Market News

Property developers freeze fresh investments on low gains, occupancy

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Britam Group managing director Tavaziva Madzinga. PHOTO | NMG

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Summary

  • Britam is among firms that will stop new property developments and instead focus on property management to reduce its exposure to financial risks.
  • A Nairobi-based private equity firm Ascent Capital has also said it will not invest in Kenya’s real estate sector.
  • The property market has been struggling in the past few years due to difficulties in disposing of new units amid an oversupply of both commercial and residential spaces.

A growing number of property developers have frozen investments in the construction of residential houses and commercial spaces amid struggles with low occupancy rates and low returns.

In the latest shift, insurance group Britam #ticker:BRIT said it will stop new property developments as part of its five-year strategy to 2025, and instead focus on property management to reduce its exposure to financial risks and improve its performance.

“In the last few years, the performance of the commercial and residential housing property in Kenya has been negatively affected by excess supply amid depressed demand. The impact has been low occupancy levels, low rental yields, and consequently revaluation losses depressing profitability,” Britam said in the 2020 Annual Report.

“The group has changed its property strategy from property development to property management services.”

This comes after the firm recorded a record net loss of Sh9.1 billion last year from a net profit of Sh3.5 billion in the previous year due to underperformance of the asset management class, valuation loss from property investments, and listed equities.

The firm has also said new regulations including risk-based capital and reduction of the period allowed to exit investment in a guaranteed fund to one year or less may affect short-term liquidity to make huge investments.

“In addition, the introduction of capital charge regulations means more capital is required for property investments,’’ it added.

Ascent Capital

A Nairobi-based private equity firm Ascent Capital has also said it will not invest in Kenya’s real estate sector.

“In our view, a lot of local capital has been catalysed to invest in real estate and there is little value we could add there,” Ascent Capital founding partner David Owino told ‘How We Made it in Africa’, a South African online business publication.

The property market has been struggling in the past few years due to difficulties in disposing of new units amid an oversupply of both commercial and residential spaces.

The depressed property market was worsened last year by job losses witnessed across many sectors due to the Covid-19 pandemic, which led to declined demand and increased auctions of homes linked to loan defaults.

HassConsult, which conducts property pricing index in the country, says sale prices for all houses stagnated last year increased by a marginal 0.17 percent largely due to a 1.2 percent price decline in the three months to December.

The drop was due to a fall in prices of apartments by 4.6 percent, especially in Kileleshwa and Kilimani.

However, the annual rental price across all properties jumped by 5.5 percent in the year.

Despite the oversupply and the low demand, the market has been characterised by high prices on the tag.

The real estate sector also held 15.7 percent or Sh68.45 billion of the gross non-performing loans of the total Sh436.07 billion in the year to December.

Property development is one of Britam Group’s investment classes through its subsidiary Britam Properties and through Nairobi Securities Exchange-listed Housing Finance #ticker:HFCK where the Britam Group holds 48.2 percent stake.

Last year, Britam recorded Sh1.47 billion in property impairment from Sh747 million recorded in the previous year due to low demand in some of the firm’s properties, including Upperhill’s Britam Tower.

The firm has said this will be one of the projects it will be targeting to achieve full occupancy.

Britam is also hoping to realise higher returns from mortgage financier HF Group following a Sh1 billion capital injection made this year.

HF has also been recovering bad loans while exiting the home construction business as announced in 2019.

The Central Bank of Kenya’s data showed the number of mortgage loans issued by HF almost halved to Sh26.0 9 billion last year from Sh40.1 billion in 2019.

“The investment was informed by the need to support the turnaround strategy and the business transformation initiatives ongoing. These are expected to see the business transform into a full-service bank,” Britam added.