director of The Mortgage Company, says that the continuing high cost of mortgages is putting a profound brake on home ownership in Kenya, and even affecting the uptake of properties for rental.

According to the report, mortgage rates remained largely static in the third quarter of the year, at an average 16.96 per cent. The report also identifies the best rate on offer from the mainstream mortgage market as the 13.5 per cent from CfC Stanbic Bank.

There are about 20,000 mortgages in a market of more than 40 million people, according to the report.

“Urgent attention needs to be given to increasing the accessibility and eligibility for mortgages if we are to make any headway in increasing home ownership to a wider band of Kenyans,” said Kariuki.

Buying to rent

Sakina Hassanali, the head of marketing at Hass Consult Ltd, says those who would have been buying town houses at this stage find the high levels of mortgage repayments beyond reach, and so are moving to rent such houses instead.
But landlords looking at buying town houses as a buy-for-rent, she says, are facing a similar equation of returns that are not currently covering the cost of finance.

Real estate experts argue that mortgagers needed to consider full financing, to take the pressure off buyers to raise large deposits, and build housing finance products for the self-employed.

High cost of property in metropolitan areas like Nairobi, combined with high interest rates, mean that most people in a country where about 46 per cent live below the poverty line cannot afford to take a mortgage to buy a house.

Developers have been taking the flak over the high property prices in the country. Today, an undeveloped acre of land in Kilimani is priced at an average of Sh300 million. In Upper Hill and Westlands, the price Sh500 million on average, while an acre of land in Milimani, Lavington and Kileleshwa goes for an average of Sh250 million.

As a three-bedroom apartment in Nairobi’s prime areas sell at an average of Sh25 million, a similar property in an affluent estate in America would go for about Sh12.9 million at today’s exchange rate.

Things seem to be different at the coastal city of Mombasa where about 60 per cent of the property bought are for investment purposes by the second-time buyers, according to Duncan Amalemba, an agent at Salyani Properties in Mombasa.