Low rental incomes hit real estate investors

Investors buying homes to let in Kenya’s fast growing towns are missing out on the long-running property boom as families jump into the home ownership bandwagon – nearly doubling prices in the past five years, a new real estate market survey indicates.

HassConsult, the estate agency that runs a residential property index, said rising demand for home ownership across all income segments continues to be the main driver of prices in the property market with a reverse impact on rental incomes.

An upturn in the supply of rental property has depressed price movements essentially warning buyers to start adjusting their expectations on rental incomes from investments in residential property. 

The HassConsult Index indicates that after providing for inflation, real rental incomes fell in the past couple of years indicating that rents may have peaked in 2008. 

The rental incomes equation is complicated by the fact that while rents have stagnated, prices of residential houses have nearly doubled in the past five years eroding rental returns or yields (a calculation derived from the buying price and annual rental income). 

“Demand for homes will continue to push the closing prices up but we have seen rental yields remain flat,” said Ms Farhana Hassanali, the property development manager at HassConsult. 

Ms Hassanali said demand for house ownership is expected to remain strong in the foreseeable future driven by, among other things, the availability of mortgage products from financial institutions and improved earning levels.

People are getting more inclined to buying than renting, she said, but this has in turn driven the property prices up by an average of 5.8 per cent in 2010 alone.

The index that focuses on the upper middle and high-end residential market in major Kenyan towns shows a strong demand for stand-alone houses and a sharp decline for apartments.

Nathan Luesby, the managing director at Property Leo, a residential property marketing firm, attributes the soaring demand for bungalows to changing lifestyles as higher incomes afford more people a broader choice of homes.

“People have more choice with better incomes and that is the reason stand alone units are highly-sought after,” said Mr Luesby.

He said that current demand and supply forces are likely to be sustained for the next 10 years as more Kenyans qualify for mortgage financing with the improvement of incomes.

The expected improvement of incomes is pegged on the positive economic outlook that is widely expected to sustain the momentum it built last year when it is estimated to have grown by at least 5 per cent.

The emerging market situation leaves speculators, who bought property prior to the global financial crisis in 2008, in a tight position as rents fall short of the anticipated levels, especially with the coming into the market of a new rental property.

“There is a strong correction in the real estate market in terms of rental incomes as more units enter the market,” said Ms Hassanali. 

The index also indicates that new residential property developments outside the city, especially along Mombasa Road towards Machakos, have cooled off the property prices in the area.

Investment analysts point say price stability in property market should help investors make sound decisions, citing greater investment risk that arises from high volatility.

Susan Mbatia, an investment manager at ICEA Asset Managers, said that at current prices, the local property market remains among the most attractive investment options and does not foresee a risk of sharp declines.

“Despite indications that prices have peaked, the local property market promises to offer investors superior returns because there still is demand for homes,” said Ms Mbatia.

A report by investment management firm Stanbic Investments released late last year termed property as the asset class of the decade, having appreciated by close to three times since 2000.

This is further confirmed when returns from all other asset classes including the stock market and bonds took a severe dent during the global financial crisis, while property recorded significant gains in the period.

Stock market last year ensured that investors collectively grew their wealth by more than a third during the year but they are yet to recover to the pre-2008 levels.

The NSE 20-Share index, which tracks the performance of the blue chip companies at the bourse is currently at 4460-range, below the 6000 peak realised in 2006.

Stand alone houses have reported the sharpest returns in the past 12 months, and is set to continue in view of investors’ focus on apartments in the past eight years owing to the high cost of land.

Rental yields surged 9.4 per cent last year alone for standalone units while their prices closed the year just short of 10 per cent.

This was against a slight decline in rental incomes for townhouses which declined half a percentage point while their prices rose 4.8 per cent in the same period.

Apartments lost both in price and rental yield by 3.4 and 4.5 per cent respectively indicating the profile of the new home buyer who has a preference for own compound and is ready to pay more to own and live in it.

New developments including the expansion of the Thika Highway and the ongoing construction of the Southern by-pass have opened up new areas for development and access to cheaper land.

With the high cost of land behind many developers, home owners can now afford stand alone units albeit the relatively high cost by regional standards in the gated communities that now dot satellite towns around Nairobi.

Mohammed Abbas, the managing director at Property Arena – another property management firm – cites the high interest in the local real estate sector to the outsized returns that it offers.

Mr Abbas said that several international investors have directed billion of shillings to the local property market which is currently offering as much as 60 per cent return on investment for the developers.

“Locally developers make up to 60 per cent return against a global average of about 25 per cent,” said Mr Abbas, who also has interest in the Dubai property market.

This confirms values contained in the HassConsult report which found out that it is only the Hong Kong property market that currently offers higher returns than the local market.

Until the third quarter of last year, the local market delivered the highest returns, while Mr Luesby estimates that it is likely to regain the pole position within the year as banks continue financing home ownership.

Several property management firms have also sprung up over the last five years to benefit from the boom that the sector is enjoying at the moment, opening up thousands of jobs.

This has, however, also introduced more competition amongst the selling agents who now have to put up with thinner selling commissions to ensure that the units they sell.

Ms Hassanali says that the margins between asking prices and the actual selling prices are now growing thinner, one because the market is more predictable and two, there is more supply of houses.

The majority of real estate investors previously bought houses with a view to selling them at higher prices or renting them for higher income but the static rental income seems to be hitting hardest on the apartment prices.

Ms Mbatia says that it currently does not make any economic sense to purchase houses to let as the rental income is not likely to be commensurate with the price of the house.

“Houses are now too pricey, you can not make a positive return by buying to let especially on new property,” she added.

The real estate dealers agree that prices for apartments or flats segment of the market may be yet to fully correct since their prices were inflated as too many investors rushed in to buy for purposes of onward letting.

Prices in this market segment have therefore fluctuated widely in the past two to three years and remain largely unpredictable. 

Demand in the middle-income property segment is likely to guide pricing on houses in the near future until there is sufficient investment in residential property to deliver enough housing that could nearly match the demand.