I posted this on my Facebook wall and it generated a heated debate, went viral and screenshots of the same were shared widely through WhatsApp messaging.
One of the most notable reactions was that such sentiments should not be coming from me. As an architect, I should be advising people to build, not otherwise. Or how will I get business?
Yet this is a debate I feel we must have, which I hope will enable people make better choices and investment decisions especially on matters regarding housing.
I considered a scenario where I was to buy a house either in cash or through a mortgage. For the purposes of this illustration, I settled for the NSSF houses porpularly known as Nyayo Estate - Embakasi as a case study.
Houses in this estate sell at between Kshs 7.5 Million to upwards of Kshs 8 Million. Monthly rents in the same area are in the region of Kshs 30,000 to Kshs 35,000. At best, one will earn a gross income of Kshs 420,000 annually.
[SIZE=4]Scenario 1[/SIZE]
A cash buyer on a best case scenario where they buy the house at the cheapest price of Kshs 7.5 Million and get a tenant to pay the highest rent of Kshs 420,000 per year. The annual rate of return is 5.6%
Compare this with a risk free investment in treasury bills whose interest has ranged between 8% and 11% this year. Worst case scenario would earn someone an income of Kshs 600,000 per year.
Many would argue that the house will have a capital gain during the same time. Fair enough. I would equate the capital gain, if any, to the additional interest you will earn from the alternative investment in this case, Kshs 180,000.
The capital gain on real estate is also usually exaggerated on paper. For it to be realized, a successful sale must happen and this is usually a tough task. Liquidating a treasury bill when it matures is easy.
[SIZE=4]Scenario 2[/SIZE]
For a mortgage buyer, you will have to raise the initial deposit of 10% of the value of the house. The higher deposit raised, the better.
Taking a mortgage on the balance of Kshs 6.75Million at a very optimistic rate of 15% p.a. with a 20 year repayment duration, the monthly repayment will be Kshs 88,385.
If this were to be a business venture, you will need to raise an additional Kshs 53,385 above the rent of Kshs 35,000 that you will receive to service the mortgage. This does not consider maintenance that must be carried out in the house.
In the debt option, capital gains also do not make sense. They all get swallowed in the interest paid. They are non existent.
[SIZE=4]So?[/SIZE]
What this therefore means is that real estate is a bad investment for both the cash buyer and the one who buys using debt.
Looking at it literally, it means that when you buy a house through debt, you will be paying almost 2.5 times the ārentā you should ideally be paying where you will be living. Through cash, it simply means you are making a bad investment.
[SIZE=4]Now what?[/SIZE]
My opinion is that housing works well as a business, where one builds to sell. Margins are in the range of 50% to 200% depending on where you are building and the price at which the land was purchased.
But obviously, those who build to sell must get customers for their products. Someone will need to buy.
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Written by
[SIZE=5]Martin Maseghe[/SIZE]
Part of the comment section read as follows:
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[SIZE=5]Martin Maseghe[/SIZE]
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[B]https://media.licdn.com/mpr/mpr/shrink_100_100/AAEAAQAAAAAAAAa7AAAAJGIyM2I0OGY5LTRjNzItNGU1Mi1hNGFjLWI4ZmJmNTdmNjQ2OA.jpg[/B]David T. Svarrer
Human Resource Partnership Manager, EA as Kenyan partner of Search IT People ApS (Denmark) | +254 203 740 107
Mr. Maseghe, now, the issue is rooted elsewhere. A 5 storey house with apartments, of a fair standard, including all amenities, and with at least 2 staircases, thereby having 20 flats, can be built for 28,000 to 35,000 per square meter. We are discussing following NCA, not mingling with concrete mix, proper re-bars, lawful. Therefore, lets assume 35,000. Flat size: 2 bedroom, 60 sq.meter. Thereby 1,200 sq. meter in total. Reason for 20 flats is that this magnitude releases most discounts on material cost, and building 40 flats only release 2 to 3 percent point more discount. All cupboards of melamine mdf, phoenix toilet/sink, hanstad stainless steel kitchen sink, black granite kitchen table, 1 balcony, stone walls, rebar enforced concrete decks, coated currogated sheet roofing. Total cost: 1,200 Ć 35,000 = 42 Mā¦ thereby 60 x 35,000 = 2.1Mā¦ Plot size 1/8 acre, or 500 m2 in Ngara = 38M. Total per flat is then 4M. Rent is 40,000 per month, thereby a very different story. Parking for 20 cars under and on side of the building. Calculation gives, 25 sqm per parking including maneuver area. Now, this was at the relatively high 35000 per sqm. At 28000 per sqm. The cost is 3.2M per flat. Now again. The sales price is 7.5M or 8.5M. Now my point: Sales price is exaggerated and inflated, and THAT is the cause of the problem. If all constructors expect to receive 2 x investment at time of sales, then thats why nobody can buy and prosper. A rule of thumb says that almost all over the world there is a ratio of 100 to 1 in terms of building cost to montly rent. The cost can go up due to higher interest. Again: If you borrow money in the bank, indeed you get it for 15% to 20%. But borrow with brains!! You pay 10% to 12% in most SACCOS worth their salt. This, as you so truly point out, is also key to successful investment. On Architecture, Engineering(my field), QS, we are included in above cost. Another way to look at it is also building(erection) time. A typical 5 storey building erects and finishes in typical runs of 2 years from ground breaking. If we apply prefab concrete slabs, the building can be erect in 3 months(maximum!!), and finished inside after further 2 months (maximum). This cuts off 19 months of construction, thereby adds another 19 x 20 x 40,000 in income. The cost goes up by 20%, and an extra 19 x 800,000 = 15.2M comes in. Building cost from before = 42M. 20% is 8.4M thereby bringing construction up to 50.4M. But now deduct the TTM factor of 15.2M coming in, and the net construction cost comes down to 35.2M. And so it goes ā¦ What is your take ???
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7 days ago
LikersMoses Hunja, Dr. Alfred Gitonga Miriti., David Ochieng Nyawir, +2
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Civil Engineer at Siemens South Africa
The major problem in this country is greed. Unfortunately, this is deeply entrenched in our way of life. Now, if you construct a whole building for 35M, then expect to return a profit of between 50-200%, then buying a house, irregardless of how you finance it, is a bad investment. My advice is for you to be a developer. Build your own house.
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27 minutes ago
[li][B]https://media.licdn.com/mpr/mpr/shrink_100_100/p/1/000/06d/3b3/3b3f00a.jpg[/B][/li]Timothy M. Njeru
PARTNER at NJERU AND COMPANY ADVOCATES. Advocate and Law Practitioner in Mombasa, Kenya.
Brilliant answer David. In fact, your answer can indirectly be derived from Mr. Masegheās article where he says, with respect to where one is building to sell, āmargins are in the range of 50% to 200% depending on where you are buildingā. The need to get a 100% or 200% margin is what makes buying a house a bad investment. If developers were less greedy and went for 30% margins (still very high), the 7.5M house would probably cost Kshs 5M, and would thus be returning about 10% per annum (In Embakassi) thus almost matching the Treasury Bill rate. Developers will soon realise that the 100 - 200% profit margins are not sustainable in the long run,and most people will opt to rent. Where I live, I have noted that quite a number of apartments that were previously on sale are now on rental.
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13 hours ago
LikersDr. Alfred Gitonga Miriti., Imran Mwangi, and kenneth kagoiya
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Rink: https://www.linkedin.com/pulse/why-you-better-off-living-your-rented-apartment-martin-maseghe