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Ideas & Debate

Investment risk a personal decision

A housing development in Nairobi: The current property boom is to a large extent driven by cash buyers. Photo/LIZ MUTHONI
A housing development in Nairobi: The current property boom is to a large extent driven by cash buyers. Photo/LIZ MUTHONI 

A couple had two little boys, aged eight and 10, who were excessively mischievous.

The boys’ mother heard that a priest had been successful in disciplining children, so she asked if he would speak with her boys.

The priest agreed, but asked to see them individually. So the mother sent her the younger one first.

The priest, a huge man with a booming voice, sat the younger boy down and asked him sternly, “Where is God?”

The boy’s mouth dropped open, but he made no response.

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The priest repeated the question in an even sterner tone, “Where is God?” Again the boy made no attempt to answer.

So the priest shook his finger in the boy’s face and bellowed, “Where Is God!?”

Handsome rewards

The boy screamed and bolted from the room, ran directly home and dove into his closet, slamming the door behind him.

When his older brother found him, he asked, “What happened?”

The youngest brother gasped for breath and replied, “We are in big trouble this time. God is missing and they think WE did it!”

A couple of weeks ago, I published an opinion piece titled “Kenyans’ obsession with owning property doesn’t always lead to a handsome reward.”

The article opened the proverbial can of worms.

Having been flooded with questions, requests for personal financial advice and differing opinions on how to calculate returns, I started to feel like the little boy who was being accused of kidnapping God.

What I failed to do with that opinion piece is to start with the preamble that I am NOT a property expert.

I do not have the answer to the interminable question: “When is the Kenyan property market going to crash?”

Only God knows the answer to that and even then, he did not give anyone an inkling in the United States and a few European countries back in 2008 following the sub-prime crisis that residential real estate prices were going to collapse in certain areas.

I will therefore seek to clarify a few of the common questions that I received from readers: Should I invest in government securities or property?

The gist of the last opinion piece is that whereas property appreciates exponentially compared to any other form of investment, one should remove any emotional attachment to that property when deciding to realise the gain

For instance if the property has appreciated by 50 per cent and is no longer generating a positive return on the rental yields, then the investor should sell the property and invest in government securities while waiting for the next opportunity to invest if they had mentally set a 50 per cent appreciation hurdle rate for selling the property.

There is really no other asset class that will allow for passive investment, which provides double digit yields except property and, to a lesser extent, the Nairobi Stock Exchange.

Investing is a personal decision and depends on whether the investor wants to simply preserve their capital in risk free investments, in which case government securities make sense or whether he wants to also achieve some capital appreciation which requires a higher risk appetite hence investment in either property or equities.

Should I buy a house in the Kiambu real estate development or rent for the rest of my life?

This is again quite a personal decision. Given where today’s interest rates are at say 15 per cent, an average middle income house costing Sh10 million, will require a monthly mortgage payment of approximately Sh126,000 after the buyer puts down a deposit of Sh1 million or 10 per cent on the 15 year mortgage.

This is not an amount that is easily payable by the average Kenyan worker and requires a great amount of sacrifice on the part of the buyer, especially where the rent for a similar house would be about Sh40,000 or a third of the mortgage payment.

The fact is that buying your own home is really not supposed to be an investment, rather it is a method of providing future security for yourself by having home ownership at the end of the mortgage period.

Of course, if the property appreciates at a rate higher than that which you are paying interest, then it becomes an investment too.

And the quintessential question: Is the Kenyan property market about to crash or witness a correction? Who knows?

The fact of the matter is that the property market crashed in some states within the United States such as Nevada, Florida and California largely due to speculative buying driven by extremely loose credit policies within the banking industry.

Home buyers

The combination of free flowing credit to speculative as well as first time home buyers with bad credit history, together with lines of credit to property developers leading to an oversupply of housing stock in certain areas boiled over into the property market crash once those lines of credit dried up after the subprime mortgage crisis in 2008.

Is Kenya anywhere near that? Hardly.

Our mortgage market is nascent to say the least, with less than 10 banks providing mortgage financing in the whole country and a negligible percentage of total banking industry credit going towards real estate development.

The current property boom is to a large extent driven by cash buyers, as Kenya is largely a cash economy.

Only when that cash has the propensity to dry up should we worry about a correction or a crash.

Or better yet, if a stronger asset class emerges in the market that provides higher returns than property then we should see the correction.

But what asset class could that possibly be other than the Nairobi Stock Exchange?

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