Introduction

Kenya’s real estate market is among the top GDP contributors in the country, indicating it as a vast and attractive investment destination. This has mainly been influenced by its overall impressive returns, ability to provide a hedge against inflation once a project is completed, and a general stability among other factors, consequently driving various individuals and entities into this investment space. Nonetheless, the sector as a capital intensive market has barred or discouraged various individuals from investing in it. This is in addition to other various pain points that we sought to discuss in this article, that hinder the sector from meeting its optimum potential:

 

Rising Construction Rates Are Leading To Increased Property Rates 

The overall construction cost indices in the country have been rising at a 3.1% CAGR since 2019. This is mainly as a result of the depreciating currency, supply chain disruptions, and the high fuel costs given that its VAT was increased to 16% in July 2023, from 8%. This has consequently been a driving factor of the rising property rates, in addition to the high land rates in Kenya. With the majority of citizens earning a middle to low income, this limits their chances to service projects or afford rents in decent neighborhoods, or own homes.

Source: KNBS

To tackle this challenge, the government embarked on the empowerment of the real estate and related sectors such as the affordable housing and manufacturing sectors through incentives. These include but are not limited to a VAT exemption on importation and local purchase of goods for the construction of affordable housing projects, stamp duty exemption for affordable housing home buyers, and a 15.0% corporate tax introduction from the initial 30.0%, for affordable housing builders with at least 100 Units, from the initial 400 Units.

 

Rising Non-Performing Loans And High Interest Rates Are Impacting Financial And Credit Access

As highlighted in our previous article, Kenya has among the highest GDP contributions in Africa, yet financing is a huge challenge. While the banking sector is heavily relied on (90%) as the source of capital, access to credit in this market has been a huge setback largely driven by the high interest rates. For example, mortgage interest rates currently average at 13% while countries such as Mauritius and Egypt average at 6%. Notably, the sector’s current ratio of Loan Provisions and Non-Performing Loans(NPLs) as a percentage is approximately 20% higher than the 14% realized a similar period five years ago. As such, banks are asking for more collateral to cushion themselves against the high loan default rates.

Source: CBK                                                                                          Source: CAHF

Despite the above, various financing options have evolved to provide an alternative means to implementing projects in the country such as REITs, pension schemes, and structured products among others. Click here to know more about Kenya’s various alternative financing options and their evolution overtime.

 

Inadequate Information Is  Fueling Crime Cases Such As Fraud And Issuance Of Title Deed Malpractices

As a result of an information deficit, various land related crimes have been reported in the market in the past. Notably, greed, land grabbing, title deed issuance malpractices, and fraudulent cases have been reported as the leading vices in the market by the National Crime Research Center (NRC):

Source: NRC

Based on the above malpractices, encumbrances or ownership misinformation has consequently caused setbacks to individuals and entities through wrangles and property loss. A major recent example is the Athi River demolitions that saw over 50 buildings destroyed after court ruled land belonged to East Africa Portland Cement. To avoid such cases in the future, thorough due diligence on a property or a project and its owner is necessary through market research and property valuations individually or under reputable firms. 

 

Non-Compliance has Led To A Rise In Buildings Collapses By A 28.2% CAGR Over The Last 10 Years

According to the Kenya National Building Inspectorate (NBI), the country has witnessed a total of 43 collapsed buildings in the last five years, with 2021 recording the most hitch. Notably, a further 723 buildings have been earmarked as extremely hazardous, whereas 10,791 require either demolition or reinforcement before occupation. Overall, the collapses have been as a result of the non-compliance cases such as poor workmanship and construction materials, lack of supervision or services of qualified professionals(80%), and lack of adherence to specifications among other issues:

Source: NBI

As a result of building collapses, various individuals or investors have either lost their money, lives, and property and assets in the process. As such, due diligence and developer regulation through a professional body is required to help oversee activities in the sector, as highlighted in our Notes From The Kenya Real Estate Regulation Bill 2023.

 

Longer Transaction Timelines Are Impacting On Investor Confidence 

As a result of the bureaucracy in the real estate processes, it takes an average of 44 days to register a property in Kenya. Compared to other African countries such as Rwanda, Mauritius, and Morocco, this is a longer period as they take less than 20 days to conduct and conclude a similar process. As such, the government needs to review its policies to a much lesser period in order to enhance a much faster and seamless transaction process:

Source: CAHF

 

Regulatory Dynamics Are An Entry Barrier, With Non-Compliance Being Relatively High At 69.8%

While regulations are key to ensure compliance and seamless flow of activities in this market, it is heavily regulated in some submarkets thus instilling an entry barrier. For example, the minimum investment amounts in REITs and its Trustee in Kenya is capped at Kshs 5.0 mn and Kshs 100 mn, respectively. This is relatively high and inhibiting to various individuals in a middle income country, as well as fund managers that can qualify as trustees.

Additionally, despite the existence of the regulations in the market, non-compliance particularly in the land and property development submarket is very high at 69.8%, with NEMA also earmarking developments and structures for demolition due to non-adherence to zoning regulations. As such, it is crucial for the government to relook its policy implementations and governance to ensure compliance is attained. While the Senate tabled Kenya’s Real Estate Regulation Bill 2023 in an aim to help streamline activities in the sector, it is important to involve professional bodies at each and every sub sector to oversee and govern their operations.

Overall, proper market due diligence and evaluation is key to ensure certainty, best use of land, and to attain impressive returns from real estate investments. Moreover, compliance, a review of transaction policies, and synergy is also encouraged to ensure seamless flow activities.

 

We love your feedback! Let us know what you think about the key pain points in Kenya’s real estate transaction process by emailing [email protected].

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