Pushed to the limit by a weakening shilling and sky-high inflation, the government this month raised the Central Bank Rate (CBR) to 16.5 per cent, prompting banks to adjust their base lending rates to almost 25 per cent. That, coupled with the ongoing demolitions of houses built on illegally acquired land, is likely to keep speculators out of the market for some time. Photo/ANTHONY OMUYA
Fraud, high mortgage interest rates, and the resultant inflated housing prices may soon burst the property bubble enjoyed by developers in the past 10 years.
This alarming realisation comes in the wake of the recent demolitions of houses in Syokimau and Lang’ata over fraudulent land deals and the skyrocketing bank interest rates as a result of a weak shilling.
The demolitions exposed the extent of the rot in the local land sector, where cartels of land officers, lawyers, real estate agents, and brokers have conspired to dupe investors into buying fraudulently acquired pieces of land.
As a result, most of those who were in the process of acquiring land in Nairobi, the centre of the property boom, have retreated to re-examine the authenticity of their deals.
Mr Peter Rono, an accountant with an international non-governmental organisation in Nairobi, was about to seal a deal on the purchase of a piece of land in Ruai when bulldozers roared into Syokimau.
He says that, having worked in Nairobi for eight years, he felt that it was the right time for him to build his own house.
However, property prices near the city were too high, so he decided to settle for the cheaper Ruai neighbourhood.
“My goal has always been to own a house in the city so that I stop this business of paying rent every month and concentrate on paying school fees for my children,” said Mr Rono.
However, after the demolition of the houses in Syokimau and the emergence of details of the rot in the lands sector, Mr Rono has halted his plans.
“I saw what happened and I don’t want to pour my money down the drain,” he said. “I’d rather just have the money lying in the bank or buy an agricultural piece of land upcountry.”
Mr Rono, a father-of-two, represents a group of Kenyans who, horrified by the events of the past two weeks, have started pulling their money from the property market. Their decision, players in the industry say, can only spell doom for the sector.
Ms Jane Karia, a director with Aviton Enterprises Limited, says the fact that these investors are not pumping money into the system means little growth will be witnessed in the industry and that, if the trend continues, it is likely to bring down the prices of property in the city.
“Given the rampant land fraud in the country and the fear of being conned, buyers will reduce to a trickle and the resultant low demand will bring down the current rates,” Ms Karia said.
And it is not only local investors who are likely to hold on to their money.
Those living in the diaspora, a segment that has contributed immensely to the growth of the local market, will start giving real estate a second thought.
Foreign Affairs assistant minister Richard Onyonka indicated that part of what created the current bubble was the large remittances from the West, which in good years surpassed the Sh100 billion mark.
“These people (Kenyans in the diaspora) are investing heavily in the sector and have made the property market vibrant,” Mr Onyonka said. “They view investment in property as relatively riskless.”
However, Mr Momanyi Ogwera, a Kenyan in the diaspora, says the news coming from home is likely to serve as a deterrent to potential investors.
“With these Tom and Jerry games on the land issue, Kenyans will now be apprehensive when investing in property because there seems to be a lot of fraud in the business. No one knows what they are buying,” said Mr Ogwera from Bolton University, US.
According to market players, the mad rush to invest in property has also been aided by relatively low bank interest rates that allowed people to borrow in order to invest.
However, recent happenings at the Central Bank of Kenya may reverse the trend.
Pushed to the limit by a weakening shilling and sky-high inflation, the government raised interest rates to an all-time high, which caused banks to adjust their base lending rates to almost 25 per cent.
Mr Martin Owuor, a trade economist for the Advisory Centre for Trade and Investment Policy, wonders whether the high property prices were even ever dictated by market forces in the first place.
“Is it that Nairobi now has better infrastructure and a population growth so high as to warrant the increase in demand for houses?” he asks. “Have construction costs shot through the roof or has Kenya suddenly gained international status, resulting in mass migrations into the country. What could be the cause?”
Mr Owuor said what was happening was a result of dangerous speculation where private investors rushed into the property market with borrowed money in a self-serving mass movement.
“The government should have regulated the real estate industry and stopped the massive domestic borrowing. A disaster looms over the real estate industry and although banks may not go under when developers default on loan repayments, a number will be bruised in the process,” said Mr Owuor.
He said the revised mortgages rates, which now stand 10 percentage points higher than before the revision by CBK, were way beyond the reach of ordinary Kenyans.
Mr Owuor compared the situation in Kenya with that in Dubai two years ago.
The Emirates nation was for a long time praised as the world’s fastest growing city before the real estate sector went bust and left the city littered with incomplete projects.
“The government has stopped further construction in the city, mortgage prices have fallen, yet no investors are willing to buy into these projects, not even after the Dubai Emir directed developers to sell their properties and offset their loans,” said Mr Owuor.
In post-9/11 US, Federal Reserve chairman Alan Greenspan earned accolades for bringing down interest rates on loans.
But analysts warned that the resultant heavy borrowing was not viable for the country. No one heeded this advice.
All it took to bring the economy to its knees was Lehman Brothers and Merill Lynch, the two companies that precipitated the worst economic recession America has seen in decades. The bubble had burst.
Mr Owuor says it is wrong that, at a time when the property market threatens Kenya’s economic strength, the Central Bank, like the Federal Reserve in the US, is doing little, if anything, to correct the situation.
The other factor that has lately gnawed at the property market is the Kenyan army’s incursion into Somalia, which has curtailed the flow of piracy money into the country.
Earlier reports had indicated that Kenya had become an investment hub for piracy kingpins, who also controlled a massive smuggling network.
Mr Kenneth Kaniu, a manager at Stanbic Investment Management Services, in an interview with the Daily Nation last year, explained that the owners of the illegally acquired millions of dollars from ransom payments did not care how much a property cost and had, thus, distorted the market.
“There was no reason why the price of land should suddenly go up by 500 per cent,” Mr Kaniu said. “This situation is likely to correct itself once the inflow of piracy dollars is stopped.”
Although the precise extent of ransom money channelled to Kenya’s property market has remained unknown, Mr Kaniu said discussions with property management agents indicate that there are immense levels of investment.
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