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Is the property bubble about to burst? PDF Print E-mail
Written by Written By Ferdinard Mwongela for The Standard,15 January 2009   

Kenyans are in a rush to own property and as a result, the property market is enjoying a major boom that has persisted over the last few years. Agents in the real estate sector hail this as the ‘coming of age’ for Kenya’s property market. Despite this, skeptics wonder if this phenomenal rise in property prices — more than 100 per cent in numerous cases — is reason for concern.

Timothy Mutisya of Lloyd Masika believes the hike in real estate is an indication that the country’s property market has finally matured. For instance, a three bedroom flat in Kilimani or Hurlingham sold at Sh3.5m—Sh4m four years ago. Today, the same property sells at between Sh7m—Sh8.5m, while an acre of serviced land in the same area has risen from Sh18m (four years ago) to Sh40m today.

In Nairobi’s South B and South C areas, houses that went for Sh4m in 2004 are now selling at Sh7.5m. An acre of land in the city centre is currently priced at Sh280m—Sh300m. Four or five years ago, the same parcel of land cost Sh160m.

demand outstrips supply

According to Mutisya, land prices in Kenya have increased between 30-40 per cent in the last two years.

S&L’s sales manager, George Laboso, believes the rise in property prices is because demand far outstrips the supply. The situation is further compounded by the annual shortage of more than 170,000 housing units. Consequently, prices can only go up and will stabilise once the housing sector satisfies the current need.

Mutisya concurs. "We are in a free market where the principle is willing seller willing buyer agreement," he says. "Previously, the real estate market was actually underperforming."

The rising cost of construction has also played a significant role in the increase. "For instance, the price of steel has risen by about 60 per cent and that of labour has gone up from Sh100 to about Sh400 per day. Other materials like cement have not also been left far behind," disclosed Mutisya.

Daniel Ojijo, the executive chairman of Mentor Group of Companies, adds that the land factor is a strong mover as far as increase in property prices is concerned. "Land forms 50 per cent of the cost up from 20 per cent. You cannot get away from computing the land factor in the final price," he says.

Scarcity of serviced land has also pushed the prices of both undeveloped and developed land.

Government policy has also significantly aided the rise. With increased revenue arising from more efficient tax collection, the Government now borrows less from the private sector.

Commercial banks too, have more cash to lend to the public and since most have greatly relaxed their lending rules, more people can access funds. Ultimately, the increased purchasing power has pushed the demand for property higher.

Mortgage companies now offer lower rates. "Some go for as low as 14 per cent from the initial high of 30 per cent," says Ojijo. He does not foresee a reprieve in land prices as long as fundamental issues like roads, water and sewerage facilities are not addressed conclusively. He feels property prices will continue to rise, and expresses fear that it could turn chaotic if not checked

"It is important that the Government demonstrates serious commitment in this the same way it does other sectors like tourism," says Ojijo.

Rigid laws of approval

Stringent approval laws by Councils and the bureaucracy suffered when trying to secure approval to develop land has forced potential buyers to concentrate more on serviced land.

The Minister for Nairobi Metropolitan Development, Mutula Kilonzo wants to enforce strict rules on ‘change of user’ applications. He says that under the ministry’s plan, land that has been set side for a specific use will not be allowed to change use.

The proposed creation of the Nairobi Metropolitan area has had a slight influence on expected infrastructural and service delivery developments. While agreeing that plans for a metropolis have had an impact on the property market, he points out owners will get value for their land.

Lack of serviced land has also had its effect as a lot of development is "concentrated within a 10km radius from the city," says Mutisya. However, an increasing number of people are choosing to invest in property in the city outskirts due to accessibility and affordability.

So, is the bubble currently buoying the sharp increase in property headed for a burst?

Laboso doubts it. "There is a huge growth potential in the market," he says, adding that although the upper market is almost saturated, the middle and low-income brackets are yet to be tapped. He expects the increase in prices to continue for a few more years before they stabilise.

Patrick Karanu, the marketing manager for Doctal Agencies, adds that people have realised the importance of investment. He does not think that the real estate market is going to dip in the near future.

what the future holds

Mutisya is confident that the real estate market can only strengthen in the short term, although predicting the market’s long-term sustainability is difficult considering that it is affected by external factors such as politics. "If the post-election clashes had gone on for much longer than they did, the property market would have crashed," he said.

On the other hand, Kenyans living abroad have began to invest in property in a big way by either buying property for themselves or for their relatives.

But for the real estate market to spread evenly around the country, Ojijo holds that the Government needs to invest in infrastructural development nationwide.