Slow activity augurs badly for property market

As the August general eections draw near, there is increasing concern about the possible effects on the economy. The key questions is: can the economy — including the property market —  withstand any turbulence?

In the last few years, different opinions have been given about the performance of the real estate sector and the sustainability of the Kenyan economy. However, the true reflection of strength and sustainability of the economy can only be deduced from the figures and reports issued by official sources.

In the recent past, Kenya has been moving forward, with some macroeconomic figures even growing impressively.

While the average growth rate has been above 5 per cent annually, the balance of payments deficit, negative trade balance, inflation, external debt and unemployment have also been growing, in most cases much faster. Kenyans tend to spend more than they earn, both as individuals and as a country. The number of new sustainable jobs created is inadequate for the large numbers joining the workforce every year. Besides, the country is highly dependent on foreign aid, which makes its economy vulnerable to international events.

The country ’s economy cannot grow sustainably since it imports more than it exports and  consumes more than it produces.

However, not everybody immediately realises the side-effects of a trade deficit or accounts balance deficit. But when big companies begin firing staff, banks collapse, the IMF and world Bank start warning about the country’s growth, and above all, when we can buy less and less with the same amount of money, we start seeing the signs of the real market.

For several months now, there has been speculation about what will happen during the August elections. This is a special year, with several important upcoming events locally and internationally, which might create a volatile environment. Since the beginning of the year, news about the economy and the market has not been very positive. Before analysing the property market, it is useful to review the macroeconomic data and how they affect daily life in the country.

A little while ago, the Kenya National Bureau of Statistics released the Consumer Price Indices (CPI) and inflation rate for February, 2017. The CPI rose from 176.93 in January to 179.88 in February while inflation stood at 9.04 per cent, up from 6.35 per cent in December 2016. The effects of this increase are dire for investors.

According to an article by Bloomberg media on March 8, 2017, “Kenyan investors are earning negative real returns after inflation quickened to 9.04 per cent in February, 42 basis points above the rate for 91-day Treasury bills.” Obviously this will affect all sectors of the economy and investments.

Besides, the country’s economic growth is now forecast to slow down; the International Monetary Fund (IMF) says it is likely to be around 5.3 per cent instead of the earlier 6.1 per cent. The IMF has also expressed concern about the banking sector and the non-performing loans (NPLs).

The fund says that NPLs have increased in recent months, accounting for 8.8 per cent of the  total loans in September. Provisions, currently close to 50 per cent of NPLs, have been declining since early 2016. Six relatively small banks that account for 6.7 per cent of the banking system have NPL ratios of more than 20 per cent (based on bank disclosure reports for 2016 Q3). The Central Bank of Kenya (CBK) recently adopted an action plan to strengthen banking supervision, including anti-money laundering/combating the financing of terrorism (AML/CFT), as well as a legal and regulatory framework for banks. The authorities continue to enhance their financial crisis preparedness with the consolidation of the Kenya Deposit Insurance Corporation (KDIC).

The property market is one of the main sources of NPLs, which rose to 8.8 per cent of the total loans in March 2016, up from 5.7 per cent for the same period in 2015.  The future does not look bright as it seems banks will reduce lending and finance in to minimise their exposure to risk.

Meanwhile, a Capital Markets Authority (CMA) report says that the sharp drop in share prices of banking stocks has pushed the Nairobi Securities Exchange (NSE) to a seven-year low. The National Bank of Kenya and Housing Finance have lost 59 per cent and 46 per cent respectively of their share value in a year, the highest among the listed lenders. Barclays Bank is currently trading 34 per cent lower than at a similar  time last year, while KCB has lost 36 per cent. Equity Bank is down 31 per cent, while Co-operative Bank has lost 30 per cent of its value in a year. And projections are that worse is still to come.

COSTLY IMPORTS

There is one factor we should all focus on: the cash flow in the Kenyan economy. Several factors contributed to the current unfavourable cash flow situation. First, the devaluation of the Kenyan shilling played a key role; when it declined from Sh83 to the dollar less than two years ago to the current Sh103, the economy had to contend with a 25 per cent extra cost on imports. In 2016, imports cost more than they did in 2015. And the CBK expects the current account deficit be more than 6per cent, compared with 5.5 per cent in 2016. That will obviously put more pressure on the country’s macroeconomics and affect Kenyans.

Then there is the investment orientation of Kenyans. In the last few years, people mainly targeted “easy money”, namely the stock market and the real estate. But the stock market is doing badly, so those who invested in it have been making huge losses. The real estate market is also overrated. Large amounts of money are tied up in the property market, which accounts for about 8 per cent of the GDP. Since the market was vibrant, with a reasonable balance between construction, purchases and sales, there was some growth.

But the market dynamics have changed. While many Kenyans have invested in the property market, it is important to realise that there are many investors but no users. Everybody is building to sell or rent but very few are building for their own use.

Yet selling property today is a challenge. There is a saying, “Properties buy money and money buys properties, but properties don’t buy properties.” It is prudent to remember this before making any decision on real estate. In addition, construction requires a lot of imported materials, yet it creates only temporary jobs while contributing to the country’s trade balance deficit.

There is a tendency to blame the elections, Brexit, US President Donald Trump or any other international development for everything. But while these developments do affect the Kenyan market, even without them, the market is already under great pressure. Of course, considering the effects of the ongoing global changes and developments, Kenya is facing huge challenges. Blaming others is an easy way of making ourselves feel better, but unless we realise where our problems emanate from, we cannot fix them. And the main source of Kenya’s economic problems is local.

The country needs to be able to stand on its own feet and depend less on foreign aid. Creating sustainable jobs, focusing on production, manufacturing, agriculture, tourism, etc. is the only way out. The external debt must stop growing and the trade balance deficit must be turned around. Only when there is a real income-producing economy can consumption grow without destroying the country.

The country’s population is growing fast, while unemployment is rising. With almost 50 per cent of the population below 18 years of age andaverage life expectancy growing, if nothing is done immediately to create millions of sustainable jobs, there will be chaos 10 years from now.

So it is pointless worrying about property prices because if things do not change, there will be no market to talk of. The current economic environment does not portend well for the future. This year might turn out to be a reference point for many years to come. It is, therefore, important that the elections run smoothly.

Kenya’s future lies in the hands of Kenyans. They need to change their mentality of investing in “fast and easy” money immediately. They must start producing real income for themselves and for the country. Kenya needs to produce real income because soon it will have to start paying back the international loans, bonds and other borrowed money.

Only when the country can achieve growth based, not just on public expenditure but on the real economy, will the real estate sector start growing again.  People will be able to afford to buy property, banks will be able to lend them money, and property prices will come down. It is not easy, and it will not happen in a day, but it is the only way to achieve sustainable prosperity.

Kosta Kioleoglou is the managing director, Africa Plantation Capital.

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What ails the property market?

The Kenya Bankers’ Association’s (KBA) latest House Price Index indicates that the property market has grown by 14.91 per cent since the first quarter of 2013. During the same period, inflation rose by 25.49 per cent, which is more than 10 per cent above the property market. With inflation rising fast and the luxury market’s performance standing at -2.1 per cent (according to Knight Frank) it is clear that almost all sectors of the property are experiencing oversupply.

On a positive note, however, there has been at least a nominal price increase on average. However, that is not enough; the reality is that an increase in the property market that is lower than the inflation rate and fixed-deposit account returns does not attract new investors and buyers. The same is true with regard to  Treasury Bills.

Kenyan investors are earning negative real returns because of the poor market performance and high inflation rate, resulting in increasing illiquidity in the market.

Property consultants Knight Frank say the property market experienced an oversupply for the better part of last year, with developers’ returns on investment shrinking. And they expect to see few new buildings in the next few years.

The oversupply of prime, residential and commercial properties could eventually become the market’s Achilles’ heel. For the market to grow, there must be activity. Building is not a sign of growth or a trend; buying and selling are what keep the market alive. In a passive market where sales are slowing down, further construction will lead to increased supply, which might trigger price reductions.

The rule of supply and demand is now working against the market dynamics. Despite the current oversupply, there is still plenty of construction going on around the country. The number of unsold properties and those available for rent are increasing even faster. 

But similarly, the time it is taking to rent or sell residential or commercial property is  increasing. Some might argue that there is a shortfall of 200,000 houses in the country, which is true, but it refers to a different type of property – affordable housing for the majority of Kenyans rather than the commercial and residential properties available on the market.

For a property market to remain stable and grow, it requires money. And there are three main sources of money for the property market. First is the actual available cash in the market, second is foreign direct or indirect investment that will provide cash inflows, and third is financing by financial institutions.

It is obvious that there is less cash available in Kenya today than there was before. A lot of money is tied up in the stock market, which is doing badly. More money is tied up in the property market, and it is not easily accessible since it is hard to convert into cash.

Finally, banks have kept their distance from the property market since it started growing  about eight years ago. With a limited number of mortgages approved during the same period and a further slowdown in mortgage approvals during the last quarter of 2016, finance does not seem to be an option for the average Kenyan potential buyer. The increase in NPLs is one of the main reasons that makes bank wary of providing finance since they want to minimise their exposure to risks.