How Far Along has the Kenyan Market into the Boom and Burst

As the urban population expansion in Kenya balloons to 500,000 per year, the annual ROI of real estate in the country –which currently falls within the range of 20% – 30%– is bound to supersede those of other lucrative property markets around the world, including American and European markets. The real estate market has remained vibrant even during survived harrowing times like the 2008 Post Election violence and the global economic meltdown –times in which several sectors of the economy took a serious hit.

However, an unprecedented storm appears to be gathering in the horizon in the Kenyan real estate markets. This is precipitated by the slump in shilling’s value against major currencies, double-digit inflation, and all-time high-interest rates. Already, many developers are calling off or downsizing development projects; construction jobs are on the decline. However, the current annual demand for accommodation, which stands at 250,000 housing units, completely outstrips the current supply, which comes in only at 60,000. So, are the market dynamics spelling doom or boom?

The Positives and Negatives of the Kenyan Real Estate Market Dynamics

Over the past few years, there has been a windfall of investments by several multinational real estate companies in the Kenyan market. It’s common these days to see megalithic real estate developments sprawling in suburban areas and city outskirts, such as the Tatu city, with a capacity to accommodate over 70,000 residents; the Thika Greens Limited (TGL) project, with over 4,000 housing units; the Migaa project, with 2,500 homes, etc.

The Kenyan high-end real estate market, according to the Knight Frank’s 2011 Prime International Residential Index (PIRI), registered the highest price increases in the world. While the value of Nairobi’s high-end real estate grew by 25%, those of London grew by 12.1%, Moscow 9.8% and Shanghai -3.4%. The land around many of these monumental developments have also skyrocketed in anticipation of transformation of the areas into sparkling residential and retail spaces for middle- and high-income earners.

However, a number of international organizations believe that this growth rate is an unsustainable bubble. Their predictions aren’t far-fetched, as the rate at which these developments spring up have slowed down in recent times.

One of the main causes of this slag has been the high-interest rates, especially for rates applied to loans above $35,000. This has simmered down the rate at which investors source funds from financial institutions. But on the brighter side, these higher interest rates could help stabilize the market growth and make it more sustainable, preventing the emergence of a bubble market where the price might plummet heavily in a short period of time.

The Sum of the Real Estate Market Equation

However, as things stand, the demand in the market outstrips supply by nearly four times. The only reason why this low supply, high demand dynamic might not lead to a boom is if the prices continue to rise beyond the levels affordable to most consumers. However, income levels in the country continues to rise, and investors are confident that the price hike will not increase to the level that are beyond the financial capabilities of most middle-income and high-income earners.

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