KONZA CITY: 2000% INCREASE IN LAND PRICE.
Konza City project has so far resulted in a 2000% increase in land price since 2010,a period of 2 years.
Land as a factor in sale and rent prices.
Land is a major factor of production. Land price determines the eventual sale and rent price for property. A 3 bedroomed 100m2 house on a ½ acre plot in Runda or Karen will cost KES 25 to 40m . A similar house in Athi River will cost 5 to 8m. The actual cost of constructing both houses is roughly the same, approximately KES 4m each. The other extra cost is mostly the cost of land. Therefore, the value of land will eventually affect the value of the property in terms of sale or rental price.
The 2000% increase in land value has largely been driven by speculation. The allure of a perfect city setting has attracted many potential buyers to Konza . This has in turn created high demand resulting in higher land prices. The acquisition of 5,000 acres of land by Ministry of Information has further resulted in making the land more scarce, hence driving land price for surrounding properties higher.
Actual land value.
Actual land value is determined by the utility a buyer will achieve after purchasing at the set price. For example, land in an already established area with security, infrastructure and developments will offer more utility to the buyer than land that does not have any infrastructure on it. In a perfect market where the forces of demand and supply are not interfered with, land price will largely be determined by the utility the land offers.
Universities previously in the neighborhood.
For instance, Daystar University bought land in Athi River over 10 years ago when the demand there was not high. The management made a wise decision and foresaw an increase in population which will necessitate that they buy land in Athi River and set up a larger University while land prices are still low due to less demand.
Likewise, Islamic University,Gretsa university and Kampala University have also bought large tracts of land in the area behind Konza along Namanga road.
At the time of purchase, demand was less hence pricing was low as compared to the current pricing in Konza after the Konza city publicity.
Similar Real Estate ventures in Nairobi suburbs.
Land around Thika Greens and Tatu city has similarly gone high in price due to speculation. This increase in land price is what is termed as a perfect real estate project in that the land owners in the area will eventually stand to benefit the most from the land sale. Land around Tatu City in Ruiru was selling for around KES 1m per acre before the Tatu City publicity. Currently, land has shot up by a very large percentage as speculators increase demand for land purchase in the vicinity.
As long as the percentage increase in land price, which increases sale and rent price, is viable, buyers will get value for their money. Where the % increase in land price results to high rents and sale prices and the land still does not assist in recouping the high prices, the purchaser looses out.If he had borrowed the money from a bank, he defaults since he cant find the profit to repay the loan. The bank then auctions the property. In a worst-case-scenario,if the property is based on a over-hyped value, the bank is left holding a devalued property hence a crisis.
USA Housing Bubble.
The 2007/2008 Housing bubble in the USA where the public borrowing appetite was artificially increased to allow for more and more people to own homes resulted in an increase in property value which became unsustainable to the buyers. This led to the mortgage industry crash when very many people defaulted and banks were left with over priced property and had to foreclose at lower prices.
Konza City oversubscription.
Konza City 5,000 acre project will most likely be oversubscribed by the speculators who will want to cash in on land leased out to them at a low price of KES 200,000 per acre while land in the surrounding Konza area sells at KES 4m per acre.
This will most likely result in high competition for the same land when buyer A, B and C all want a particular parcel of land at a reserve price of KES 200,000. In such a situation, buyer A will try to outdo buyer B and C in all ways possible, including use of ‘negotiation’ skills such political clout or corruption so as to be favored more than buyer B and C in the allocation.
Public Procurement Act.
To prevent this, AG Githu Muigai has suggested the use of the 2005 Public Procurement and Disposal act whereby buyers A,B and C will be compelled to compete for the parcel and the buyer with the highest price gets the allocation and possibilities of any buyer to ‘negotiate’ for the allocation are eliminated. This way, Kenyan tax payers get value for their money since the land has been initially bought using tax payer money.
The Ministry of Information has retained the services of the Worldbank/IFC as the project advisors . It’s my hope that in the Worldbank/IFC advisory, they will look into situations that will result into a win-win for Kenyan tax payers.
Its also my hope that the Ministry of Information and its Konza City advisors, Worldbank/IFC will listen to the wisdom of the Attorney General and enable Kenyan taxpayers to benefit.
Architect Francis Gichuhi Kamau.