The year 2014 has just started.
Current property for sale value in Kenya is still quite high compared to other properties in developed countries such as South Africa and USA.
Check here for Kenya vs South Africa property analysis.
Currently, the price of a middle class range house in Rongai,Kiserian, Ruiru,Kitengela et al areas costs around kes 60,000 per m2. This cost includes land, bank interest rates, construction costs and developer profit.
See example for this house for sale at Ruiru for kes 6m. Cost per m2 is kes 60,000.
This is similar to this bungalow for sale in Kitengela for kes 6m.
Compare these prices to average prices of houses ofr sale in the USA.
This house below in California, USA, costs kes 69,000 per m2 to buy, inclusive of land, taxes, building costs etc.
This house below in USA costs kes 50,000 per m2 to buy .This is cheaper than most houses for sale in Rongai, Kitengela and other Nairobi middle class suburbs. Same case with South Africa. Kenyan real estate costs much higher for the same quality than in South Africa.
USA infrastructure in terms of security, roads, water, electricity, availability of nearby schools, hospitals,and shopping malls is way higher quality than Kenya s.
Reason for high costs of property in Kenya.
The main reason is that the land costs in Kenya are appreciating at a crazy rate of between 30% and 60% per annum. This huge land rare appreciation in turn leads to high inflation rate which in turn leads to high bank interest rates.
The developers are therefore forced to buy expensive land then borrow expensive money to construct. When these are added together , cost of housing becomes way too expensive.
Land appreciation rate in USA for the last 10 years averages 5%.
Land appreciation in South Africa is also within single digit level.
In Kenya, the average 30% to 60% is way too high in comparison, meaning , the land price in Kenya is extremely high.
Solution to tame this high land price lies in 2 areas.
1.Idle land taxation.
Government can legislate measures to stem this appreciation by implementing idle land taxation.
This will punish land owners who keep land idle hence they will re sell their land to developers hence over supply of land , leading to lower costs.
In the event that the Land commission in Kenya is unable to increase the supply of available land through idle land taxation, then constructing vertically on the available pieces of land is a good solution. Developers will have to ensure their buildings rise vertically, several storeys, thereby utilising the vertical space that can be utilised for 4 to 6 levels or even higher depending on the feasibility study.
In 2014, we will see more and more storeyed construction in Kenya, particularly in urban areas as land becomes more expensive hence unreachable to developers.
The available land, mostly 1/8th acres, will have to be constructed vertically so as to become economically viable.
This will spawn new businesses that assist in vertical construction, mainly hiring of cranes, scaffolding and form work.
Bank Intrest rates.
As long as the land appreciation rate will continue to be high, this will result to high inflation rate. It will be impossible for bank interest rates to be equal or lower than the inflation rate since this means a loss to the banks.
Currently, inflation rate is on average between 7 to 8%.
This rate is similar/closer to the Central Bank base lending rate which stands at 8.5%.
As long as the most important factor of production ,Land, remains underutilised in Kenya, there will be less production hence higher inflation hence higher bank interest rates hence higher land costs hence high property value.
We are currently witnessing Kenyan banks moving away from construction finance due to high rate of defaulters. This is because property in Kenya is too expensive for lower quality infrastructure compared to other developed countries.
Solutions to fund construction in Kenya whereby high cost of land and high interest rate is minimised/removed have been crafted by a4architect.com through the real estate investment forum whereby potential developers come together and pool their savings into one development.
This requires no bank loans and construction can be developed into several storeys, hence remaining competitive.
Investors can visit the forum here and register to discuss with other like minded investors.
See the real estate investment forum here
Potential investors are free to join in and reap the benefits of real estate investment in Kenya. With high land prices and high bank interest rates keeping most investors form developing in Kenya, this pooling resources forum will come in to fill in the huge demand gap created.
Francis Gichuhi Kamau, Architect.