The WHO characterized Covid-19 as a pandemic on March 11th, becoming the first pandemic to be caused by a coronavirus. The Kenyan Ministry of Health confirmed the first case in the country on March 12th, with the government issuing measures shortly after to combat the spread of this virus. Some of the measures include; a daily curfew from 7 pm to 5 am countrywide, mandatory quarantine for persons coming into the country, banning of movement into/out of certain counties (Nairobi metropolitan area, Mombasa, Kilifi & Kwale), suspension of all international flights, passenger distancing guidelines in PSV’s, banning of public gatherings, closing of bars and restaurants could only be open for takeaway.
As a result of this health crisis, many sectors of the economy have taken a hit, affecting the Nairobi real estate sector both directly and indirectly. Let’s start with residential real estate, I will do a separate article on the effects in the commercial real estate sector.
With many scared of contracting/spreading the virus, the prerogative has been to stay at home. Organisations have enabled their employees to continue working from home to minimise movement. This has led to a collapse in demand in property sales as people simply aren’t viewing property anymore. If people aren’t viewing property then transactions won’t happen, that’s the nature of the game. Many of the leads we had before the virus have taken a step back and decided to wait the crisis out, some expecting that the market will provide better value post-crisis. The result of this will be a decline in transaction volumes in 2020.
Covid-19 has also hit a market that was already struggling with years of oversupply and a harsh economic environment. With the return of liquidity following the abolishment of rate caps on bank lending, the market had started to see signs of recovery in early 2020. Private sector credit growth in the 12 months to March 2020 was at 8.9%, it’s highest since July 2016. In the real estate sector, this liquidity largely flowed to property developers. These recent gains will be completely wiped out with the decline in transaction volumes expected. The central bank also lowered CBR to 7.00% and CRR to 4.25% as policy measures to control the economic effects of the health crisis. As of March 18th 2020, the CBK notes that loans amounting to KSh 81.7 Billion have been restructured. The real estate sector accounted for 17.2% of this amount, second only to the tourism sector.
On the positive side, we have not seen any effect on property values. Sellers are being patient and given that demand has all but gone away, there is no incentive to lower prices for buyers that do not exist. Developers are also working with banks to restructure their loans with the expectation of a decline in sales income. Real estate is not as liquid as other assets so a massive sell-off was not to be expected. Values should hold stable but it all depends on how we come out on the other side of this crisis.
Positively, new developments are still seeing some interest. Given that many are 2-3 years away from completion and the only guide is the show house provided by the developer, buyers remain unchanged by the current pandemic. Virtual viewings are easier with off-plan buyers since they were not seeing the exact unit at the time of purchase anyway. Transaction volumes will be lower given the wider economic effects affecting consumer purchasing power.
The rental side of things presents a different case. Lettings are still going on and demand is strong. Now that people are spending time at home more than ever, the space you call home just got more important. As a result, some tenants are on the market looking for an upgrade, while others are looking for a better deal. The short term nature of lettings(1 year) allows transactions to continue even at an unprecedented time like this.
Serviced apartment lettings have taken a massive hit. Nairobi being a regional hub has led to an increase in furnished & serviced apartment options available to serve this market. Travel websites such as Airbnb and booking.com enabled this market segment to grow and investors were attracted by the higher returns compared with normal rentals. With international flights suspended and borders closed, demand has effectively collapsed. Some of these listings have crept back to the rental market in hopes to find tenants but many will have to remain vacant until the economy fully reopens.
Now comes the big one, rent payment. Many workers have been asked to take unpaid leave, others have lost their jobs and many of those who depend on day to day income have been affected by the economic slowdown caused by the covid-19 pandemic. One man’s spending is another person’s income so if people are staying at home, someone else is not getting money in their pocket. This greatly affects their ability to pay rent and it shows with the collection data we’re seeing.
Rent collection is down across the board compared to previous months with many tenants asking for waivers or rent reductions. Some tenants are expecting the government to intervene and issue a decree waiving rent payments but GoK has made its position clear that landlords/tenants should work to find common ground. This is ideally the best solution. We have seen some landlords reducing rents for their tenants for up to 3 month periods and the majority are not locking or evicting anyone for non-payment. Many have not reduced rents, however. It is important to note that there is an entire ecosystem that is dependent on rental income; landlords, banks & SACCOs that have financed these rental properties, property and facility managers who derive their fees from the rent they collect, service providers such as security, cleaning and maintenance who depend on the service charge to operate.
We’re also noticing some interesting developments that could affect property values in future. There is an increasing appreciation for properties with gardens. With everyone staying home, having a garden has never been more important. One client told me it was “an absolute privilege” to have a private pool in his compound and he now “appreciates it more than ever.” Will this increasing desirability affect property values? It remains to be seen.
The outlook for the year is certainly grim and it is further exacerbated by the fact that no one knows how bad this could get. The property market is cyclical and we have been on a decline since 2016. Compared to other asset classes, we’re not too badly off, however, 2020 will be the biggest test yet!
