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Supporting fundamentals for the Kenya Real Estate sector

  1. Demographics:Kenya’s population continues to grow rapidly at double the global rate at an average of 2.6% p.a. and the urbanization rates are high at 4.4%. Additionally, the middle-class population segment has continued to expand thereby increasing disposable income and hence creating real demand for property unlike in a bubble where demand is fuelled by investors interested solely in capital growth, hold it for a short period before reselling it at a higher price,
  2. Stable economy: In a bubble economy, the burst is most often than not followed by an economic recession. However, the Kenyan real estate growth has been supported mainly by a stable and growing economy as evidenced by the country’s growing GDP, which has averaged at 5.1% for the last five years. The country’s GDP has grown to 5.8% in 2016 from 4.6% in 2012 with GDP Per Capita growing by 26.0% to USD 1,455 from USD 1,155 in the same period,
  3. Supporting fundamentals for the Kenya Real Estate sector:
  4. Low Credit supply:Property bubbles are mainly characterized by ‘cheap’ mortgages and access to credit, available to a majority of the population and at low interest rates thus making house buying possible for a majority of the population. With the introduction of the Banking (Amendment) Act, 2015 in Kenya, we have witnessed a steep decline in credit advancement to the private sector with record lows of 1.6% in August 2017, down from 5.4% in August 2016, before the bill was amended into law. This is a clear indication thathome buyers rely on cash buys and thus, mortgage rates remain at record lows -and could fall further as lending institutions become more unwilling to extend credit to individuals. As per the CBK, the number of mortgages fell by 1.5% at the end of 2016, to 24,085 from 24,458 in 2015,
  5. High genuine demand:A real estate bubble bursts when supply exceeds demand. However, according to the World Bank, the country has a deficit of 2.0 mn units, with the National Housing Corporation estimating an annual demand of 200,000 units. This is supported by the rapid population growth, which means the demand for properties is real and is expected to continue to be so as the country is only able to provide 35,000 homes annually. Additionally, entry of long term foreign investors has added onto the demand, especially for high end properties,
  6. Increase in house prices is in tandem with an increase in earnings: A real estate bubble more often than not results from a credit-driven market resulting in a bust where households are overridden with debt beyond their property’s value. According to Kenya National Bureau of Statistics Economic Survey 2017, wage earnings increased to Kshs 1.6 tn in 2016 from Kshs 1.5 tn in 2015, a 9.1% increase against a 7.4% increase in property prices. This indicates that there is still room for property prices to growin order to match the population’s income,
  7. Availability of land and government incentives: Land prices in Kenya have been driven by a justified demand and infrastructural development that has opened up more areas for development. States that have experienced a property bubble are characterized by limited land supply, against a high population growth coupled by government’s negative restrictions against densification; as seen in the United States bubble as well as a raise in stamp duty in the Spanish bubble. Recently, the government has been keen on streamlining the land ministries to make it easier for developers to acquire land and introduced a new law that will enable densification of exclusive low-rise residential areas.

Source: Kibunyi, Duncan & Ndiritu, Simon Wagura & Carcel, Hector & Gil-Alana, Luis. (2017). Real estate prices in Kenya: is there a bubble?. Journal of Housing and the Built Environment. 10.1007/s10901-017-9541-x.