Why property sector needs independent real estate index

Recently we had an interesting argument with two gentlemen who are real estate agents.

I told them that my friend had posted something on Facebook to the effect that he had counted so many empty apartments in the Kilimani / Kileleshwa areas of Nairobi. My question was whether some segments of the real estate market are over supplied and ready for a price correction.

The two disagreed and even offered to take me for a ride around the area so that I can show them those empty houses. Just as I was about to concede defeat, they implied that if one is serious about investing in the real estate sector, it is important to offer something different from what is already available.

In another incident a property salesman explained to a buyer that he should be among the first to buy in the first phase of a project. This was because according the plan the second phase similar houses will be selling at a significantly higher cost.

As a believer of the law of demand and supply I wondered how the same item should be priced differently even when not a single unit has been sold. It seems like a marketing gimmick to create fake scarcity for a commodity.

Take an example of a flat as in the case above or office space and you will realize that it is possible for so much new stock to be added to the market in a fairly short time.

The other issue is landlords behaving badly; they're rudely to tenants, issue threats and even auction them. This tendency is driven by the mentality of a sellers’ market whether so many people are seeking houses to let.

For this reason, most tenancy agreements come with a standard annual or biannual rent increase with no regard to market conditions. This is similar to an annual increase in minimum wage regardless of workers’ productivity.

When exiting a rented house the tenant is required to fix anything that is broken in addition to a new coat of paint. If the tenant has been living in a house for many years some of the repairs would relate to aging aspects of the house. It sounds like a very compelling investment opportunity with near zero risks.

There are also builders who don’t care; they use sub- standard materials such as accessories that break within a short period of usage or lead to cracking walls.

While carrying out a housing marketing study, I remember meeting a tenant in Kiambu who complained about this. She said the builders of the flats seemed not to have cared since they were not building the houses for their own use. Most substandard houses that collapse are also built by people with this mentality.

Big money has also gotten involved in this lucrative business with the likes of Centum, Ambanis and insurance companies.

Great ideas are also copied quickly. I saw a tall building under construction in Nairobi Upper Hill that has a sign to-let on the crane. This kind of unprecedented aggressive advertising in real estate also suggests we live in highly competitive times and the industry mentality needs an adjustment towards more market orientation.

There is also underinvestment in the low priced housing where demand is huge. This is a fact that the Cabinet Secretary for Lands and Housing Charity Ngilu and Nairobi City Governor Evans Kidero agreed on when launching the Housing Survey results.

Lastly, most of the available data on the industry is from real estate players like Hass and Knight Frank.

To be fair I recommend you use the indices with pinch of salt; when they point at a market that is slowing down you can be sure the real situation is worse.

We need an independent index that does not come from industry players.

When OPEC set oil prices we paid through the nose for oil. Currently Obama is calling the shots and the oil prices can only get better for consumers.

The writer is the Marketing Director of SBO Research. E-mail: [email protected], Twitter @bngahu