Economic Update

Published 30 Mar 2018

A plan to increase the availability of low-cost housing, combined with improving credit conditions, is expected to support gains in Kenya’s property market in the near to medium term.

In January the government said it had shortlisted 35 private construction firms to participate in the tendering process for a pilot project for its KSh2.6trn ($25.7bn) affordable housing programme.

The trial scheme will involve the development of 8000 two- and three-bedroom homes to be built on a 55-acre site in Mavoko, Machakos County. The winning bidders will undertake the work under engineering and procurement contracts, and the homes are to be sold for between KSh1m ($9900) and KSh1.5m ($14,900).

Bridging Kenya’s housing deficit was one of “Big Four” policy commitments that President Uhuru Kenyatta unveiled at the end of last year, with the goal of adding up to 1m affordable housing units to the nation’s stocks by 2023.

The policy could prove to be a key driver for development, according to Palkesh Shah, director of local real estate firm Chigwell Holdings, who believes the lower end of the market will provide significant opportunities.

“The new plan from the federal government to build such a significant number of affordable homes is a welcome development, since this is the segment that holds real potential for growth,” he told OBG.

Kenya’s housing deficit is estimated at around 2m units, though current production is only adding around 50,000 per year.

Lending up, NPLs down

Recent progress with the government’s strategy follows on from positive credit growth in the real estate sector last year

According to the latest credit survey from the Central Bank of Kenya (CBK), 24% of banks recorded a rise in real estate lending activity in the fourth quarter of 2017, up from 18% in the previous three-month period.

The upswing was part of a trend witnessed throughout the year, with lending to the property market increasing by 8.6% overall, easily outpacing broader private sector credit growth, which expanded by just 2.4%.

In another positive for the market, the number of non-performing loans (NPLs) in the real estate sector fell from 49% in the third quarter to 31% by the end of the year. Furthermore, 58% of credit officers surveyed by the CBK said they expected NPL rates to ease further in 2018.

Significantly, construction was one of the other 11 sectors analysed by the CBK that recorded strong credit growth in the October-December period of last year, with 29% of banks registering an increase in loans disbursed to the building industry, representing a five-percentage-point rise on the previous quarter.

This upswing could be sustained as more projects move through the construction pipeline under the new housing initiative.

Residential rents and prices drop in 2017

As the government works to address the shortfall in affordable housing, the broader macroeconomic environment and saturation in higher-end segments of the market have both had a detrimental impact on average rents and sale prices.

Rents in the residential segment fell by 3.9% overall last year, and by 1.2% in the fourth quarter, according to a report issued by local realtor Hassconsult at the end of January, while sales prices dropped 4.1% over the year.

An oversupply of large family-sized apartments in Nairobi, brought about an increase in the city’s youth population, was cited as the reason for declining rents, while tighter liquidity conditions and high inflation were given as factors curbing overall growth and returns in the sector.

Industry stakeholders have noted that while oversupply in the upper tiers of the market could initially dampen any rebound, the sector should correct itself in the longer term amid demographic changes and rises in income.

One positive noted in the report was that increases in land and property sales in some districts of Nairobi are anticipated on the back of planned state-backed infrastructure developments, including connectivity upgrades that are expected to be rolled out this year and beyond. One of these is the KSh9.3bn ($92.1m) expansion of the capital’s Outer Ring Road, which was 87% complete as of December last year.