Is Nairobi growing into a global real estate hotspot?

By KEVIN OGUOKO

Barely a year ago, was Nairobi named the second most expensive city to live in in Africa after Nigeria’s Lagos. World’s most expensive cities, which include New York, London, Dubai and Hong Kong, are also among the most expensive places to buy a home in the world.

One factor that has led to these expensive cities  being considered global property hotspots is the expected investment return an investor would gain in the foreseeable future if they owned a piece of property in any of them. A piece of land located in upmarket Cape Town is cheaper than the same size piece of land in Kileleshwa or Kilimani. So in terms of housing prices, Nairobi is on track being considered a property hotspot.

But the question remains: What makes a city or town a property hotspot? And how far or near is Nairobi from meeting these standards? Here are some indicators:

Stable housing market

In the US housing bubble, housing prices had peaked in early 2006, only to start declining in 2006 and 2007, and reach new lows in 2012. The housing crisis would later spread throughout the world, affecting European cities such as London and Berlin as well.

According to a BBC report titled, What Makes a Global Property Hotspot? the ability of a city to jump back or to remain fairly stable during a recession determines whether or not it should be considered a property hotspot.

While existing home sales increased more than 75 per cent between 1995 and 2005 in the United States, sales rose only 15 per cent in upstate New York. Although sales activity in the region trended well below that of the nation during this period, the subsequent decline in home sales was less pronounced upstate.

Between 2005 and 2008, home sales fell only ten per cent there, compared to an approximately 30 per cent decline nationwide. In London, home prices have more than doubled (+107 per cent) since 2005, according to UK estate agent Savills.

In other global property hotspots, it is even more — home prices have surged 232 per cent in Singapore, and Hong Kong has the most expensive property market in the world despite the global world crisis which affected these cities.

The analysis of the report revealed that upstate New York indicated the region’s relatively low incidence of non-prime mortgages and the better-than-average performance of these loans contributed to the stability and eventual rise in property prices.

So how does Kenya compare?

In 2011, Kenya faced the worst regional drought in 60 years, which boosted food prices and weakened the shilling. The result was the currency losing a fifth of its value against the US dollar that year.

Despite these dire financial challenges, the housing market wasn’t much affected. The average increase for all property sales were 1.3 per cent while the average increase for standalone houses and townhouses being 2.9 per cent and 3.8 per cent respectively.

Not to get too excited, these positive figures had little to do with Kenya as an emerging property hotspot. “The first quarter results have borne out our predictions that the soaring interest rates of last year, and current extremely high interest rate levels, would have little impact on house prices, in a market with such an early-stage mortgage component,” said Farhana Hassanali-Hashmani during the release of the 2011 first quarter Hass Property Index. 

She added: “With most of our housing market still being bought by cash buyers, in a profound situation of under-supply, buying and sales closures remain steady, through recession and any setbacks in mortgage pricing.”

Tax incentives

There is nothing that attracts investors like tax incentives. In London, for a $15 million (Sh1.275 billion) property, the annual cost of owning the property is $16,000 (Sh1.36 million) paid as council tax.

In Hong Kong, it is $95,918 (Sh8.2 million), in Singapore it is $121,907 (Sh1.04 million) and it is $1.43 million (Sh121.5 million) in New York.

The favourable tax regime of London arise from the fact that London has no annual property tax based on the value of the property, only a local council tax.

For Asian cities like Singapore and Hong Kong, there is another attraction: Neither place has capital gains tax. That is rather appealing even to foreigners.

The fourth quarter 2013 mortgage report by The Mortgage Company faulted the Kenya government for its slow pace in providing a conducive environment for real estate investment.

“In Kenya, these incentives are not aligned to the market realities — the developers who can access incentives can only do so for homes not exceeding Sh1.6 million. Given the rise in cost of land, construction and the many taxes introduced to the “booming” sector, the government is not addressing the housing challenge. The interest component that qualifies for tax is quite limiting and does not provide adequate relief for the new home buyers,” said The Mortgage Company Managing Director Caroline Kariuki.

This came at a time industry players are complaining that the real estate industry is being over-regulated as seen in the numerous fees and levies both by the national and county governments.

Social impact

According to Peter Koulizos, a property professor and author based in Australia, if the surrounding suburbs are more expensive than your suburb, and your suburb is similar in streetscape and housing style, this is a potential moneymaker.

“Some people will want to live in the more expensive suburbs but won’t be able to afford to. This means they will be looking in neighbouring cheaper suburbs for property. The more people looking to buy in an area, the greater the potential for capital growth,” says Koulizos.

In Singapore, more than 80 per cent of the population lives in quality social housing that can be bought with a government-subsidised mortgage. The subsidy comes from a person’s own savings because it is drawn from the forced saving scheme known as the Central Provident Fund.

Singaporeans put in about 20 per cent of their wages into this government-run savings plan, with matching contributions by employers. The funds can then be used to finance a cheaper mortgage or health needs or retirement.

Hong Kong is, however, a not-a-perfect example of how a city’s structure can influence it being labelled a property hotspot. Hong Kong’s sky-high property prices have a negative impact as public housing is inadequate — such housing only covers 30 per cent of the population and are still expensive. Public housing residents in Hong Kong pay as much as half of their incomes in rent, according to the BBC report.

In Nairobi, every other estate is different in streetscape except in gated communities where developers build similar cluster units to meet the targeted demographic expectations. The fact that Nairobi is host to one of the most studied slums in the world and biggest in Africa, Kibera, does not help the quality factor either.