The Real Estate ‘Bubble’ or Opportunity in Kenya?

Residential apartments, Photo Courtesy Nation.co.ke

Have you ever had the chance of visiting the suburbs of Nairobi City? If you have, then you are likely to notice very many developments ranging from tarmacked roads, to streetlights and shopping malls on every corner of any estate. However one will stand out – the increase in number of high-rise blocks of residential apartments. This is the harsh reality that every Uber driver is subjected to when they try and locate you amidst high number of residential apartments. The probability of any open/free piece of land within the suburbs of Nairobi being transformed into some residential apartments in the next five years is close to one. While some may look at this trend as an opportunity, others will look at it as a cost and a burden. But there’s more than what meets the eye with all these rising numbers of residential apartments around.

Housing has been a major topic of concern for decades. Close to 12 years ago, the world witnessed a major financial meltdown which affected the global economy and changed the course of the financial industry completely- the financial crisis. On the run up to this crisis was the housing bubble that was predominantly in the American economy. A housing bubble is a situation where there is an accelerated demand for houses and financing for houses and a limited supply of the same. This situation creates an imbalance in the ecosystem and in effect, suppliers take this opportunity and inflate the prices. The rising prices lead to a point of unsustainable levels and then decline. As with every bubble, there comes a bursting point, and this was what the American economy faced prior to the financial crisis.

Closer home (Kenya), housing is one of the key areas of development under the Kenyan government’s flagship project dubbed ‘Big 4 Agenda’, together with food security, manufacturing and affordable healthcare. The main goal under the housing agenda is to ensure that every single Kenyan is able to own a decent house that is equivalent to the same amount of rent that he/she pays. The government plans to build at least 200,000 units annually over a period of five years. However, statistics from the Ministry of Housing and Urban Development indicate that the housing shortage in the country stands at 1.85 million units. This is more than 200,000 units per year. And with the ongoing pandemic, the numbers stand to increase as we look to reach the year 2022, which is the deadline for this project.

While the Kenyan government is falling short of their promise under the housing agenda, the real estate investors and private developers are taking up the opportunity to “fill” the gap by increasing the supply of house units in the market. This is well depicted in the results of the national census that was undertaken by the Kenya National Bureau of Statistics in the year 2019. It is estimated that 88.5% of all rental units in the country are supplied by individual investors, while 6% of this is supplied by private developers. The public sector, which involves the national government, county government and parastatals, provided very little rental units; 5.5%. Given all these, the number one question that both consumers and producers are struggling with on their minds is – “Is there a real estate bubble in Kenya?” If you answered ‘YES’ to that question, then a more fundamental question to ask yourself is – “When will the real estate bubble in Kenya end?”

 It is very critical for one to be able to understand the dynamics that play along in the real estate market. One way would be to think through the factors that impact the market. The most overt factor is land. There’s no doubt that land is a major factor to consider in the real estate market. Land prices have been on the rise and are likely to continue with this upward trend in the near future due to urban development pressures. This, however, could pose a big stumbling block for investors looking to enter the market and prove to be costly for existing incumbents. However hard it could be, real estate developers have adopted various strategies to enable them maximize value from small costly pieces of land. One of these include adopting the concept of building vertically. This is based on the fact that doing so allows you to build more with small area.

Other than land, demographics are quite key as well. The Kenyan population as at 2019 stood at 47.5 million. This is an increase of 6.6 million from 40.9 million in the year 2009. Out of this population, 75% (37.5 million) are under the age of 35 years. The number of households is estimated at 12.2 million and the average size of each household is 3.9. What does this mean? Real estate development rides on the shifting demographic status in countries. Recently, the Kenyan market witnessed the development of student-based accommodation units. This was a response to the growing presence of youth aged 18-35 years who are actively or passively pursuing their studies in urban areas and interest in providing accommodation that suit their needs. On the flipside, the aging population would also be of interest to real estate investors in ensuring that they get affordable care homes when they retire.

In as much as the future looks fulfilling, one should take a clean look at the current status in the real estate market. Despite the high number of house units available, you’ll find most of them being unoccupied for some time. Situations like this are normally expected in the short run. However, when it spillovers in the long run, it ceases to become an opportunity but a burden. Investors are either forced to sell the house units for very low prices to attract potential customers or stick with the situation and weather the ‘storm’ until a potential customer shows up. This is the state in which the real estate market is currently. But there’s hope that the market will pick up once there’s resumption to normalcy.

Written By Wayne Matengo
@matengowayne(Twitter) 
@wayne matengo (Linkedln)