Kenya’s property market rewards cash buyers at expense of mortgage takers
A housing project. The cost of new homes in Nairobi and its environs is too expensive for average buyers. PHOTO | FILE | NATION MEDIA GROUP
What you need to know:
Spewing out bile, abuses and hate on a writer of a quotidian subject like real estate is inarguably odd.
Last Tuesday, my friend Wallace Kantai penned a very interesting column in this newspaper titled Why Kenya’s real estate scene is a bubble waiting to burst. I read it online as I like to see reader comments, some of which are interesting, others amusing while others demonstrate that there are one or two readers who are suffering from bats in their belfry.
Spewing out bile, abuses and hate on a writer of a quotidian subject like real estate is inarguably odd. I should know as I have received death threats in the past when I write about my own opinions about Kenya’s real estate. They walk amongst us.
Anyway back to Kantai’s piece. One of the online commentators made a very good point; regional instability drives local housing demand. For as long as there is regional instability in places such as Somalia and South Sudan, there will always be a demand for housing in Kenya from their moneyed elite that does business in those countries, but channels the profits elsewhere.
Another commentator hit the nail on the head; proceeds from corruption are being channelled to real estate. How very true, after all real estate as an asset class has lowest barriers to entry. All you need is an off-the-briefcase-lawyer’s-shelf-company that has a tonne of cash to buy a house.
No questions asked and, until very recently, no tax implications such as capital gains tax. Park your corruption proceeds in a block of residential flats, a commercial building or a hotel then sit back and wait for the value of the property to rise.
As long as there is regional instability and deep seated corruption in Kenya, our real estate scene will only go in one direction: up! If you look at housing bubbles in other markets such as the US and Europe, the primary driver for the rise and subsequent fall in housing prices is one thing only: access to credit. This access to credit is provided on both the demand side (buyers of property) and the supply side (developers of property).
In China, for example, the property market which has in the past been described as “red hot” has seen a big decline as developers are faced with huge housing stocks, large debt and a slowdown of demand. The result is that developers start to slash the prices of their housing stock as their bankers start to pile pressure for loan repayments.
CNBC.com reports that according to a survey by China Real Estate Index System, 45 of the 100 cities experienced month-on-month property price declines in April, up from 37 cities in March. The obvious result is that buyers then stay away from the market as they await the prices to flatten out so that their investments don’t start off at a negative from the beginning.
Interestingly enough, the Chinese mortgage market requires a significant amount of down payment from potential borrowers, which makes the debt portion of the average Chinese homeowner’s property relatively low.
Thus credit does not play a significant role in the take up of housing stock in China, as it did in the US with the 100 per cent and above financing that was given even to illiterate, non-income earning borrowers in the run up to the 2008 financial crisis.
CNBC.com reports that with rental yields as low as one or two per cent due to the oversupply of housing stock compared with mortgage rates in the six to seven per cent range, the motivation to rent a house rather than buy one is, financially, a foregone conclusion.
Let’s look at the rental yield argument for a minute. You buy an apartment in Kilimani in Nairobi for Sh15 million, pay four per cent stamp duty at Sh600,000 and legal fees at say two per cent, which would be Sh300,000. Your total upfront cost is thus Sh15.9 million.
You choose to rent it out since you already live in another house and just needed a place to park a loose 16 mita (in Kenyan parlance) since the bank was only giving interest of about eight per cent per annum and the bank manager was already asking questions as to how that figure multiplied by 10 had just “landed” into your bank account last month.
You will probably get about Sh75,000 per month in rent, which translates to Sh900,000 as your annual rental income. If you divide that by the cost of the house at Sh15.9 million, your gross rental yield comes to 5.66 per cent. I say gross, because I haven’t netted off any taxes or maintenance costs that you may be paying on the apartment.
Today mortgage rates in Kenya are anywhere between 11 per cent (assuming you are an A+ customer at the bank that’s allegedly giving this rate) and 19 per cent (which is the rate that the ordinary mwananchi is getting).
The regular Kenyan can afford to pay 5.66 per cent on the value of a property to a landlord rather than 19 per cent to a bank. It’s useful to note that the rule of thumb in real estate investing is that you should be at least earning 10 per cent annually in rental yields.
Thus a Kilimani apartment that has a total cost of Sh15.9 million should be generating an annual rental income of Sh1.5 million per annum or Sh125,000 per month. If this is not your yield, then your acquisition, from a real estate investment perspective, is under water. But wait; shouldn’t we factor in the capital appreciation on the apartment?
That’s what I would do, and given that the property is appreciating on an annual basis at about 12 per cent or Sh1,908,000 then if I add that amount to my annual rental income of Sh900,000, I’m getting a return on my property of about 17 per cent per annum – not bad but still below what it costs to borrow at 19 per cent.
So our property market today is geared towards rewarding the cash buyer and penalising the mortgage borrower. Question is, are there enough cash buyers in the market? Ask the Somalis, South Sudanese and Kenya’s tenderpreneurs.
