Real Estate’s major highlights for 2018 and projections for the coming year

In 2017, the highly divisive political campaigns, a tension-packed general election, the shocking annulment of the presidential election and thereafter a repeat election that almost half the country boycotted, all threatened to send the country’s economy to hell in a handbasket.

The beginning of 2018 was a turbulent one as well. But enter the famous ‘Handshake’ and many economic sectors, including real estate breathed a huge sigh of relief, and are seemingly performing better.

According to Kenya Retail Sector Report by real estate and investment management firm Cytonn Investments, the real estate sector performed better in 2018 compared to 2017.

The report says that the metrics under consideration, namely retail space supply, retail market performance, retail space demand and market sentiments all returned a positive outlook apart from retail space supply which was neutral. The conclusion was also inspired by the higher yields at 8.6 per cent from 8.3 per cent in 2017, which is supported by the improved macroeconomic environment.

“The handshake was one of the defining moments as it brought a level of political stability into the country. Following that, business has picked up and investors came back to the market,” says senior investment analyst at Cytonn Mr Caleb Mugendi. He is upbeat that 2019 is going to be a bullish year.

On his part, Mr Francis Kihanya, CEO of real estate firm Manyatta Capital says that at the beginning of 2018, as was the case towards the end of 2017, many investors adopted a wait-and-see attitude and thus withheld their money. As a result, there was little activity on the property scene as many construction projects were put on hold and people didn’t buy a lot of real estate because of the uncertainties that came with the political heat in the country.

“2018 started from a point of unpredictability, coming from a long winded electioneering period that had strained out the real estate sector big time. The big sigh of relief came in March when that Handshake happened,” says Mr Kihanya.

Today, we take a look at some of the issues in the property scene that defined 2018 and are worth keeping tabs on as 2019 unfolds.

Affordable housing

In 2017, during the Jamhuri Day celebrations, President Uhuru Kenyatta announced the “Big Four” pillars of his second and last term in office, among them affordable housing, consequently setting the stage for what is to become the country’s largest mass housing project since independence. In 2018, the government’s plan to construct 500,000 low cost houses in the next four years has been a major talking point in the property sector.

Commenting on the government’s plan, Mr Mugendi says it is a good initiative because it will cater for those at the low-end of the market who are often ignored by private developers, adding that it has the potential to attract lots of investors into the country looking for partnerships with the government.

“Government foresees this as one of the sectors that will drive growth and take Kenya’s economy towards Vision 2030,” says Mr Mugendi.

Due to the influx of new units in the near future, Mr Mugendi foresees a situation whereby the low cost housing market is going to be disrupted in a good way, such that prices of homes will be brought within the reach of many low income Kenyans.

“Going forward, if this initiative succeeds, land prices, a factor that has been the greatest impediment to housing will be checked, enabling Kenyans, especially those in urban centres to own a roof over their heads,” notes Mr Mugendi.

Land prices to go down even further

Yet another advantage of the government’s direct involvement in provision of social housing, Mr Mugendi says is the ability of such a move to bring down the cost of land, as a result of government releasing parcels of land it has been sitting on for ages.
“We have actually seen the prices of land come down in 2018. We expect that trend to continue in the 2019” offers Mr Mugendi.

Reduction in State Bureaucracy

While addressing stakeholders in the construction industry during the inaugural Construction Industry Awards (COINA) 2018 at Carnivore Restaurant in August this year, Mr Charles Hinga, the Housing PS, intimated that at least 35 legislations, some on procurement, were set to be repealed in a move by the government to put on course the plan to realise the affordable housing dream.

Consequently, during this year’s Jamhuri Day celebrations, the President, while outlining the progress for the ‘Big Four’ agenda, gave cutting down State bureaucracy by establishing appropriate laws and policies that would provide the platform to transform the housing sector, done in the past 12 months as one of the progress made.

Still, experts in the real estate sector feels more needs to be done in terms of streamlining government policies in the housing sector in order to fast- track the agenda.

Interest rate cap

Kenya capped commercial lending rates in September 2016 at 4 percentage points above the central bank’s benchmark rate, which now stands at 9.0 per cent, in a bid to limit the cost of borrowing for businesses and individuals.

Many in the industry were upbeat that the interest rate cap would finally be reversed, especially after the Central Bank Governor, Dr Patrick Njoroge, in September 2017 said the interest rate cap on loans would soon be reversed, and that banks would be free to price their loans.

That did not happen in 2018, much to the disappointment of many.

“Real estate is capital intensive and developers need cheap and accessible credit to be able to make meaningful investment in the sector,” says Mr Kihanya, who has been in the business for many years.

Most Kenyans have not been getting cheap credit as banks have adopted a stricter vetting process. On the other hand, Kenyan parliament has rejected all attempts by CBK and Treasury to have the law repealed, creating a cal-du-sac situation.

The Kenya Bankers Association (KBA), commercial banks’ umbrella body, through the CEO Dr Habil Olaka told DN2 that their position that interest rate cap is not the way to go has not changed.

“The segments (small and medium enterprises and households) where credit was expected to flow into are not getting the right quantity of credit. Therefore, economic activities in those sectors are serious hampered. This means economic growth is not happening at full potential,” said Dr Olaka.

Statistics from Kenya National Bureau of Statistics (KNBS) seems to make the case for Dr Olaka. The data shows that in one year to December 2017, credit to the private sector only grew by 1.6 per cent, much slower than the previous year. Consequently, Central Bank of Kenya (CBK) data shows that in the 12-months to March 2017, credit to the private sector grew by 3.3 per cent, far below the preferred 12 to 15 per cent.

But it is not everyone who is buying these findings, and the accompanying arguments. For Mr Kihanya, two years is too little time to draw conclusions on the effectiveness or lack thereof of the interest rate cap law.

“Real estate is a cycle that takes five to eight years. So any bad decision made that affects the sector now, we are likely to see results earliest 2023,” offers Mr Kihanya. He adds the Presidents refusal to pander to banks as regards interest caps is “probably his biggest legacy.”

“The government needs to go full circle — stop taking from banks, so they can start hawking the money to real estate and other sectors,” says Mr Kihanya.

He believes commercial banks, CBK and Treasury are working in cohorts to frustrate the law.

“There is no way low interest rate can attract little interest from borrowers,” says Mr Kihanya, responding to a report from CBK indicating a slowdown in the country’s credit sector.

In the era of interest rate cap, most financial institutions have opted to play it safe by putting their money on government securities, said to be risk-free.

“My hope for 2019 is that the government will reduce its appetite for domestic borrowing. This will leave banks with no choice but to turn to individual borrowers,” offers Mr Kihanya.

There’s no telling whether the rate cap law will stand the test of time as members of parliament, the originator of rate caps, have stuck to their guns, while bankers are unrelenting and will most likely pick up the debate next year. Borrowers on the other hand, including those in real estate, want cheap and accessible credit.

It will therefore be interesting to keep watch on how things play out in 2019.

Unfavourable tax regime

Out of the government’s desire to raise money to fund the ‘Big Four’ agenda, various tax measures were adopted in 2018 through the Finance Act, 2018. Notably, some of them touch on very basic commodities, thus leaving ordinary Kenyans staring at tough times ahead.

For instance, the increase in fuel prices means a ripple effect across all sectors of the economy, including agriculture, manufacturing, transport, tourism, building and construction, energy and healthcare.

“The fuel levy for instance affects the whole economy in terms of inflation and the fact that you will have to pay more for basic goods.

It also means that people have less disposable income, bearing in mind that people need money to invest in property,” says Mr Mugendi.

So, should the government rethink its tax policies, especially after a court temporarily stopped the government’s plan to impose a 1.5 per cent housing development levy, in 2019? Only time will tell.