A grandeur home with a rustic appeal in Nairobi’s posh neighbourhood has been in the market for over three years. It was built in leafy Karen, which is near international schools and shopping malls. It has a fireplace, a study room and staff quarters.
There are only nine other such homes sharing five acres, an advantage to the privacy-seeking ultra rich. It is perfect but it has no buyer. The only problem is the price. It goes for Sh115 million.
Developers of luxury, high-priced houses have been rushing to build for the ultra-wealthy without factoring in the actual number of buyers.
Every year, the pool of buyers spending over Sh100 million on a house reduces as they move on to other investments. Their waning appetite is proving a hugely expensive exercise for owners.
The cost of maintaining unsold houses is not cheap. Nili Godhia in charge of Greater Kitisuru area at Pam Golding, a real estate company, says unsold homes in areas such as Muthaiga could cost the seller over Sh50,000 every month in maintenance, which includes paying for security, electricity and garden-care among others.
However, she says, what makes a luxury home stay long in the market is the wrong price and wrong product.
“If the pricing is not right especially now that there is an oversupply in areas such as Greater Kitisuru, then it takes longer to sell the house. It may take six to 12 months. But sellers with unique homes and who target specific buyers are able to sell within a month or two,” she says.
Over the past few months, prices of luxury homes have dropped. For instance those located in Muthaiga have come down by 30 per cent, according to Nili. Old houses go for about Sh75 million to Sh80 million but buyers cherry-pick the best based on many factors including cost of renovation.
Therefore if a seller is not willing to give huge discounts, the house is unlikely to sell fast.
Mwenda Thuranira, the CEO of real-estate company MySpace Properties argues that development of luxury homes is demand-driven. And there is demand despite slowdown in real estate sector growth. He says these homes are not developed casually with the view of making arbitrary sales. Many such developers invest in building the luxury homes when they have buyers. In the property market, Mwenda says, there are different cadres of buyers. There are those whose budget for a home is Sh7 million or less and then there are the uber-wealthy who have no qualms paying up to Sh600million or more.
“About a year or two ago, I stumbled upon a prospective buyer who had Sh500 million to spend on a home. Sometime back, we sold a penthouse at Sh200 million in Mombasa and another home worth roughly a near-similar amount in the same area,” says Mwenda, adding that there are buyers for these homes in Kenya, those who have no misgivings about spending huge amounts of money.
He cites Magnolia Hills in Nairobi's Kitisuru, considered among the priciest in the country. One unit in the neighbourhood, named House 12, was selling for Sh600 million six years ago.
In Muthaiga, there are several such pricey properties, especially flat land which is rare. There is also the Golden Luxury Villas development, in Mambrui near Malindi and others in Nanyuki.
The trick, he says, is to ensure that a developer has buyer for a luxury home before constructing it. However Sally Rugano, a senior property agent at real-estate consultancy firm, Knight Frank has a different view.
She notes that from 2008, when the economy was doing well and there were prospects for growth and expansion, with bypasses and key highways coming up in areas that did not have such infrastructure, developers saw a niche market.
It was then that there was a surge in development of such exclusive gated communities and villas in upmarket and sheltered, uncrowded locations.
“Historically, demand for these properties has been there from investors and homeowners, who could enjoy high capital appreciation and the trappings of modern living. But then came 2015 and 2016, when the supply overtook demand and the prices began declining. Consequently, investment in the high-end residential market slowed down considerably,” she says.
Sally notes that at the moment, there are a combination of factors why these luxury homes are not moving as fast as they did back then.
These reasons, other than oversupply, include the fact that these homes are targeted at high net worth individuals who have competing uses for their money. In addition, adverse economic conditions such as the ongoing credit crunch has resulted in less money in circulation tilting the market in favour of buyers and tenants.
“The prime residential market is currently experiencing a period of low transaction activity as buyers seek out highly discounted properties or those that are best in class that they perceive as value for their money. However, with the lifting of the cap on interest rates, we anticipate more real estate activity in the coming future,” Sally says.
Elizabeth Mwangi-Oluoch, the chief executive officer of the Kenya Property Developers Association brings a new perspective into the subject. She says that the market for high-end luxury homes becomes very limited as we climb up on the income bracket.
“It is also not unique to Kenya. It happens to all developing or mid-tiered economies,” she says. She says developers are constantly following the money. They invest in a development that will give back maximum returns.
However, there is always a two or three-year lag from when the developer sees the demand to building the house. And a lot can change in between.
“Another point to note is that there are many areas where the zoning regulations still permit only one unit on half-acre land and if a developer builds on this land there is no way they can develop and sell for less than Sh100 million. However, if the zoning in the area changes to quarter-acre zone then the developer would easily develop two units costing Sh60 million each. These would be much easier to sell than the single unit selling for over Sh100 million. The zoning bylaws therefore in certain instances dictate what the developer is able to do,” says Elizabeth.
Nonetheless, she says, that developers see prospects of a good market and are still keen on building high-end luxury homes.
“A recent report by Knight Frank projects that there will be an increase of 22.2 per cent in individuals with high net worth between the years 2018 and 2023. This means the market will increase for these homes,” she says.
She adds that this factor will however depend on dynamics like economic growth, stability during elections, interest rates, liquidity in the market, the zoning policies and bylaws in urban centres especially in Nairobi.