Fund manager Cytonn has downplayed prospects of a real estate bubble in Kenyan real estate markets. There has been frequent talk of a bubble in the market in recent months following negative market sentiments from various quarters.
However, the investment firm in a recent analysis has stated that in its view there is no case for a real estate bubble. Drawing from previous bubble bursts in two global markets, Japan and Poland, the analysis finds that there is no evidence to support the notion of a bubble but an expected market correction.
Supply of credit
First, the analysis suggests that the current demand is not fueled by an inordinate supply of credit by lending institutions which would set the path for a bubble but by genuine supply deficits which have built up over the years. Cytonn further argues that the low mortgage numbers in the country are proof of the inaccessibility and unaffordability of credit.
According to the Cytonn research, housing uptake during a bubble fall to a low of between 0-10 percent but uptake of housing in the country has remained above the limit at about 20.9 percent. This is attributed to the huge housing deficit of approximately 2 million units and growing.
Kenya’s population grows at an average rate of 2.2 percent annually with an even more rapid urbanization rate (4.3 percent) over the past five years. These together with the growing middle class, is estimated to raises the demand and increase the capacity to absorb occasional supply shocks.
Supply of land
The open market for land means supply is not limited or controlled by the state. This means that there is limited room for unsustainable demand for land that could cause prices to skyrocket. According to Cytonn, Nairobi’s satellite towns provide relatively affordable land for development far from the CBD.
The nature of tax regulations link the capital gains tax is to discourage land speculation. In addition, policy reforms in the land sector encourage development more than hoarding of land. These measures in effect encourage supply to balance demand.
Dynamic expansion of local and multinational firms
Cytonn says that the country’s commercial and retail property demand and supply is characterized by the continuous expansion of local and multinational firms. That the current oversupply in commercial property should not result in a significant drop in the prices of properties as local and international firms are likely to increasing occupancy.
With no new developments expected to add to the retail supply, the firm says it expects the market to absorb the market surplus in the short-term.
“We do not foresee a real estate bubble occurring in Kenya, as the market is still constrained by issues such as unavailability of credit and relatively high-interest rates, tight credit underwriting standards, inaccessibility of mortgage financing and thus, there lacks the possibility of unsustainable demand that will supersede the current supply across all the sectors,” says the analysis.