We are at the beginning of 2016 and everybody is wondering how this year is going to be, since 2015 was full of surprises and had plenty of bad news. This year, few are willing to forecast anything beyond a market correction, yet there is little sign of positive evidence for a rebound according to analysts. China’s GDP numbers (to be announced before the end of the month) are expected to be the worst in a quarter-century. U.S. earnings season is off to a bad start.
Kosta Kioleoglou REV – Civil Engineer Msc/DBM
And oil’s free fall has kick started a selling spree by Middle Eastern sovereign funds, which hold more than $2 trillion in Western securities that could be redeemed to prop up ailing oil economies.
While European markets try to remain stable after a brutal sell-off, oil continued to fall as Iran prepares to dump an extra 500,000, sanction-free barrels a day on world markets. A lot of turbulence is expected during the coming months. Emerging markets around the world are the ones that could be affected the most as their growth depends on the international markets.
So where is Kenya standing today?
Within the last few years, Kenya has been performing on average better than what was expected in the beginning of the year 2000, experts indicate. The country’s economy has been continuously growing with percentages that other economies cannot even dream of. With an average of over 5% annual growth since 2010, the Kenyan economy has been upgraded to a middle class economy and at the same time, everybody’s expectations for an even better future are growing too.
In between the real numbers and the Kenyan’s expectations, the Real Estate Market has capitalized the most out of this positive course. Real Estate values have been growing all over the country with Nairobi and its satellite cities, gaining amazing price rises and making big profits for almost everyone involved with the property industry.
The above amazing performance, though, has to be associated with several factors. First of all, the key to this success was the political stability in the country that created a stable environment and the required feeling of “safety” to local and foreign investors. Equally important, was the fact that the global financial and economic circumstances have been favoring most of the times the growth of the emerging markets with vast available capitals invested from the big economies to all emerging markets around the world.
The expectations from the oil reserves discovered in the country boosted the positive attitude of investors and attracted especially foreign investors who wanted to capitalize early in a possible future economic growth. The Chinese plan to penetrate and dominate investment-wise in Africa and especially the sub-Saharan region is another very important reason for growth, as huge investments have been funded on because of Chinese interests. Finally, the stability of the Kenyan shilling over the last years together with a steady interest rate environment played their own role in the country’s amazing course.
Year 2015 started with the expectations of the Kenyan economy performance to be extremely high. According to the World Bank and IMF, Kenya’s economic growth was expected to exceed 6% during 2015. However, global economic events in 2015 played a mixed role of positive and negative effects in the Kenyan growth.
The Kenyan shilling felt the pressure of foreign currencies, especially the USD and in June, we saw the rate sliding down to 106 KES/USD. The CBK tried to control further losses by increasing twice in 30 days the CBR from 8.5 to 11.5% while selling millions of USD from the country’s reserves to support the KES. During summer, the Chinese crisis was the reason for further turbulence. An upcoming war in Syria and the sanctions against Russia were amongst other possible reasons that increased the volatility of the markets around the world.
The downward racing of oil prices that hit negative records month after month played a mixed role. Low oil prices help some economic factors like keeping inflation low, but at the same time, all the expectations for further economic growth from the exploitation of the recently discovered oil reserves in the country froze, creating a negative atmosphere concerning this sector of the economy.
Inflation was marked by negative records during the year with the overall rate standing at 8.01 per cent in December 2015 completely outside the government forecasted limits. These are some of the key economic facts that we saw during the year 2015 in Kenya and around the world. Apart from the theoretical weight they have, they also had direct effects to the real markets and daily life of Kenya. Real Estate was one of the sectors that was affected from all the internal and external factors. The cost of construction increased as well as the cost of borrowing money and that affected directly the market growth.
The fact is that the increase by almost 30% (from 8.5% to 11.5%) of the central bank rate was the reason for the loans to become more expensive. This made people more skeptical to applying for one. The Real Estate market, representing over 10% of the country’s GDP (respectively) remains big and keeps growing, but the numbers in comparison with previous years do not look so good or promising. The overall average price growth during the first three quarters of 2015 according to the Housing Price Index published by the Kenya Bankers Association, barely reached 4.3% (2.75 Q1, 0.2 Q2 and 1.26% Q3, no data available yet for Q4).
According to Knight Frank Africa Report year 2015, by the end of 2014, the market moved from a position of stability to having an oversupply of Grade B office space and just a relative shortage of Grade A developments. The industrial market remained subdued and the residential market had marginal increases in capital and rental values during the year 2014. In addition, the start of 2014 saw Kenya experience an oversupply of prime properties especially in Nairobi and Mombasa.
By the beginning of 2015, there was an oversupply in several sectors of the real estate market. All through 2015, the market was under big pressure because of all the above reasons and the sector’s performance was not exactly ideal but still remained promising amongst the public opinion. Alternative investment options that traditionally used to give low returns provided an amazing opportunity to investors who wanted to capitalize on the country’s need for cash with the treasury bills offering returns of over 20% a couple of months ago. Investors are now starting to look for other options far from the Real Estate and that is another challenge for the market.
The question that has been bothering everybody is “What is going to happen in 2016?” Well, no one can predict the future, but we can definitely try to simply analyze the situation and come up with a possible scenario for the next 12 months. The fact is that the numbers usually do not lie. And the numbers say that so far, the real estate performance on average cannot even cover inflation. That means that the capital value increase during last year was smaller than the increase of costs of living so the investment was not exactly profitable.
Another fact is that the annual price increase is smaller than the interest rates. That will cause the uptake of residential mortgages to remain low in 2016, while the volatility of rates is create uncertainty to the market. The fact that interest rates are higher than Rental yields makes the Buy to Rent sector of the market to slow down as well. The diaspora inflows have been a key factor for the Real Estate Market growth in Kenya. With over 1.1 billion dollars’ inflow last year, the market capitalized the possibility and sales to this sector. The global market volatility and the difficult economic year that everybody is expecting around the world in 2016 is creating worries concerning the inflows that should be expected during 2016 from the Kenyan diaspora.
My opinion is that this will be one of the most important years in the last decade concerning the future of the Kenyan economy and Real Estate. The key factors of the economy have been producing mixed performance and in general lower than what was forecast by analysts. The increasing inflation, the weakening Kenyan shilling, the rise of the external and state debt, the global economic turbulence, the Chinese crisis that is getting bigger day after day (and China is playing a key role in the Sub-Saharan growth the last years) together with a market that is based on rumors, expensive finance, non-existing mortgage market and an economy that is not growing equally are all indicators that one should be seriously worried about.
It is also very important to note another problem. Kenyans thirsty for a better life has led to an extremely consuming society. Kenya having to import most of the products sold in the retail markets is negatively affecting both the economy and the average family’s affordability.
I strongly believe that high interest rates in Kenya are hurting real estate investment. Interest is a cost to the developer of real estate as it is to the end buyer. The increase of the commercial banks’ lending rates caused a slow down to the market as it affected both existing and new loans.The intervention by the CBK targeted to bring relief to the economy, but the effects of high interest rates on real estate are yet to be felt. The real estate market is an imperfect market. Any changes in the real estate market are felt several months later. This can be explained by the process and the time it takes to deliver real estate.
If something is to help the market’s growth, it will be the drastic change of the country’s financing environment; an ease of the interest rates and easier access to finance. Lower interest rates allow more people to be able to qualify to purchase a home, thus more people can afford to purchase. When more people are able to purchase homes, the amount of homes on the market will be reduced (reduces the supply) which in turn pushes up the cost. Conversely, when interest rates are high, fewer buyers are able to qualify for a loan which increases supply. Over supply tends to push prices lower.
Kenya’s property market is in front of a crossroad and not all the options will lead to success and profits. All interested parties should be extremely careful as the global volatility is affecting directly all the markets and especially the emerging ones. 2016 is expected to be quite volatile and challenging for the Real Estate Sector. It has to prove its sustainability in order to continue attracting investments. In the middle of a global financial vortex that is expected in 2016, awareness, patience, constantly following up with the market indicators and economic data will be the best advice. Obviously profits will be made from Kenya’s Real estate this year, but it will not be that easy and the risk factor has to be seriously considered by all the interested parties.
I always believe that we need to stay optimistic as psychology is very important when it comes to investments. But it is good to remember that sometimes it is better to say no to a deal or a market than just go for it. This year, let us have a rather ‘safe than aggressive’ attitude.
By Kosta Kioleoglou
REValuer by Tegova
Civil Engineer Msc/DBM, Africa Plantation Capital