When you scratch the surface and look past Kenya’s housing deficit of c2mn homes, growing 200k units annually, you see a market where affordability is stretched to the point where only 12.3% of urban households can afford to buy the cheapest new build house ($26k / KES2.7mn) built by a developer /contractor.
Market demand is there, but are the buyers?
Furthermore, when we add this to avg. gross income of just $7.34k and the small number of formally employed people (2.7mn in 2020), which is declining (-6% Y-o-Y), it is hard to see where the growth will come from.
High land prices (per acre) of +$500k and +USD100k in the suburbs and satellite towns of Nairobi, respectively, means there is a disconnect between buyers and affordability.
These unfavourable structural challenges are nothing new, but we believe this has finally started to show as the masses have been crowded out. We think structural changes are needed to improve the outlook, which looks stagnant at best.
If not, the bursting of this bubble could have a significant impact on listed financial services companies and in particular, the banks.
Nairobi prices showing signs of softening Current land prices in the high-end residential segment have fallen significantly from their peak levels over the past four years. Most notably, land prices in Runa in 1Q21 were 27% below their recent peak in 4Q17.
On the commercial side, we note that land prices in Upperhill (Nairobi’s most expensive suburb – $D4.6mn an acre) are 13% below the peak in 4Q17.
Since 4Q17, land prices in the suburbs of Nairobi have all underperformed the CPI basket (see Fig.15). Tough Nairobi office market is now very visible Post Nairobi’s office stock growing at a 2012-20 CAGR of 21.3% (to 36.4mn sq. ft), available supply in Nairobi’s metropolitan area now exceeds demand (7.7mn sq. ft vs 0.2mn sq. ft).
Worryingly, office vacancy rates in Nairobi rose to 22.3% in 2020 from 9% in 2011. Average rental yields in Nairobi are also down to 7% vs 8.5% in 2016.
Financial services companies most exposed to property weakness Of the 20 financial services companies we review in this note, we estimate their total property exposure is USD42.9bn (43% of GDP).
Indirect exposure i.e., real estate collateral held by banks, accounts for 86% ($37.1bn) of total exposure. When ranked by total property exposure as a percentage of total assets (2020), the most exposed were KCB Group (209%), HF (206%) and Family Bank (106%) and the least exposed were Sanlam (9%), Liberty (5%) and Jubilee (5%).
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