The Kenyan real estate scene is a paradox. One the one hand you have an annual deficit continuously running into hundreds of thousand units, and on the other hand, you have fully constructed houses lying idle; some people opting to build their own houses while others thinking it doesn’t make economic sense to invest in non-productive dead assets like a house. It seems almost everyone has an opinion when it comes to housing, so we asked Johnson Denge, the Manager in charge of Market Research and Land Acquisitions at Cytonn Real Estate, what he thinks about these and other related issues.
Kenya is said to be enjoying a fast-growing middle class. Is this demographic investing in real estate?
Yes, more and more people are investing in real estate with statistics from the Kenya National Bureau of Statistics showing that the contribution of real estate to GDP has increased from 4% in 2011 to 8% in 2016. The increased investment can also be shown by increased development activity in the country especially in the Nairobi Metropolitan Area.
There’s a perception that buying a house to live in is not an actual value for money, especially for people under the age of 45. How true is this?
Each investment opportunity should be judged on its own merit. If the house results in significant rental costs savings then it has value for money. On the other hand if it can earn high rental yields then it is better as an investment opportunity. However, a key consideration should be given to the sentimental value and status that people attach to house ownership which cannot be valued in monetary terms. Also houses always appreciate in value enabling one to recoup initial investment plus profit and hence this perception is not necessarily true.
What usually happens when an individual, excited about the prospects of building his own house, embarks on the project?
Individuals usually run into several problems. Key among them being high costs as a result of unit purchases. The costs almost always exceed the budget. Individuals also encounter fraudulent contractors who take advantage of their clients’ lack of know-how to overcharge and under deliver. The project delays because, often, the contractors hired are not professionals. The final product is of poor quality.
The Kenyan mortgage industry, at 22,000 mortgages, is performing below par. What can be done to spur its growth?
Three things, starting with reduction of interest rates. The high interest rates in the economy make mortgage prices very expensive and hence unaffordable. In Kenya the markup on mortgage from cash price can be as high as 30% factoring in the time value of money. Secondly, tapping into the informal and “Kadogo” economy. This has worked in other sectors such as banking and savings. Mortgage products should be structured such that buyers will be able to pay smaller payments more frequently. Thirdly, educating people on mortgages. There is insufficient knowledge in the market on available mortgage options and products.
Why is the cost of houses so high and what can be done to accommodate average-income earners?
House prices are pushed up by a number of factors including high interest rates, high land prices, high demand for the product in the market as well as high construction costs. Developers ought to come up with flexible and innovative payment plans, and apply construction methods that lower costs such as Alternative Building Technology to accommodate the low to middle income earners. We should also create opportunities in the counties so that Nairobi is not the only place that is highly urbanization. This will shift the demand slightly.
Why is it that the market still experiences a deficit of nearly 200,000 units per year, yet some units are lying idle without buyers?
A number of factors can lead to low uptake of buildings. They include overpricing, inadequate research hence providing a product that does not address market needs, inadequate marketing, poor choice of location as well as an oversupply in the market segment. Due to high land prices and inadequate infrastructure in areas with low land prices, the market is not able to produce low cost housing where the deficits exist. This means that the market does not lack housing; it lacks affordable housing.
Between investing in the money markets and real estate, which option offers the best Return On Investment?
Real estate has the best ROI because in addition to the yield, the principle appreciates (capital appreciation). It is also less risky and provides a hedge against inflation. It is thus the best asset class for investment.
What are the advantages of buying from a developer?
Developers normally research before undertaking a development. A house in a development will be in an ideal location with amenities such as water and electricity, high appreciation prospects and ease of access. This can also be described as the concept of best and highest use on available development land. In most developments, infrastructure such as roads is provided alongside the development. In self-building, one would have to incur the cost of developing the same. Further, it saves you the headache of managing the construction and unexpected costs in constructions – managing a construction is time consuming and hard. Buying from a developer relieves you of this headache. Lastly, most developments are in a community setting hence one buys a house in a community with security and neighbors as well
In your thinking, which areas will be ripe for development in the next 5 years?
Five years is a long time and market dynamics change. However in the next one to five years, residential developments especially in Nairobi’s satellite towns with lower land prices such as Ngong and Kikuyu will provide great investment opportunities. What we need to see is for the relevant authorities to put in the necessary infrastructure and planning regulations.
Briefly tell us about Cytonn Real Estate projects (target market, cost, location, date of completion etc)
Cytonn has a deal pipeline of Ksh73 billion. We target both the high and low-end markets. 15% of our deal pipeline is dedicated to the high end and 85% to the low to mid end population.
Some of our Projects include:
|Alma||1 bedroom Ksh5.8million
2 bedroom Ksh7.9 million
3 bedroom Ksh12.4 million
|Situ Village||Ksh75 million||2019||Karen|
|Rongai Sharpland||Ksh980,000 per eighth acre plot||Rongai|