Supply increase tips homes market in favour of buyers
Residential property selling prices dropped by two per cent in the three months to June as buyers took advantage of increased supply on units to close deals lower.
Residential property selling prices dropped by two per cent in the three months to June as buyers took advantage of increased supply on units to close deals lower.
HassConsult, the agency that compiles Kenya’s only housing index, said property buyers have been emboldened by the near saturation on certain segments of the real estate market to force huge concessions on asking prices.
The buyers managed to close deals at an average of Sh1.2 million discount on the average asking price of Sh22.3 million, pointing to a slowdown in demand even as the market continues to attract billions of shillings in new investments.
“We have witnessed some cooling down in the property market where buyers have become more selective,” said Farhanna Hassanali, the property development manager at HassConsult. “Some of them are holding off from purchases in search of bargain buys and most are unwilling to close deals at asking prices,” she said.
In Nairobi, evidence of a supply increase lies in the fact that City Hall approved Sh35 billion worth of new residential houses in the first four months of the year — more than the value of approvals between June and December last year.
Real estate market observers say selling prices may have hit a plateau in the short-term because asking prices have risen beyond the reach of most prospective buyers and can only move in one direction — down.
In the medium term, sellers are expected to follow the dictates of the bargain-hunters to avoid tying down their money on dead stock as new stocks enter the market.
Pete Muraya, the managing director of Suraya Property Group, says the coming into the market of more units has made home buyers a picky lot with the closing prices as the main battlefront.
Mr Muraya warns that even in the face of rising inflation and high cost of inputs, sellers will have to absorb the additional construction costs to remain competitive in the homes market.
“It is not possible to pass on all the additional costs to the buyer and remain competitive,” he said. “That means developers who were targeting 20 per cent margins, may have to do with 15.” The latest findings mark the first significant drop in home prices that have steadily risen in the past eight years – save for the brief drop during the 2009 global credit crunch.
The slowdown in home prices is expected to culminate in longer of units in the market as buyers wait in anticipation of even lower prices.
The closing price reversal ultimately negated the subdued asking price growth of 1.8 per cent compared to the first quarter pulling lower than the all time high reported in the fourth quarter of last year.
While asking prices shot up by double digits across all residential property classes in the 12 months to June 2011, prices rose the most in the upper end of the market to an average of Sh31.9 million, a 17 per cent increase.
Dealers saw that as a pointer to the fact that demand remains strongest in the top end of the market because most developers left the segment for high density projects targeting the middle class. “In the apartment market, particularly, there emerged a clear margin between asking and closing prices,” said Ms Hassanali.
The index however shows that developers have earned outsized returns on investment since 2001 during which prices rose 3.5 times.
This rate of return has become a powerful magnet for institutional investors such as the National Social Security Fund that have invested billions of shillings in the real estate market to tap into the big returns.
NHC – the state-owned housing developer is also planning a 1800-units estate in Mavoko whose construction is expected to begin in November with the roll-out of the pre-fabricated building panels making factory.
James Ruitha, the managing director, said the project to be completed mid next year, will make use of technology to bring down the cost of houses. NHC has priced the houses at Sh3 million for a three-bedroom apartment.
The recent bubble in property prices has been linked to high rate of urbanization and under-investment in the housing sector. Property developers are also expected to face hard time finding buyers as inflation and interest rates hit new highs keeping out some potential buyers.
Commercial banks have responded to high inflationary pressure with an increase of at least 1.5 per cent in base lending rate tilting the mortgage market in favour of high interest rates.
The unrelenting inflation rates are expected to change the saving patterns of middle income households even as higher borrowing costs become a disincentive to taking up a mortgage.
Lower absorption
This could mean even lower absorption rates, especially for town houses and apartments segment of the market where prices have been more volatile compared to the high end market.
Most property dealers believe prices in Kenya’s real estate market are mainly determined by the level of demand that allows investors to make as much as 40 per cent return on their money.
That means it will take a while before real estate loses its shine as a premier asset class even with a downward correction.
