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Real estate sector bubble not about to burst

Wahinya Henry @PeopleDailyKe

Researchers and real estate developers have discounted fears of a bubble burst in the sector any time soon. The fast growth of the property market in Kenya has been mistaken as a possible bubble likely to burst soon while in real sense, the market presents attractive opportunities for investors.

As a result of the sector’s resilient performance and despite the long electioneering period last year, property prices have held steady, with only low increases in both rents and asking prices.

“What we are experiencing in Nairobi is a prolonged boom backed by fundamentals that determine the demand for real estate products,” says the senior manager regional market at Cytonn Investments, Johnson Denge.

“There could be oversupply in some markets, especially in the upper middle- income areas, but proper market research to match supply and demand need to be carried out to prevent the misconception,” he adds, Researchers at Kenya Institute of Public Policy and Research Analysis (KIPPRA) have also dismissed fears of a real estate bubble phenomenon in Kenya.

In a study, researchers Casty Gatakaa and M Njoroge admit lack of previous comprehensive data made them arrive at the conclusion despite increasing prices in some real estate sectors.

“The lack of data makes its hard to dismiss completely the bubble phenomenon in Kenya,” says Gatakaa. They instead make some proposals that can tame the possibility of a bubble occurring — by setting up a land bank.

“Change in real estate prices has a significant impact on welfare of individuals and investments. Prices escalated in 2003 in Nairobi and its environs. This raised fears the real estate market was experiencing a bubble,” says Gatakaa in a Kippra report issued last year. A bubble is when rapid increase in real estate occurs and can’t be explained.

“A burst of the bubble’ is when a sharp decline takes place in prices after a surge. “A bubble in real estate pushes prices up. A burst can lead to loss of many families wealth or the collapse of an economy of a country,” she said.

Though it has not been established that a property bubble exists in the urban Kenya market, the press and policy makers have repeatedly raised concerns of ongoing property price escalation over the last decade.

In the conventional theory, real estate prices escalate beyond their fundamental values when all investors speculate prices will keep going up. Denge says escalation of prices is informed by economic fundamentals such as a rapid population growth. Price increases in urban areas are a boom. Not a bubble. Interest rates are insignificant; they don’t lure peoples’ decisions to take mortgage.

Performance of real estate market in the 4th quarter of 2017 helps support the findings of the KIPPRA study in the sense that the fluctuation have been explained and reasons for sharp increases and decrease in some areas given and not suspect money used in acquisition of real estate.

Nairobi suburbs recorded a 3.32 per cent annual growth in asking prices, satellite towns registered a 5.43 per cent growth rate while overall land still posted a positive return last year. However, prices were flattening towards the end of the year, according to Head of Development Consulting & Research at Hass Consult, Sakina Hassanali.

Activity in the land market is expected to pick up going forward driven by government-led projects such as the “Big Four” of which housing is critical. “The government’s plan to construct at least 500,000 affordable units over the next five years will spur private developers to move to areas where these houses will be put up as they seek to take advantage of the supporting infrastructure that will come through such a plan,” said Hassanali.

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