The real estate market in Kenya right now, can be said to be booming and booming hard. It was expected that the PEV would put a damper in the growth of this sector but it has proved resilient and come back even harder. Many companies have dedicated new units of their current businesses to focus specifically on real estate, amongst them are CFC Stanbic holdings, NSSF, Liberty Life and Centum. Mega real estate projects have been rolled out and are being rolled out such as Tatu by Reneissance Capital and Thika Greens by Thika Greens Ltd. Such projects are the stuff of ambition, boldness and confidence.

Some of the reasons given by analysts in the real estate sector are that;
  1. Kenya currently has a supply gap of over 200,000 housing units per year as demand annually exceeds supply. 
  2. "Capital gains and availability of refinancing options in the home loans market is helping young people reap the value of their initial investments" - Business Daily article.
  3. An emerging middle class that will provide a consistent base of housing demand for the next coming years.
  4. Allied to this is the fact that there is a youth bulge i.e. bulk of the population is aged between 15-24. Potential future home owners.
  5. The property market has over the last 10 years outperformed the stock market in terms of returns.
  6. Government spending on infrastructure will increase value of property.
Allied to this, Analyst at Mavuno Capital Robert Bunyi commented to me that given that Kenyan corporates are small and badly managed, real estate is the best alternative. Furthermore, the fact that only 6% of Kenyans own their homes, only 14,000 mortgages are issued (CBK data) and that Kenya may be seeing average growth rates of 5-6% over the medium term, the real estate market is the place to be over the next 10-20 years.

However, of all these, the most outstanding statement that could form the basis of this article and the ensuing analysis is that "the majority of real estate investors have been buying houses with a view to selling or letting them at higher prices akin to share trading". SHARE TRADING!!!!.

Having given a snapshot of the situation, I guess my two cents comes in here. In any beginner economics class, demand will be defined as the not only the willingness to purchase a good or service but more importantly the ability. A house is a place in which you live in, a source of shelter. Therefore, majority of end-users if I could call them that, are people who are willing and able to buy a house to live in. Does Kenya then, have this demand. The answer to this is a simple NO. Most of the analysis done in local dailies about real estate, have often quoted demand as the people who are in need of shelter rather than the people who are able and willing to buy shelter.

I have blogged before about the distorted civil service pay in which median level employees only earn 1/52 of what top level employees earn. If we assume a ministers salary to be one million shillings (approx $12,500) per month, then that puts the median civil servant salary at approx Kshs 19,500 ($250) per month. From a blogpost by local blogger bankelele, the average monthly mortgage payment for house that is selling for 10 million Kshs (approx $125,000) would be approximately Kshs, 131,447 ($1,643) more than 6 times what the median civil servant earns. How is he expected to pay for such a house.

Given that the private sector pays considerably more, it is still folly to assume that the median employee, can afford a 10 million Kshs house. Which is very modest by Kenyan real estate standards. That price would get you a maisonette in areas such as Lang'ata, BuruBuru and South B. Whereas with the same cash, one can buy a house in a high class suburb in South Africa.

Many other statistics point to the fact that there is minimal demand for houses from potential homeowners (end-users). Such as;
  1. Only 3.6% of Kenyans own computers. (Poverty).
  2. The main sources of incomes for adults in Kenya are, 20% family and friends, 18% food crops and around 10-12% retail businesses, kiosks and shops in toi, Gikomba and the stalls in Nairobi. (Poverty).
  3. 32.7% of Kenyans are excluded from finanial access both formal and informal.
  4. 51.8% of Kenyans get money for daily usage through internal remittances.
  5. 60% of the youth's main income source is from transfers.
  6. Kenya has a gross saving rate of 10%, compared to Ghana with approximately 26%.
  7. And interestingly there are only 15 passenger cars per 1,000 people compared to 108 in S.Africa.
These stats may seem unnecessary but they point to the fact that Kenya is a poor country with weak financial systems that cannot provide the demand for such housing projects.

Creepy parallels can be drawn between what we are witnessing and what recently happened in the U.S.A and other developed countries in terms of real estate. With banks falling over each other to lend to real estate investors, investors treating houses as if they are tradeable stocks, more speculators than home-buyers in the real estate market and ambitious real estate projects. I hate to be a wet blanket, but I would venture to say that if the current trend goes unchecked, these investors will realise that there is no real demand for such houses and stop speculating. This will lead to a dramatic downward correction of housing prices and eventually an inventory overhang in the real estate market. One of my favourite quotes in fiction comes from Thomas Hardy's "Far from the Maddening Crowd" in which he writes that "blandishments and glitter are the female's folly", the current housing market and all the blandishments and glitter could be the investor's folly. Just because stocks and other businesses are underperforming doesn't mean that real estate is a good venture. It is not the better of the two evils.