VAAL Real Estate

COVID-19, THE UNPRECEDENTED PAUSE IN KENYA’S REAL ESTATE

According to the World Health Organization, Covid19 aka Coronavirus is an infectious respiratory disease caused by severe acute respiratory syndrome coronavirus2(SARS-CoV2). The disease was first identified in Wuhan, the capital of Central Chinas Hubei Province, and has since spread globally, resulting in an ongoing pandemic. The virus spreads from symptomatic people to others who are in close contact through respiratory droplets caused by sneezing, coughing and talking, or by contact with contaminated objects or surfaces. The first Covid19 case in Kenya was reported on March 13th, 2020 and so far, as of 10th of May, 2020 Kenya has 239 recoveries, 32 deaths, and 672 confirmed cases and the numbers are increasing day by day.

Impact of Covid19 in the real estate industry in Kenya

  • There has been a drop-in prices and discounts have been given by various realtors in order to encourage people to buy property during this pandemic. Some companies are giving their clients personalized payment plans that are pocket friendly to their needs.
  • Since January 2020, the Corona Virus pandemic has caused unfavorable effects on real estate in Kenya. Nonetheless, the impact of the economic disruption in real estate varies. Web traffic to real estate portals such as the VAAL Real Estate portal has significantly dropped. First, numerous ongoing projects have been halted and there has been a slow uptake of new developments. Developers are experiencing issues getting building materials that they need to finish their projects due to the china lockdown that was recently uplifted. Additionally, the county lockdown especially Mombasa means the supply of construction materials from the port to Nairobi is close to impossible. Only essential goods are allowed in and out of Nairobi as a result of the government directive to curb the spread of the virus. More so, most home buyers are skeptical about the market and have put their buying plans on hold.
  • Developers are experiencing a cash flow issue as a result of buyers holding back on their pending installments. Besides, there is a large drop in new property sales. Banks are also not disbursing new loans hence a decline in mortgage uptake by home buyers. They have also tightened their lending conditions.
  • The majority of employers are earning half-pay, some are on unpaid leave, while the rest have been laid off. From a rental front, landlords want to retain their tenants and as a result, most of them have been lenient. They have been forced to renegotiate their payment terms or reduce a certain percentage of the rent. New occupancies have been redundant owing to the logistical aspects and cash flow to would-be tenants.
  • In addition, some tenants have resulted in relocating to smaller houses or moving in with other family and friends in order to cut costs. As a result, the number of vacant houses has increased.
  • 75% the commercial office spaces are vacant especially due to the government directive encouraging employees to work from home. Some companies no longer see the need for keeping their office spaces.
  • The retail and hospitality section have been majorly affected. The occupation percentage of the above has tremendously dropped and some retail entrepreneurs have resulted in online marketing and selling.
  • Over the last few years, real estate in Kenya has been lucrative to the diaspora market. However, due to the borders closure and flight cancellation, there has been a tremendous drop in the number of diaspora clients investing back home. More so, diaspora remittances have also dropped as coronavirus affects Kenyans working abroad according to the World Bank report https://shrts.net/a6iL0.

Outlook and market projection on real estate

Commercial

Both sub-sectors namely office space and retail will experience prolonged slumbers as they navigate the oversupply already felt pre-covid19 and cash shortfalls with consumers rendering business volatility to retailers unattainable to maintain and or setup considering the overhead costs. This is expected for both, rental and purchases.

Industrial & Warehousing

This may be the biggest benefactor as a sub-sector of real estate either through lets or purchases owing to numerous factors but majorly the appetite for extra storage to accommodate FMCGs which supplies were hampered by Covid19 building up an unprecedented demand to be met, the exponential growth of e-commerce due to the opportunity presented by the pandemic pushing commodity traders to prefer ownership of extra storage by warehousing over office space.

Residential

Rentals: The letting market has and will continue to receive a substantial impact as a result of both financial and logistical encumbrances which may precipitate a renegotiation of more lenient tenancy terms and may force a reduction of the rental rates by 20 – 30%.  

Sales

Having a suppressed market demand meeting the already delivered units and those -under construction, it would be wise to expect a market correction on pricing warranted by the artificial glut created by 10 – 15%, however, this is very short-term and would bounce back within one calendar year.

Is now time that the bubble bursts? / Will corona facilitate the bubble to burst?

A real estate bubble also referred to as a “housing bubble,” occurs when the price of housing rises at a rapid pace, driven by an increase in demand, limited supply, and emotional buying. Once speculators recognize that housing prices are on the rise, they enter the market, further driving up demand. The phenomenon is called a bubble because at some point it may burst.

“I tend to disagree as there are many factors that will lead to the bubble. Nonetheless, Real Estate Developers have adopted the concept of building property vertically due to the high cost of land in Nairobi. This allows them to demolish previously built houses and put up high-rises to meet the needs of the consumers. A good example is the Wilma Towers-Manhattan Style by VAALl Real Estate which is a twin tower development built in new era architecture offering modern amenities including an outdoor running track and kid’s play area. This is ideal for the citizens who would not want to move to satellite areas.”-Sumeiya Omar, Property Sales Supervisor, VAAL Real Estate.

Source: https://vaal.co.ke/housing-demand-in-nairobi/

This goes to say that there is no bubble as of current. Nevertheless, with the effects of Corona, the pricing will experience a downward trend to accommodate the dwindling demand though for a short term with an expected rise thereafter as illustrated in the graph below.

Efffects of COVID19 on real estates in Kenya

 

Opportunities on Real Estate Market within and beyond Corona

With the declining demand, developers and vendors are willing to negotiate further than the pre Covid19 pricing and more favorable and flexible payment terms to the purchasers with an attempt to maintain cash flows. However, this is not expected in the long term as the market would pick up as soon as there is a resumption of normalcy.

As such, real estate developers such as VAAL Real Estate are offering a 15% discount on selected units on their four projects namely; Moonvalley Apartments-Dubai Style, Divine Suites-Hotel Living Concept, Elite Residence-Convenient Urban Living and Wilma Towers-Manhattan Style.

Source: https://vaal.co.ke/

Investors are also in a position to attain lucrative capital gains on their properties since their purchase price would be at a much lower rate than expected and benefit from the pricing correction attained after normalcy. “Appreciation of the property. Capital gains based on when acquired the property. Above the acquisition price. With the discount you would be breaking even or still retaining part of the capital gain as it is a short term phase. According to the actuarial scientist, 6-12, months we should be getting down to the initial price prior the discount.” Peter Karuga-Business Development Manager, VAAL Real Estate.

Following a reduction in the CBK Lending rate, commercial banks have lowered their interests on both mortgages and financial loans for which investors could capitalize on as compared to what was previously.

Owing to what has been witnessed during the pandemic period real estate has cemented its position as one of if not the only income generators to many investors being considered as a basic especially in regards to residential.

Real Estate, being a fixed asset also creates a hedge against inflations and partly to currencies fluctuations unlike investments in financial markets as well as easing succession and retirement planning as it guarantees income stability to its investors with minimal exposure to losses as has been with most other sectors. Landlords are the only investors with assured income during these trying times.

 

Anticipated recovery period by sector

The global economy is rearing to reopen however on a sector to sector basis depending on the impact incurred demand and risk that it may pose in further transmission of the virus. Below is a projection of the expected reopening of different sectors though it may differ from country to country and may also determine which sectors recover the earliest by taking advantage of the head start.

Effects of COVID19 on real estates in Kenya

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