Property market faces liquidity crisis in this Covid-19 crisis
Analysts in the real estate sector have predicted the possibility of a further crash in property prices as Covid-19 continues to crawl previous gains, despite the property market having remained generally stable in the first quarter of 2020.
Although the severity of the effects of the pandemic on Kenya’s real estate sector is still unclear and developing each day, says a report by Knight Frank, the pandemic has shifted the focus of the building and construction sector to healthcare investments and logistics.
“The overall impact of the pandemic will be substantial, but ultimately depends on the duration and measures that governments, organisations and individuals are taking to mitigate its adverse effects,” said Knight Frank Kenya MD Ben Woodhams.
Speaking on the aftermath of Covid-19, MySpace Properties CEO, Mwenda Thuranira, said prices are expected to drop by 10 per cent in the short-term following job losses and falling disposable income in the majority of households.
“Players have been forced to reduce prices on both high-end and middle-level properties in Nairobi and satellite towns to attract buyers and developers,” he said.
However, other analysts are more optimistic. Chief economist at Mentoria Economics, a local based economic think-tank, Ken Gichinga, says the behaviour of property markets going forward will depend on how much money the State will inject into the economy.
“The situation right now remains very fluid. Much will depend on how much liquidity the government will pump into the economy.
If they move slowly, we might see a sharp drop in prices due to weak demand, coupled with an oversupply of house units,” he said.
Gichinga said a recent move by the government allowing pension scheme holders to access up to 40 per cent of their funds for a home purchase will have a positive effect on the sector’s liquidity, but may not be significant to counter falling home prices.
“Already, there has been a move to create legislation to allow pensioners to access up to 40 per cent of their pension funds to purchase homes.
This might release some much-needed liquidity into the market, but I’m not sure it will be sufficient to prevent a price drop. For now, we can only watch and pray,” he said.
In its first quarterly report for 2020, Hassconsult says Kenya’s property markets could face liquidity constraints in the coming months, forcing further price drops.
Stability of the prices in the quarter is not an indication the property market will post positive results given that the first Covid- 19 case hit the country in March, said Hassconsult head of research and marketing, Sakina Hassanali.
“It is important to note that Kenya recorded the first case of Covid-19 towards the end of the quarter and, therefore, the real effects of the pandemic will begin to emerge from the second quarter,” Sakina said.
Zillow, a leading real estate and rental marketplace in the US, conducted a study on global housing during previous pandemics.
It concluded that while home sales dropped during an outbreak, home prices stayed about the same or only suffered a slight decrease.
This is largely due to the little opportunity for prices to change when there are fewer transactions.
In the US, previous pandemics have resulted in a market pause, but have not caused any devaluation of property assets.
This data is reflected in other global markets and is expected to be similar in Kenya. “Property has a long history of providing superior returns over most asset classes.
And while we will continue to track data locally, we expect this trend to continue despite the economic environment that the pandemic has created,” she added.
According to the Hass House Sale Index for Quarter One 2020, property prices mildly edged up by 0.9 per cent over the quarter with detached and semi-detached homes showing resilience, with slight increases of 1.3 per cent and 0.9 per cent respectively.
The Hass Sale Index is used to measure the asking price changes of residential housing nationwide throughout Kenya serving as an indicator of trends.
It says apartment prices recorded a slight decline of 0.4 per cent over the quarter, continuing a period of price stagnation and bringing the total annual decline to two per cent.
Similarly, apartments recorded the strongest growth in rents at 2.9 per cent against the overall property rents slight drop of 0.7 per cent.
“Globally, the pandemic has caused markets, across all asset classes, to perform poorly, but the extent of this effect on our local market will depend on how we manage the Covid-19 pandemic,” said Sakina.
She said that as more companies scale down operations and send Kenyans home due to the ongoing pandemic, there would be pressure on landlords to give waivers or discounts until the economic situation returns to normalcy.
This will be reflected in property prices, with the rental markets being more severely affected in the short to medium term.
HassConsult Land price indices for the first quarter of 2020 show a marginal retreat for both suburbs and satellite towns over the quarter.
Land prices in the suburbs decreased by 0.9 per cent while in the satellite towns’ prices slightly dropped 0.21 per cent.
However, some Nairobi suburbs have bucked the overall trend, with Muthaiga plots up 2.38 per cent in Quarter One and Spring Valley showing an 8.87 per cent increase in the past year.
Similarly, among the satellite towns, Kitengela continued to grow with a two per cent increase in the first quarter and a 12.68 percent increase in the past 12 months.
Investors are displaying caution and delaying purchasing decisions in the absence of market stability.
In Nairobi, the quarterly drop was the biggest since the index was launched while for satellite towns the last drop was last seen in the third quarter of 2017.
Annually, prices in Nairobi’s suburbs rose marginally by 0.28 per cent while for the satellite towns’ prices were up 6.51 per cent, said sakina.
“The Covid-19 pandemic has left some landowners in unexpectedly limited liquidity and as a result, we may see a bigger supply in land moving forward,” she said.
“However, this will create an opportunity for shrewd investors who have not been affected.
It is important to note that land has traditionally outpaced other asset classes over the long-term, and we have no data that suggests this will change,” said Sakina.