Happy New Year! We hope that you had a wonderful break and enjoyed special time with family and friends. Time away from our everyday tasks can be remarkably restorative. We are confident that, as always, you return to your work with renewed enthusiasm and vigour. The year 2018 is here! Who would have thought that time will run that fast. As with any new year, we plan for various goals (resolutions) that we set out to achieve. For players in the real estate sector, there are personal targets that you would like to attain before the 2018 curtain closes, for instance buying that dream holiday home by the beachfront. As you make these plans, it’s prudent to know the forecast so that you could realistic resolutions.
Politics & Economy
One of the highlights of the year 2017 was the high octane politics that dominated the better part of the year. The election fever slowed down not only the real estate performance, but other sectors as well. It led to investors holding out investment funds pending peaceful conclusion of the electioneering period. This manifested in the review of building approvals in Nairobi that showed decline of 18.4% between January and July 2017. The residential market was the most affected as it recorded a 2.6% lower than the 12.6% total returns recorded in 2016 according a report by a Cytonn, a leading investment company.
However, 2018 holds a brighter future for the players. The elections have been concluded and the country seems to be forging ahead with focus now shifting to developmental politics. Already, the economic indicators are showing growth is returning to various sectors given the relative calmness in the political affairs and this will stabilize then grow further in the medium to long term. According to the cabinet secretary for National Treasury, Hon. Henry Rotich, the economic growth will rebound in 2018 and he’s putting the figure at 6%. World Bank Group projection on the other hand seems to closely support his view with a 5.8 % economic growth. However, this will depend on the completion of ongoing infrastructure projects, settlement of an election dispute on the charging of the opposition, the resolution of slower credit growth, and the strengthening of the global economy and tourism. In the long-term, the adoption of prudent macroeconomic policies will help safeguard Kenya’s robust economic performance. This includes the implementation of fiscal and monetary prudence and lowering the deficit down to 4.3% by FY19/20.
The prolonged election period that was marked by fears of violence decelerated investments both domestic and foreign based. However, the year 2018 will see significant investment coming through to Kenya with real estate being the main beneficiary. “Investors still favour real estate due to high demand that grows every year. Demand for housing and supporting infrastructure far outweigh any adverse circumstances of the past year,” says Aly-Khan Satchu, a financial analyst with rich.com.
Already, Kenya has overtaken South Africa as preferred destination for direct foreign investment (FDI). A growing number of foreign companies are investing in Kenya’s real estate sector to capitalize on the ever rising demand for housing which currently stands at 2 million units annually. Milost Global Inc., a US private equity company based in New York has entered the Kenyan market through a partnership with a local company. The company joins several equity companies that are already operating in the country. This foreign-local partnership model will be the trend driving FDI in Kenya’s real estate. However, the extent of investment will be pegged on the general economic performance and the state of political affairs that is still experiencing latent tensions.
Finance for real estate developers and property buyers has been a thorny subject now since the law capping interest rate came into effect in September 2017. In order to realize significant growth, access to affordable finance must be addressed and repealing the law capping interest rate would be a great start. The Central Bank of Kenya (CBK) has been on a lobbying overdrive in a bid to roll back the law given the adverse effects it has had on the economy. Given the fact that lobbying was being done during an election period and the law from the face value seem to favour an ordinary citizen on what is claimed to be exploitation by the banks, their chances for success were negligible. It was a non-starter. However, with the elections behind us, they have promising chance to overturn the law that has curtailed flow of finance and it’s likely the law will be repealed. Even as the country awaits new design of legal tender, the facts on the effects of the law are there for all to see; logical persuasion will be prudent. In the meantime, developers can overcome the financial hurdle if they find a way of financing projects through alternative markets such as private equities as well as tapping into the growing foreign direct investments. For buyers, they can rely on SACCOs and self-help investment groups.
When it comes to taxation, the real estate industry is likely to be under the enlarged scope of the taxman as the country is faced with a big fiscal deficit in the budget. This comes on the background of the industry being one of the most lucrative sectors in the country. Loans borrowed by the government to fund various public investments more so infrastructure are due but the internal revenues aren’t adequate. Tax compliance enforcement will be very strict. Industry players should ensure they are in full compliance to avoid complications with the taxman. In the long term, as the pressure to pay off the debts pile, special taxes may be introduced to raise more revenue given the fact the real estate sector is one of the most lucrative sectors.
The year 2017 was perhaps the worst year in building disasters thanks to poor workmanship. In order to avoid future incidences, 2018 may see the industry get strict regulations to curb the menace. The red tape brought about the heavy regulations will affect efficiency and most certainly have additional cost. Industry players should also anticipate strict enforcement as well. The government intends to carry out annual building audits with an initial target of 6000 buildings per year to ensure safety and security of tenants.
Housing remains a big challenge in Kenya. The shortage of decent low cost housing has led to mushrooming of slums in major urban areas as many have been priced out. The wages are stagnant while the cost of housing and living generally are skyrocketing. If not addressed in good time, it will be a crisis. Presently, we have an outstanding demand of 1.85 million units and to meet this, 132,000 units are required per year to cater for new entrants into urban areas. In 2018, we anticipate lots of activities on low cost housing and perhaps it will be the biggest cash cow across all the housing segments. Suppliers of building material stand to gain as well as the construction boom picks later in the year. The government is expected to invest heavily with about 0.5 million units per year for the next five years. In this regard, we'll see opening up of suburbs and peri-urban areas to host the low-cost housing units as well as significant improvement of infrastructure that developers can take advantage of. While there will be still activity in middle and high end housing, the focus will be on low cost housing.
Is bubble nigh?
This question will always haunt the real estate players for as so long as they are alive. Each year, it is posed. Even so, it is important to review the industry fundamentals to ensure that the investments are safe and secure. A real estate bubble bursts when supply exceeds demand and credit is so cheap and readily available. Currently, the country has a deficit of two million housing units, against an annual demand of 200,000 units. Developers are producing only 35,000 homes annually and credit is not cheap and is not readily available. So, no bubble in 2018. Let’s review again in 2019!
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