Copy & Paste from Wallace Kantai

This weekend I went to visit a friend of mine. His neighbour has put his house on the rental market. It’s a beautiful four-bedroomed bungalow, with a two-bedroomed servants’ quarters, on a quarter acre of land. He’s put it on the market for KSh 120,000 a month. I asked around about how much similar houses are sold for in that neighbourhood, and the prices are in excess of KSh 40 million.

Let’s take a minute to digest and analyse that. If you paid cash for that house and rented it out, you would make your money back in three hundred and thirty three months. That’s almost twenty eight years. House prices are like stocks - you can use a basic price/ rent, which is analogous to a price/ earnings (or PE) ratio to determine whether a house is under- or over-priced. Long-term average is around 16. This particular house is at 27.7.

Another calculation. If you convinced your bank to provide you with a mortgage, and you financed the house at 18% (and you’d need to be VERY good friends with your bank manager to get that), you’d be paying KSh 617,000 every month for twenty years. So, in effect, if you took out a mortgage in the hopes of renting the house out, you’d need to shell out almost KSh 400,000 a month more out of your own pocket just to break even.

One last thought nugget. People tell you to not take a mortgage and save. However, saving in a medium-to-high inflation environment is the equivalent of borrowing at a high rate. So, if you save to buy (either a ready home or land on which to build), you’re effectively borrowing money at around 7-10%, depending on the economic environment.

Let me end with a (possibly apocryphal) story before I give you my conclusion. A lady put up a house some years ago in South ‘C’. She had put it on the market for KSh 9 million, but she realistically expected 8 million bob for it. One day, someone came to view the house, and made an offer of KSh 12 million. From that point on, the lady refused to entertain any offers below KSh 12 million (which, you’ll remember, was 50% above what she was initially expecting). The phantom buyer never turned up again, but as far as the lady was concerned, the house’s value was KSh 12 million, and not a penny less. She finally sold it after many moons.

Kenya’s property market is in a bubble. The bubble is still inflating, and if it doesn’t get deflated gently, it will burst very painfully. Real estate prices are almost totally unmoored from their true values, and what’s keeping them up there is hope, greed and fear (and a generous helping of dishonest money). Everyone’s a property speculator and dealer. All power to them, but when the music stops, there’ll be plenty of people left without chairs. When the tide goes out, you’ll realise how many people were swimming commando. Take your pick of trite metaphor, but don’t say you weren’t warned.

Then this is a comment I liked from one of the contributors:

My view is this. There is a lot of noise about how you can’t go wrong with real estate. Is noise could be coming from all the people along the value chain before the final house buyer takes up the house.

The architect, the land seller, the consultants, the lawyers etc… All will say that real estate is good. It’s true from their point of view since they keep reaping huge profits from real estate even though the final buyers are holding the wrong end of the stick.

These guys along the chain have very little risk. They supply and they get paid. The buyer has the risk of holding the asset and yielding below average return.

Let me summarize my own experience and research. Know your target market, research on your immediate/future competition, improve on your build either by clever design structure or more features while still maintaining the budget. Keep your expectations at conservative levels. In other words if you are building for the upper class take a tour of Dubai and come replicate that here under our moderate budget (key is good QS and architect) If your target is rental know the needs of the masses (lower class bedsitter/1 bedroom) and innovate on the design. If its middle-class 2-3 bedrooms always provide more features at the same budget. The market is saturated with copy paste dull designs with little modern features. A little innovations, clever design and features will make your property stand out over the rest guarantee tenants or buyers.

If the CIC did admit that we are a thieving nation, then the bubble aint bursting in this generation

All good things must come to an end. When this bubble bursts officially, the death care industry will experience a mini boom of its own.

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I was to say the same as mentioned by the comment, but i will just say- other than the architect not advising the client, property developers are the ones dry frying the so called real estate market with just petty decorated lies. Whenever i pass ongoing projects or some already completed, i just wonder whats wrong with these guys.

Nice read.

If you are serious in real estate, take a day off and visit at least 3 properties advertised for rental and sale in at least 3 locations in Nairobi. Take notes on location, features, extras, design, convenience, price and security. You will notice occupancy is mostly driven by some factors you didn’t anticipate. When the boom was high people got greedy and just build carelessly without much thought into it. Now the demand is slowing at the upper class while opening at the lower class. Meanwhile 5 years ago there was a quantum shift in design and building technology. Modern building came up to western standards that completely took over the market. A lot of buildings suddenly looked old and couldn’t meet the competition.

80% of real estate in Kenya is financed by cash obtained through fraudulent deals and an almost equal % of the buyers as well are people looking for an avenue to clean their dirty cash…so as long as the corruption vice exists…the bubble will just be a bubble & nothing else…so ladies and gents,hold ur horses ur not the target market!

This is a “rendition” of the movie/ Book “The Big Short”

Keep shouting of a bursting bubble. A broken clock is right twice a day.

The only bubble i fear bursting is the tip of a CD am wearing! This other bubble sounds like literature, u will always once inna while read about it but nothing happens!

http://www.businessdailyafrica.com/Real-estate-slowdown-leaves-banks-with-bad-loans/-/539552/3289432/-/131krs7/-/index.html

The signs are there. Just that no one is paying attention.

There is tremendous pressure for land around the CBD in Nairobi forcing property values to skyrocket. South C is adjacent or close to CBD to its values will jump accordingly. This forces Nairobi residents to keep moving out of the city to adjacent cities , Kitengela, Thika, Kangemi, Ngong, etc because of cheaper land prices and housing. Devolution enhances infrastructure enabling faster travel times from these satellite cities to jobs or market places. So eventually yes, the pressure for land in and adjacent the CBD will soften but we are not there yet. It really depends on devolution effects. There is not much the government can do to improve housing in Nairobi itself, you can only settle so many residents in an area.
Yes you can save to buy a property (7-10%) as you claim but you have put the cost into the savings, that is I save 2 million to buy a house worth 2 million. Story finished. But when I borrow at 18%, I haven’t included the cost of loan. That is, if i borrow 10 million at 18% to be paid back in 10 years, I effectively have to pay back 21 million shillings ( using a simple amortization calculator).

Upper class housing - slowed down

middle class housing - flat but still growing

Lower class housing - booming

As a developer where would you invest? Mortgage in Kenya will never take off. Its too expensive and you can still easily lose the property if you default. Most buyers are using savings, chama or Sacco loans of between 1-5 millions that they repay in 1-5 years. When analyst say the boom is over coz mortgage uptake has gone really down its because even the upper high class who where the only people who could qualify realized its very expensive. Over 100,000 housing units are sold a year in Nairobi alone. There goes the myth its corruption loot. Thats way too many houses.

No bubble will burst. It’s been said over and over but we are not seeing it bursting anytime. Kama bedsitter kunazo za 9k plus… Keep waiting for your bubble

…food for thought…

My naive interpretation and observation
When tomatoes are in plenty, the price goes down, or, for the Kshs 10 you bought one tomato at scarcity, you get three healthy tomatoes.
Looking at properties around Nairobi, not all have full occupancy, 50-80% at best for most.
Small families(1-2 people)drive the uptake of the so called bedsitters as mentioned above, due to cost and convenience. If you could get a one bedroom at the same cost, a lot of people would go for that.

I’d rather rent out a cheaper but larger house on the peripheries of the city than one almost three times that, but closer to the city. If that doesn’t inform property development, especially residential, then I wonder what would.

Well the experts have spoken… [ATTACH=full]47868[/ATTACH]

The segment of real estate he’s talking about is driven by illicit financial flows, it provides a nice way of packing illigal money without having to worry to much, the avarage Kenyan borrows from the less formal financial ‘institutions’ like chamas and saccos at much much lower interest rates, the average kenyan buys land and builds.