Weak house sales plunge real estate to 4-year low

The real estate sector has recorded its slowest quarterly growth in four years, giving weight to recent property market reports that have signalled a slump in demand despite increased supply of new housing units.

Fresh Kenya National Bureau of Statistics (KNBS) data, covering the third quarter ended September 2018, shows real estate recorded a growth of 5.8 per cent, the slowest since the 5.4 per cent registered in the fourth quarter of 2014.

The growth rate is way lower than the four-year peak of 9.6 per cent recorded in the first quarter of 2016.

Market analysts link the sharp dip to uncertainties in approval laws, difficulty in accessing bank loans and a general slowdown in spending power among buyers.

Cytonn Investments senior manager for regional markets Johnson Denge said in an interview Wednesday that the market is experiencing subdued demand in the traditional drivers of real estate.

“Demand is both constrained by oversupply in some segments and also due to would-be-buyers experiencing very limited access to credit,” said Mr Denge.

“We have seen oversupply in areas such as office space, upper-limit residentials in select markets and also in retail space.

"Demand has slowed down and developers will have to look for new pockets of value, especially in the lower end of the market.”

Slowed pace

The KNBS numbers are in synch with recent reports by the Kenya Bankers Association (KBA) and Hass Consult that signalled slowed pace of increase in prices of new houses.

HassConsult's report covering three months to end of September showed that house prices rose by 1.1 per cent.

KBA's report showed a 1.35 per cent rise, marking a second consecutive slowed growth since the first quarter.

“The situation reflects subdued demand on the back of continued investments in the housing market, which remained skewed in favour of the middle and high-income bracket,” Jared Osoro, the director of research and policy at KBA, said.

This subdued demand amid slowing growth in prices has made it difficult for property developers to repay bank loans.

The Central Bank of Kenya’s (CBK’s) quarterly report shows that real estate developers had the highest growth in loan defaults in the three months ended June 2018, underscoring the struggles of developers in finding buyers for houses amid declining returns.

Non-performing loans (NPLs) in the sector rose by Sh6.1 billion, or 15.8 per cent in the April-June period to Sh44.4 billion compared to the previous quarter.

This growth in loan defaults outpaced that of manufacturers (11.7 per cent) and traders (7.3 per cent).

“The real estate sector registered the highest increase in NPLs by Sh6.1 billion (15.8 per cent) due to slow uptake of housing units,” the CBK said.

Cement consumption

The reduced demand in new houses has impacted on the building and construction sector where cement consumption for 10 months to October 2018 dropped by 6.41 per cent to 4.129 metric tonnes compared to a similar period in 2017.

This also led to 9.5 per cent decline in cement production during the period as the number of new building plans being approved declined.

In Nairobi alone, the value of building approvals by the City Hall in the 10 months to October 2018 fell by 21.5 per cent to Sh169.2 billion, pointing to tied-up investment value for investors.

Firms selling cement have also been on the receiving end, with ARM Cement sinking into administration and Bamburi Cement warning investors of a looming dip in profit to a 10-year low.

Banks have shied away from lending to real estate developers, with credit as at end of September 2018 growing by just 1.7 per cent.

This is significantly lower compared to a growth rate of 9.2 per cent in the quarter to September 2017.

According to Mr Denge, the continued credit crunch in a sector that relies heavily on credit puts pressure on developers to return the sector to last decade’s performance when returns had outpaced that from equities and government paper.

“Credit crunch bites both developers and buyers. Real estate being a capital-intensive sector means developers need credit to construct and also would-be buyers need to access credit to acquire the property,” he said.

Stagnated prices

Mr Denge said the market was likely to continue experiencing stagnated prices with some areas witnessing correction in pricing.

“We are going to see a lot of stagnated pricing but not a drop since the underlying costs still remain.

"Even auctioneers who are not able to dispose of distressed property will still continue to protect reserve prices,” he said.