Markets & Finance

Commercial buildings plan approvals hit four-year high

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A construction site. Developers are ignoring market reports showing a slow uptake of commercial space. PHOTO | FILE

The value of commercial properties approved for construction in Nairobi rose to a four-year high in October even as market reports indicate that demand is lagging supply.

Data from the Kenya National Bureau of Statistics shows that plans to develop commercial buildings worth Sh13.7 billion were approved in the month of October up from Sh10.3 billion a month earlier.

This is the clearest signal that developers are ignoring market reports showing a slow uptake of commercial space and hoping for a possible spike in 2018 after next year’s general election.

“The high supply of office space is expected to peak in 2016 before bottoming out in 2017 and rising again in 2018, with Westlands and Upper Hill leading in the supply,” reads a previous report by Britam Asset Management.

Kenya will go to the polls on August 8, a period in which most investors take a wait ­and ­see stance.

Last year, the uptake of commercial space was at 1.33 million square feet against a supply of two million square feet compared to 2014 when the uptake was 1.3 million square feet in a market of 1.7 million square feet.

Mall developers have started being creative, scrapping goodwill payments and offering discounts, to attract buyers and tenants to their premises.

NextGen Mall, on Mombasa Road, has been luring buyers with massive discounts and giveaways. Other malls have also spruced up and lowered rents as competition picks up.

READ: Malls outdo each other to attract clients, shoppers

The value of approved residential houses dropped during October to Sh15.5 billion compared to Sh17 billion in the month of September.

Demand for residential units has also stagnated with most developers targeting high end users leaving the bottom of the pyramid underserved.

Kenya’s housing deficit is estimated to stand at more than 300,000 units annually and most acute in Nairobi.

The Nairobi County Government plans to demolish hundreds of colonial era houses to pave way for highrise residential units in an effort to cover the deficit. Construction of the highrise units is expected to be complete by end of 2018.

Government recently introduced tax incentives to developers who build low end of market houses to help bridge the housing gap.

Recent capping of interest rates is also expected to spur house buying as mortgages become affordable to more households.

The spike in value of planned commercial developments pushed the real estate plans for Nairobi to a three-year high of Sh29.2 billion.

Increase in plan approvals gives hope to a real estate sector whose other indicators are pointing to a grim future.

READ: City Hall set to demolish seven colonial-era Nairobi estates

The value of cement produced declined in October to 517,805 metric tonnes (MT) from 518,020 MT in September and 530,913 MT in a similar month last year.

Consumption of cement contracted in a similar pattern to 494,165 metric tonnes in September from 520,713 metric tonnes in August and 518,435 metric tonnes in September last year.

Most importantly, loans to the building and construction sector stagnated in the month of October at Sh105 billion while those to real estate also remained flat at Sh329 billion.

Bad loans from the two sectors have also been on the rise signalling to slow sales. Non-performing loans in the real estate sector rose 45.5 per cent at the end of March to Sh21.4 billion while those classified under building and construction rose by 37.6 per cent to Sh17.2 billion.

In the last five years it have given annual returns of approximately 25 per cent, in comparison to other asset classes that give returns of averagely 14 per cent per annum.

Some have been cautioning of a possible bubble burst which is yet to happen, with stagnation of commercial prices amidst oversupply being taken as a key indicator.