Is the city’s property bubble finally bursting?

The driver navigates his way on Riara Road to the Junction Mall, in a bid to evade the already clogged Ngong Road. It’s mid-morning and traffic is already building up fast. But this gives me an opportunity to peer keenly through the car window as we drive. 

I stare at houses on both sides of the road. Some compounds have as many as 30 units while others are a few shy of this number. Most are newly-built residential houses that are already occupied. As we crawl through traffic, I notice there are many more houses under construction.

Idly, I wonder why so many apartments are coming up, yet so many are unoccupied, with “To Let” signs dangling on the front gates. I start counting and realise that close to seven units are letting.

Further down on the newly constructed Ring Road between Kilimani and Hurlingham, there are more houses with the “To Let” sign.

To the ordinary person, the sign may not mean much but to a critical real estate consultant, it is a signal that things are no longer looking up in the once booming real estate market, especially in the leafy suburbs.

I decide to find out from industry experts whether there is finally a glut in the sector.

Abdiwahid Biriq, a corporate and commercial lawyer at Sagana, Biriq & Co. Advocates, agrees with my observation. He is among those who went around Lavington, Kileleshwa, Kilimani and Westlands areas in search of a rental house a while back.

“I remember in 2009, I went around looking for an apartment near the central business district. I visited Kilimani, Westlands and even Riara Road, but either I couldn’t afford the units or none was available,” says Mr Abdiwahid, who has written extensively on the real estate market.

He says one of his articles published in the Daily Nation late last year attracted a lot of negative criticism. He was accused on “casting doom” on the flourishing property market.

But even with the negative talk, Mr Abdiwahid has remained undeterred in his quest to advise anyone investing in real estate to be aware that the sector is not what it was five years ago.

“The market is extremely quiet. You may also have seen the number of properties available for rent in the recent past. Some years back, you could go round Kileleshwa, Milimani and Chiromo areas and not find an apartment to let.

The number of people looking were too many for the available units. Because of this demand, many people decided to invest in middle and high-end housing units in these leafy suburbs. Now they are everywhere. According to me, the house of cards is falling,” says Mr Abdiwahid.

The property market for sure is undergoing some changes. It’s a transformation that the likes of Mr Abdiwahid and Mr Patel (who requested that we only use one of his names for fear of sharing his peers’ experiences) can own up to.

Patel saw the signs of a difficult market in 2012, when he was completing construction of a high-end commercial property in Westlands, Nairobi.

“People are having difficulties letting such properties. Personally, I have had to spend a lot more on interiors to attract tenants from multinationals. Luckily, it paid off. But I can tell you for sure, commercial properties that were for rent have opted to sell some units to repay their loans,” said Mr Patel when I first spoke to him last year.

A year later, what he told me is still happening. Now, rental properties are affected as well. Today, rental houses are lying vacant for months, some even for years while those for sale are still waiting for buyers.

Some developers have had to reduce the asking price several times and still there are no takers. Villa Care Ltd, a real estate firm with expertise in rental and management of commercial and residential properties, however, disagrees, saying that most of the vacant houses are already sold and simply waiting for the owners to move in or rent them out.  

According to Daniel Ojijo, CEO Villa Care, conveyance at the Lands offices is what is causing the delay. Frank Ireri, managing director Housing Finance, also points fingers at the Lands offices although he admits that sales are slow. He says the challenge for them is delay on sales caused by conveyance.

But even though financiers may not openly speak about the issue, it’s no secret that they have financed some projects which have recorded stagnated sales for a couple of years. A large number of them are projects that were sold off-plan that are still incomplete, calling for buyers with hiked prices years on.

“I’m aware of properties that have been on the market for over two years. Those claiming that 90 per cent are sold are simply using a market gimmick, a clear indication of a frustrated seller. It’s a speculative run to drive housing prices up,” says Mr Abdiwahid.

Some developers have been forced to offer discounts in paid daily adverts in the media. For example, a Chinese developer in the upmarket area of Karen has had to reduce the price of houses by close to 25 per cent and still there are no takers.

Others have opted to host homes expos abroad in the hope of roping in buyers in the diaspora, while some are now resorting to online platforms with the hope of finding random buyers.

Villa Care is among companies that are sending random emails to potential buyers. But Mr Ojijo says they are simply embracing technology.

“Today’s market is going online. We are being in the forefront in technology. The online campaign has been very successful.”

It maybe a new marketing strategy but there are definitely other reasons that may explain the change in tack. For starters, slow sales attributed to high property pricing could be one of the reasons that has caused real estate firms to rethink their marketing approach.

“In the last couple of years, the real estate market has overpriced houses for sale, driving people who could hitherto afford them to instead invest in more affordable property on the outskirts of the city,” says Mwenda Makathimo, managing director Vidmerck Properties Ltd.

Kitengela, Thika, Ongata Rongai, Kiserian, Ngong and Ruiru are some of the areas hosting a huge number of new homeowners from Nairobi.

Ojijo, however, insists that this is a small fraction of the targeted buyers.

Mr Mwenda, a valuation expert, also points to the number of rental houses supplied to the market in the last five years. According to him, this came as a result of a glut in cash inflows from various sources abroad and cheap lending rates.

The Central Bank Rate then, went down to as low as six per cent. It’s within this period that developers spent less on construction but reaped super profits.

“Houses that would normally cost Sh4 million to construct were being sold at Sh16 million while those that were in the Sh6 million - Sh7 million range went for Sh17 million and there were takers all the time. But the situation has changed,” says Mr Mwenda.

“The biggest problem is greed on the part of the developers. Prices have simply become too high for potential buyers,” says Mr Abdiwahid.

According to Ojijo, the increase in price shows that developers are not in a hurry to sell. He says there’s still a big demand out there for houses for sale and for rent, pointing out that some developers also keep reviewing the pre-sale prices thus hiking cost.

High land prices and lack of proper data from independent sources on the current situation of market are other factors affecting this once booming sector.

Players like Mr Abdiwahid feel lowering the house prices is the only way to bring back activity in the market. 

“Some want to maintain the prices because they are not losing out on anything since they may have got their money
from some cheap source. Such people can wait and speculate on price because the cost of construction was low at the
time they built the houses yet they do not want to pass this rebate onto buyers,” admits Mr Mwenda.

Even as they wait for buyers, the market is becoming quieter. Mortgage accounts in a country of 41 million people stand at only 19,000 according to a recent Central Bank report, confirmation that the high and middle class property market is slowly stagnating.

Mortgages

“The yardstick for measuring whether houses are overvalued is the ratio of prices to salaries. This means at current prices, one should be earning over Sh1 million per month to afford a decent apartment in Nairobi, which is not the case,” says Mr Abdiwahid.

Expensive mortgages have resulted in fewer buyers in the high and middle class property market. But Ojijo disagrees, saying there are cash buyers looking for investment opportunities.

The high cost of land purchased by developers is another factor that has pushed up the cost of houses. “An acre of land in some of these areas is going for between Sh300 million and Sh500 million. Anyone aiming to develop housing on such expensive land would only be looking at institutions as they would be the ones who can afford and not individuals,” says Mr Abdiwahid.

According to him, any time one writes a letter of offer for a property they intend to purchase, they unwittingly engage in a bidding war. Property owners have cunningly devised letters of offer as a method of engaging potential buyers in a bidding war without their knowledge.

“How many times has a vendor told you that he has a higher bid but still calls to encourage you to increase your offer? They never respond immediately or negotiate the price face-to-face because they use the offer to hoodwink potential buyers.”

But what other solutions can be explored for the sake of the potential buyer? Mr Abdiwahid says the government should make an effort to bring down property prices through policy.

“Many will recall with nostalgia the era when the councils and government invested in council and civil servants housing. The government should go back to invest in affordable homes for Kenyans. Only then will prices come down,” he says.

Mr Mwenda also faults the government’s inactivity in the property market.

“Only when the government gets involved in the sector will prices stabilise,” he says. And although the government has tried under its National Housing Scheme, the units are just not enough.