Landlords setting rent in dollars amid weakening shillingWednesday February 08 2023
A number of prime office space landlords in Nairobi are now setting rent prices in dollars, joining a growing number of businesses that are pegging daily sales prices on the movement of the greenback in a bid to cushion themselves against forex losses triggered by the weakening shilling.
The emerging preference for dollar payments in real estate points to the increased dollarisation of the economy, with the shilling weakening against the dollar by nine percent over the past 12 months.
The landlords and traders have been adjusting prices upwards regularly to cover the movement of exchange rates, contributing to the rising inflation.
“There has been increased preference from investors to have rent in dollar payments due to the ongoing depreciation of the Kenyan shilling,” Knight Frank, a property consultant, said in its Kenya Market Update published on February 2.
The firm says while only a small number of landlords may require actual dollar payments, there exists a mechanism built into the lease which allows for payment in Kenya shilling terms but based upon the prevailing dollar rate.
“The main trend is we could end up having a two-tier market where there is a segment that is purely dollar-based and then a tier below based on the shilling,” Anthony Havelock, the Head of Capital Markets at Knight Frank Kenya, told the Business Daily.
“This would confuse matters, especially amongst occupiers and tenants and how the market is perceived internationally.”
The Knight Frank report does not name any specific landlords or the numbers currently charging in dollars.
In addition to office rentals, lease agreements in certain malls have been pegged on the dollar alongside the cost of short-term rentals, including on platforms such as Airbnb and Booking.com.
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The setting of rental prices in dollars is also strategic as some developers look to appeal to a widening diaspora clientele.
“Some landlords are asking for rent in dollars as a gimmick to remain competitive in the marketplace. If I quoted to you a selling price of Sh250 million, this would be more intimidating than say quoting to you a price of $20,000,” said Collins Chacha, a developer.
The dollarisation of the real estate market is, however, a catch-22 situation for investors, where one may gain from cushioning against forex losses but lose out should the dollar quotation be seen as a hurdle by a potential client.
“If they could, most landlords would ask for payments in dollars. In properties with high demand and sufficient quality, landlords can afford to ask for payments in dollars where possible. Much also depends on if the landlord has bank finance and if this has been loaned in local currency or dollar terms,” Mr Havelock said.
For retail traders, frequent price adjustments have become a necessity as manufacturers begin to set selling prices in dollars as cover against forex losses in the purchase of inputs.
Selling prices have edged upwards over recent months even where the retailers are still holding old stock, given that they have to keep an eye on the higher cost it will take them to replenish under a weaker shilling.
“The direct demand for dollars in payments is not there since we are usually price takers and not price setters. However, the fluctuation of the dollar has already been reflected in the pricing on the shelf through the manufacturer/supplier-recommended retail price,” Retail Traders Association of Kenya chief executive Wambui Mbarire told the Business Daily.
“When manufacturers raise selling prices, they tell us it is because of a factor of inflation and a weaker exchange rate.”
Last year, some manufacturers were citing a preference for their clients to pay for goods in dollars, citing difficulties accessing enough stock of the US currency to purchase raw materials from abroad.
However, the Central Bank of Kenya (CBK) has on several occasions dismissed the concerns over dollar shortages, saying that the foreign exchange market had enough liquidity to meet demand from importers and corporates for payments like dividends.
But, even in the absence of supply constraints, importers often face the pressure to hedge against future exchange fluctuations, which can affect margins if there is a significant round of depreciation.
Data from the CBK show the shilling has lost ground on the dollar by nine percentage points since February 2022 and is currently trading at 124.80 as per the official exchange rate.
Buyers from commercial banks, however, pay a higher rate of up to Sh134 per dollar, with supply also constrained by reduced inflows into the country and high demand from a mix of manufacturers, traders and oil marketers.
The weaker shilling has been primarily tied to a strengthened dollar over the past year even as other reasons factor in the depreciation.
The CBK has over the months maintained calm over the direction of the shilling, emphasising that the currency remains well-priced while arguing its interventions are limited to minimising volatility.
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The regulator nevertheless told the International Monetary Fund (IMF) in December that the exchange rate has allowed the country to absorb external shocks and preserve export competitiveness.
The weaker local currency has, for instance, had the inverse effect of cushioning exports which served to trim the country’s current account deficit to 4.9 percent of GDP despite shocks experienced across 2022.