A residential development in Karen. PHOTO | COURTESY
What you need to know:
Knight Frank reported declined activity in prime residential rentals, saying that expats - most of whom rent the lavish homes - were leaving the country because they no longer felt secure working here.
Landlords of upscale residential houses have decided to hold on to their vacant properties for six to eight months before they look for takers as insecurity, tight immigration rules and terror threats bite the market.
Reginald Okumu, managing partner of Ark Consultants, said that stringent immigration rules as well as the escalating insecurity have discouraged many expats from flying in, with many who were already in the country preferring to leave and monitor affairs from afar. And it is this group who are potential prime residential tenants.
In its latest report on the real estate market, property consulting firm, Knight Frank said there were signs of a slowdown in transactions in the prime residential market towards the end of 2014 which have been carried on to this year.
Insecurity concerns
Ben Woodhams, Knight Frank’s country manager for Kenya, attributed the inactivity to insecurity concerns and oversupply of prime residential properties which now have fewer takers.
“Oversupply of prime residential homes and insecurity, which have seen some companies scale down their operations, are reasons why the high-end residential market has slowed down,” he said.
Nairobi and Mombasa are the most affected regions because these are the areas with large foreign populations.
Terror threats and random attacks from Al-Shaabab have affected tourism, leading to decreased arrivals. At the beginning of the threats, it was mostly hotels at the Coast which hosted foreign tourists that were under threat. However, prime real estate market now seems to be affected by the same threats.
Last year, Knight Frank reported declined activity in prime residential rentals, saying that expats - most of whom rent the lavish homes - were leaving the country because they no longer felt secure working here.
The Westgate Shopping Mall terror attack in 2013 in Nairobi hugely impacted the prime residential market as international firms repatriated a large number of their staff to other countries.
Empty houses
“International companies no longer feel safe here,” said Okumu. Landlords in the prime market segment have now been left with empty houses with many reluctant to rent them out for less – a factor which has led to the rent prices remaining unchanged.
“The residential market witnessed marginal increases in capital and rental values last year. However, there were signs of a slowdown in the prime residential market towards the end of the year,” reads the Knight Frank report.
Rents for prime residential properties stagnated at Sh465,000 ($5,000) per month for a four-bedroomed stand-alone house.
Oversupply of prime residential homes is as a result of the lag by developers who often take time between conceptualisation of investment plans and completion of the property. Usually, it takes two to three years to construct these kind of houses.
“It is difficult to anticipate market demand and supply because of the time taken from building to renting the house,” said Woodhams.
Right tenant
While some prime property consultants may prefer holding onto the property for a little longer to find the right tenant instead of renting it out at a lower price, Okumu urges such homeowners to reduce the rent and earn money instead of going without income for several months.
“When the market is deprived, the decision is always about cutting down on losses instead of focusing on making profit. It costs about Sh60,000 a month to maintain a prime residential house, its lawns, security and electricity bills. Why pay that money for an empty house yet you cannot even be sure when the situation will improve?” Okumu asks. “If the available market is not willing to pay what you are asking for, lower the price.”
Since the risk of renting out a house at a lower price may extend to a year or two, it’s advisable to have short lease agreements as you monitor the situation.
It’s also advisable to add a rent escalation clause in the lease contract to allow for upward adjustment in case the market regains its activity.
