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WEAK SHILLING AND HIGHER INTEREST RATES HIT CONSTRUCTION SECTOR

Kenya’s real estate market is at a crossroads because, as developers continue trying to bridge the housing deficit, the market dynamics seem unlikely to support this growth. The last nine months have seen several changes in the industry, with mixed results. The major ones are:

WEAK SHILLING

The Kenya shilling has depreciated by 16 per cent to the dollar this year, leading to and increase in construction costs since more than 60 per cent of the inputs are imported.

The latest Kenya Bureau of Statistics figures show that construction

costs have risen by 15 per cent since the beginning of the year. Meanwhile existing loans are now more expensive by at least 1.5 per cent.

“We have seen a rise in the construction costs, from the price of cement, steel, ceramics, electrical equipment and labour costs. Fortunately, we always enter into long-term hedging contracts that protects us from price fluctuations,” Mr Peter Muraya, a director at property developer Suraya Holdings, says.

It is a tricky for developers starting new projects because the increase in construction costs, coupled with an increase in the cost of development finance, puts into doubt the viability of these projects.

“It’s going to be very tough for new projects. The market dynamics are not in favour of either the purchaser or the developer,” Mr Muraya says.

HIGHER INTEREST RATES

In the last seven months, the interest on commercial bank loans has been at an average 16 per cent. However, since the rise of the Central Bank Rate (CBR) to 11.5 from 8.5 per cent, it has risen to 18 per cent. This is because the Kenya Bankers Reference Rate (KBRR) now stands at 8.57 per cent, up from 8.54 per cent.

According to Patricia Githu, the chief executive officer of Developing Africa, which is building Juja South Estate, the rise in these rates has a direct impact on those investing in real estate.

“The rise in the rates has stretched thin those who want to take up mortgages. It’s made them hold back. This has in turn slowed down the demand,” she says.

More than 40 per cent of Kenya’s property market is mortgage driven, with the rates financed through either cash or loans. Already, those serving mortgages have seen a slight increase in their monthly repayments after banks readjusted their rates to reflect with the new KBRR.

According the third quarter Cytonn Investment report,“Uptake of mortgages will decrease as the high interest rates will be a deterrent to the people contemplating buying property through mortgage financing. We also expect an increase in the number of non-performing mortgages as servicing the mortgage loans will be an uphill task for a large number of end-users. Developers and investors alike should remain cautious as the uncertainty of the interest rates environment persists in the wake of the weakening Kenya shilling.”

REVISION OF LAWS

Stakeholders under the Kenya Private Developers Association (KPDA) are pushing for an amendment of the Sectional Properties Act, which they hope will reduce the time and processes required to register individual units so that buyers can use their new homes as collateral in the shortest time possible.

Mr Muraya, one of the drafters of the Bill, says the proposed Shared Communities Bill and Amendments to the Sectional Properties Act are being drafted by lawyers at the lands ministry and will be presented to the Cabinet.

In the current set-up, property developers wishing to register apartments do not use the Sectional Properties Act. Instead, they use sub lease titles and management companies, circumventing the old, complex land laws.

“The sectional property amendment 2015 proposes to section the titles so that a developer can get individual title deeds. This means that the purchaser or the banks can conduct an official search for the individual parcel of land at the registry as it will have its own file,” Mr. Muraya said.

The Sectional Property Act of 1987 currently in use only provides for the division of buildings into units owned by individual proprietors and common property owned by tenants in common. Currently, developers are using the Registered Land Act Cap 300 for registration the of sectional property titles, which only deals with titles that are either freehold or leasehold with an un-expired term of not less than 45 years.

Mr Charles Peter Mwangi, a valuer with Rubyland Ltd, says the proposed amendments are timely. “The proposed amendment and the proposed Shared Communities Act, if enacted, will revolutionalise the real estate sector. They will make it easy not only to register property, but also help in the management of gated communities that is currently not backed by any legislation,” Mr. Mwangi said.

Mr Mwangi further notes that the benefits include making online applications and searches, and harmonisation of the mortgage applications by banks, which will simplify the application process.

New laws propose building deadlines

In August, the government, through the Ministry of Lands, proposed to introduce the Physical Planning Bill 2015, which will give property developers and individuals building deadlines to complete construction. Failure to comply will lead to penalties. The proposed law will affect those who run out of cash or who would like to build at their own pace.

“Where an applicant is granted development permission for building works, that applicant shall complete those building works within five years after receiving the development permission,” the Bill sponsored by Leader of the Majority Aden Duale reads in part.

Proposed land laws

The lands ministry has proposed laws that will affect land ownership and management in the country.

Acting Lands Cabinet Secretary Fred Matiang’i has tabled the Minimum and Maximum Land Holding Acreages Bill 2015. The bill, was tabled before the Constitution Implementation Commission.

Other controversial proposed laws include the Community Land Bill 2015, the Land Laws (Amendments) Bill 2015 and Physical Planning Bill, 2015, all of which are before the National Assembly. Key among the changes in these Bills are the restoration of the powers of the defunct commissioner of lands and the reversal of the spousal rights and customary trust land rights caveats.

SLOWDOWN IN CONSTRUCTION

The figures released by KNBS in late September show that the construction sector grew by 9.9 per cent in the second quarter of the year, compared with 16.6 per cent over the same period last year. This was also lower than the 11.3 per cent in the first quarter of this year.

Construction mainly consists of infrastructural projects such as roads, railways and real estate, with the standard-gauge railway project said to have lifted the sector.

National Construction Authority Chairman Steven Oundo said that the drop is attributable to a weaker shilling, expensive imports and high finance costs, especially to developers and contractors.

Source: Daily Nation

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