The Covid-19 pandemic sent Kenyan and the global economies into decline in 2020, with its effects expected to extend to 2021, derailing the economic recovery process. Economists and investors in Kenya are largely optimistic about an economic recovery in 2021, a disposition that might be farfetched following the macroeconomic events in 2020 and the recent coronavirus restriction measures.

The following are the major Macroeconomic factors in the financial year 2020/21 that will shape the Kenya real estate market in 2021.

a.) A continued depreciation of the local currency

In 2020, the Kenyan shilling weakened against major international currencies but strengthened against the local currencies month on month. The local currency weakened against the US dollar throughout 2020, hitting a historic low of 109.98 in November 2020. The graph below shows the performance of the Kenya shillings against the US dollar over the period. In January 2021, the Kenya shilling weakened further against the US dollar, exchanging at 109.65 in the first week of January 2021, with the projection expected to continue in the first quarter of 2021 as the demand for the dollar increases as the economy recovers and businesses open up.

At the same time, the usable foreign exchange reserve depreciated month on month in 2020 but remained adequate, meeting the CBKs requirement to endeavor to maintain at least four months of import cover and the EAC regions convergence criteria of 4.5 months of import cover.  The local currency’s poor performance in 2020 raised the cost of importation of construction materials, fixtures and fittings, and the cost of electricity, which is projected to continue to 2021. Combined with the poor economic performance, increase in taxes, and the country’s political tension, more lease breaks are expected, especially in the retail and commercial office space in 2021.

b.) Rising Inflation rate

The Kenya Annual inflation rate was on a rising trajectory in 2020 in the 2^nd half of the year. That was attributed to reduced government spending on essential services, reduced stock market activities, consumer desire to increase savings, reduced money supply in the economy and tightening monetary policies (higher interest rates). The increasing inflation rate is expected to increase lending rates in 2021. Consequently, property prices are expected to increase, leading to most people renting properties instead of purchasing, as most construction companies and developers rely on loans to fund development projects. Furthermore, the rising inflation is expected to further devalue the local currency in 2021, leading to high importation costs for construction materials, fixtures, and finishes.

c.) Reduced Consumer Purchasing Power, and low business confidence.

As indicated by a negative Purchasing Managers Index (PMI), business confidence was low in the better part of 2020. That was attributed to the containment measures due to Covid-19 leading to reduced consumer’s purchasing power. As indicated by the graph below, the negative PMI precedes changes in the trend in major estimates of economic activity and output, such as the GDP, Industrial Production, and Employment. That is expected to affect the transactions in the property market, as most real estate investors will shy away from investing in properties in a market where other sectors of the economy, which the real estate market is interdependent on, are in a low trajectory.

d.) Interest and Mortgage rates

As shown in the graph below, Kenya’s saving and deposit rates were on a declining trajectory plummeting to a five-year low in October 2020 on reduced demand for savings in an economy where lending to homes and businesses plunged. On the other side, borrowing from the CBK became more expensive, with the repurchase agreements (repos) rate hitting 6.56 percent in December 2020 in contrast to 3.29 percent in mid-October 2020. That is expected to raise the borrowing rate in 2021, and hence fewer people/ businesses are likely to borrow funds from banks for their restart strategies and projects development.

On the contrary, the low returns on savings and deposits are set to trigger the movement of cash to other investments with a stable return. Hence, more money is expected to be injected into real estate developments, real estate securities, and government securities. Furthermore, more cash is expected to be invested into businesses as firms anticipate an economic recovery, consequently opening up offices and hence sustaining cash flow in the commercial office sector. As more money is injected into the economy, consumers’ purchasing power is expected to increase, and consequently, the footfall in the retail sector is expected to rise. The declining interest rate will trigger more borrowing to fund the economic recovery for most SMEs and businesses, and therefore sustaining cashflow in the retail sector of the Kenya real estate market. In addition, the declining interest rate is expected to lower the cost to obtain a mortgage to buy a home, creating a higher demand for residential real estate, which again is expected to push real estate prices up. Also, the declining interested rate is likely to raise the yield for REITS, making them more attractive to equity investors.

e.) Rising Public debt

The budget projected revenues of KES 1.89 trillion or 16.8% of GDP yielded a budget deficit of KES 841 billion or 7.5% of GDP, down from the 8.3% shortfall estimated for the 2020/21 fiscal year. The budget framework took into account the adverse impact of the coronavirus shock on revenue, which was amplified by VAT reductions and tax relief measures to cushion the fallout from the pandemic. The government sees the deficit narrowing to 6.1% of GDP in the fiscal year 2021–2022 and has retained the medium-term target at 3.0%. As such, the government increased its domestic and foreign borrowing to fund the deficit in the 2020/21 fiscal year budget. As of September 2020, the total government borrowing totaled 7,120,597,720, with the government planning to add about one trillion Kenya shillings to its public debt mountain in the 2021/22 financial year to plug the widening budget hole due to the negative impacts of the Covid-19 pandemic. The country’s debt servicing was a significant source of liquidity pressures in the financial year 2020/21 and financial year 2021/22, consequently affecting real estate transactions in 2021, as taxes are expected to increase further to service the debt.

f.) Excess Market Liquidity

Kenya’s excess liquidity accumulated by commercial banks above the regulatory standard was in a declining trajectory in 2020. Central Bank data indicate that the excess bank reserves declined by an average of 25.1 billion shillings month on month. The excess liquidity in the Kenyan market, which was experienced mostly in the third quarter of 2020, was attributed to business activities’ resumption as the Kenyan government partially reopened the economy on 1^st July 2020. The excess liquidity was used by banks for lending and buying government securities, and consequently reducing the amount of money left for real estate transactions and development project funding. In 2021, banks and other financiers are expected to shift their investments to government securities (which experienced oversubscription in 2020), thereby reducing real estate funding.

f.) National Infrastructure development projects

2020 experienced a boom in the National Infrastructural projects as the government shifted its effort in empowering local contractors and creating employment. Some of the key infrastructural projects that are expected to shape the real estate market in 2021 include:

• Expansion of Ngong Road
• Expansion of Waiyaki Way
• Konza Technopolis project
• Tatu City
• The affordable housing project

The infrastructural projects mentioned above, among many others, are expected to open up the real estate market in respective locations boosting real estate transactions.

In conclusion, for real estate investors, you should be aware of the economy’s cycle while recognizing the macroeconomic factors influencing business decision making. You should also be cognizant of the real estate property’s sensitivity to the economic factors for risk management. Furthermore, understanding the key economic factors that drive the real estate market is essential to performing a comprehensive evaluation of a potential investment and a real estate transaction decision.

Buildafrique Consulting Group is a specialist and expert in End-to-End Development Consultancy, Real Estate Project Finance and Capital Raising, Joint Venture Structuring in Kenya, conducting Real Estate Feasibility Studies, Development Project Management, and Final Product Management (Sales and Letting) in Kenya for real estate investment projects.

B.) WEEKLY NEWS HIGHLIGHTS

          MAJOR ECONOMIC NEWS HIGHLIGHT

i.) EPRA adjusts price across all fuel products

On Thursday, 14^th January 2021, the Energy and Petroleum Regulation Authority (EPRA) adjusted diesel and kerosene prices upward by Sh4.57 and Sh3.56 per litre respectively. In Nairobi, diesel will retail at Sh96.40 per litre while Kerosene will be sold at Sh87.12 per litre. Super Petrol will retail at Sh 106.99, its price having been adjusted by Sh0.17 per litre. According to EPRA, this month’s price changes are a consequence of the average landed cost of imported Super Petrol, diesel and Kerosene increasing by 1.51 per cent, 13.05 per cent and 9.27 percent from US dollar 318.71, 293.88 and 277.27 per cubic metre in November 2020 to US dollar 323.52, 332.22 and 302.97 per cubic metre in December 2020.

ii.) Reversal of corona tax to aid Kenya’s IMF funds request

According to Moody’s, a global ratings agency, Kenya stands a better chance of getting a financing deal with the IMF following January 2021’s reversal of coronavirus tax subsidies, which signaled that the National Treasury was committed to improving its fiscal position. According to the firm, the return of income and value added tax to pre-Covid-19 rates will reverse the trend where revenues had fallen to a five-year low and help seal a deal for cheap concessional debt. The firm further said that Kenya needs to secure more tax revenues, reduce debt service and expand the economy and exports to recover from the impact of the coronavirus on the economy.

iii.) Current account deficit narrows on lower oil import bill

According to the latest data by the CBK, Kenya’s current account deficit narrowed to 4.7 percent of gross domestic product (GDP) in the 12 months to November 2020, attributed to savings from oil imports and resilient earnings from exports and remittances. The deficit figure represents a recovery in the country’s inflows that were expected to worsen due to the shocks on trade, oil prices, tourism and remittances. According to the CBK, the cumulative diaspora remittance inflows in the 12 months to November 2020 totaled Sh333.28billion ($3.045 billion) compared to Sh281.79 billion ($2.790 billion) in the 12 months to November 2019.

iv.) KRA beats December revenue target to collect over Sh166b

According to KRA Commissioner General Githii Mburu, increased economic activities in December 2020 saw the Kenya Revenue Authority (KRA) surpass its revenue target for the first time during the Covid-19 era, netting more than Sh166 billion in taxes. Nearly all the tax-heads did well with the KRA surpassing the Sh164 billion target – a performance rate of 101.3 per cent which was the first positive and above target collection rate since the outbreak of Covid-19 pandemic. The improved performance was attributed to the economic recovery following the relaxation of the Covid-19 containment measures and enhanced compliance efforts by KRA in December.

          CONSTRUCTION INDUSTRY HIGHLIGHTS

i.) Building Contractors Face Losses on Sharp Rise of Steel prices

Over the past three months, steel prices experienced a steep rise exposing Kenya’s building contractors into significant losses. Steel reinforcements bars are retailing at an average of KSh.105 per Kg from around KSh80 per Kg 3 months ago. The price fluctuation is especially expected to affect building contractors with fixed-sum contracts who cannot apply for variation in contract prices under their contracts. In fixed-sum contracts, contractors are expected to adhere to their contract prices. The increase of about KSh35 per Kg on the crucial construction material is expected to amplify costs, significantly reducing contractors’ potential profits.

ii.) NMS Plans Redevelopment of the City Estates

The Nairobi Metropolitan Services has initiated plans to redevelop ten city estates as part of affordable housing program. NMS published an Expression of Interest (EOI) to redevelop the estates which include Bahati, Maringo, Jericho, Lumumba, Bondeni, Ziwani, Embakasi, California, Kariobangi North, and Woodley. The EOI notice further called for development partners in the banking industry, pension funds and schemes, real estate developers and other investors to redevelop the properties in a joint venture with Nairobi County government. According to NMS Deputy Director General Kang’ethe Thuku, NMS would be embarking on urban regeneration and redevelopment exercise using a phased approach in the 10 estates.

iii.) State allocates 19.5 Billion for Infrastructure in Public Schools

According to the Government Spokesman Colonel (Rtd) Cyrus, the government has allocated an additional Sh 19.5 billion for construction of more educational facilities in public schools as part of an ongoing grand scheme to address Covid-19 requirements and ease congestion occasioned by high enrollments. Colonel (Rtd) Cyrus Oguna further observed that as schools reopened after a 10-month break occasioned by the pandemic, Sh14.9 billion had been disbursed to secondary schools for construction and equipping of more dormitories, classes, and other amenities to achieve social distancing among learners, while primary schools had already received Sh4.6 billion.

iv.) Local private developers up in arms over construction of affordable Housing Projects by foreign investors

Local private developers have protested various affordable housing projects unveiled in the city by the Chinese and the Nairobi Metropolitan Services (NMS). The local developers argued that some of the projects, especially those by foreign nationals, were substandard and circumvented Kenyan laws. They further argued that projects by foreign contractors and developers were favored by the state department for housing and were not censored. However, the permanent Secretary for the State Department for Housing and Urban Development, Charles Hinga refuted the claims, noting that they have never received any complaint of such degree.

          COMMERCIAL REAL ESTATE HIGHLIGHTS

i.) Housing Department put on the spot for inconsistent State rental income

On 15^th January 2020, the Auditor General Nancy Gathungu, raised a red flag over inconsistencies in the amount of rental income collected, raising suspicion that part of the cash may have been misappropriated. According to the latest audit, rent income from State-owned housing units rose by Sh103.5 million in the year to June 2019 compared with a decline of Sh93 million in the previous year when it reported Sh156.3 million.. The Auditor –General put the Housing department on the spot to explain why statements of receipts and payments reflect comparative rent income of Sh156, 530,113 while the trial balance in support reflects a nil balance.

ii.) NBK ink a deal with Costa Homes to support off-plan buying.

On 16^th January 2020, the National Bank of Kenya (NBK) and Costa Homes launched an off-plan housing development account where buyers’ funds will be held until delivery of their completed units. According to NBK managing director Paul Russo, the savings plan seeks to eradicate instances where developers use pre-sale funds for development of housing units with some failing to deliver the units as agreed. Mr. Russo further said that the product is aimed at restoring confidence among house buyers where some developers have failed to fulfil their promises leading to loss of funds.

iii.) Asset managers eye boost from investment trusts.

Asset managers have welcomed the establishment of more real estate investments trusts (Reits) to deepen the housing sector. According to the ICEA Lion Asset Management Chief Executive Einstein Kihanda, Reits provide a significant opportunity for property investors to professionalize the whole aspect of property investments by having pooled funds to invest in property. Kihanda further said that the entrance of such players as Acorn, who runs two REITs (D-REIT and I – REIT), would provide more opportunity for growth for the Reit sector whose biggest challenge was their limited presence.

iv.) Lands Ministry to issue new titles in digital migration.

The Ministry of Lands has started the transition to a new lands registration system, which will see title deeds issued before the enactment of the Land Registration Act in 2012 cancelled and new ones issued. On, 12^th January 2021, Cabinet Secretary Ministry of Lands and Physical planning Farida Karoney announced that the ministry started the conversion of land parcels that were registered using now-repealed laws. Ms. Karoney said that the objective of the conversion is to collapse land registration process in the repealed laws into one. As a result, all titles issued under the repealed laws will be cancelled and replaced with titles under the Land Registration Act, 2012.

C.) KENYA REAL ESTATE TRENDS

i.) Real estate annual rental yield continues in a downward trajectory

Real estate annual yield continues in a downward trajectory, hitting the lowest in 2020. The decline is attributed to subdued performance across all sectors due to reduced sale and rental rates in a bid to attract and retain tenants.

In terms of performance, residential, commercial office, retail, mixed-use developments, and serviced apartments sectors registered average rental yields of 4.7%, 7.0%, 7.5%, 7.1%, and 4.0%, respectively, resulting in an average rental yield for the real estate market of 6.1%, 0.9% points lower compared to 7.0% recorded in 2019 and 11.2% recorded in 2018. Existing properties recorded a (0.2%) price correction; thus, the resultant average total returns came in at 5.9%, down from 9.0% recorded in 2019.

ii.) Sustainable housing design ideas are fast gaining currency in Kenya

Sustainable housing design ideas are fast gaining currency in Kenya, as more property developers strive to build ‘green homes’ that do not deplete natural resources. The latest innovation being the ‘Houses of Tomorrow’ innovative project by Bamburi cement.

As the world seeks to reverse climate change, many builders are now turning to sustainable developments that use bio-degradable building materials, green architecture, renewable energy sources, and eco-friendly building practices. Energy efficiency and a drive for low carbon emissions are expected to continue driving innovation in design and construction.

D.) GLOBAL REAL ESTATE TRENDS

i.) Residential design in Hong Kong adjust to fit the new working practice

According to JLL’s newly released Residential Market Monitor report, Hong Kong property developers continue to reconfigure apartment design to suit dwellers’ working needs as a flexible workplace arrangement becomes more common. Such designs include creating space as a study room instead of an en-suite bathroom or putting co-working space within the clubhouse facilities to cater to the new normal of flexible workplace arrangement.

According to Nelson Wong, Head of Research at JLL in Greater China, such flexible workplace policy, being introduced and experimented amid the COVID-19 outbreak may gradually bring about some lasting residential development changes. The new trend is expected to be adopted by Kenyan developers for residential investments.

ii.) Home Affordability in the U.S. Worsened in Late 2020

According to ATTOM Data Solutions latest U.S. Home Affordability Report, median home prices of single-family homes and condos in the fourth quarter of 2020 were less affordable than historical averages in 55 percent of counties.

Compared to historical levels, 275 of the 499 counties analyzed in the fourth quarter of 2020 were less affordable than past averages, up from 217 of the same group of counties in the fourth quarter of 2019 and 164 in the fourth quarter of 2017. The fallback came as continued spikes in median home prices of at least 10 percent in 2020 in most of the country outpaced the impact of increasing wages and declining mortgage rates to historic lows. Those price increases occurred as the U.S. housing market kept booming despite economic troubles related to the ongoing Coronavirus pandemic. On the other hand, the affordability of Kenya Homes is aggravated by the unfavorable mortgage models in the Kenyan mortgage market, worsened by the country’s poor economic performance.

E.) COMMON REAL ESTATE & DEVELOPMENT CHALLENGES,  AND SOLUTIONS

Managing Interest Rates on a Real Estate Development Loan or Equity Funding.

YOUR CHALLENGE:

In modern real estate investment and the year 2021; a need to source external funding  in form on development loan or equity funding is inevitable because of the huge capital requirement coupled with depreciated economic opportunities to raise capital. The challenge comes in finding ways to reduce the cost of finance on development load or equity capital; which can also be interpreted as to how to reduce the interest rate for debt or equity funding.

THE SOLUTIONS:

There are a number of ways to reduce the cost of finance in a project, as outlined below:

a) Increasing the Equity Contribution Share in the Capital Structure: One of the ways of reducing the cost of finance is to increase your Equity Contribution share into the project, or into the Capital Structure. This way, you borrow less thereby reducing the overall cost of capital into the Project. This can be done by liquidating other assets whose overall returns or capital gain is much lower than the cost of borrowing.

b) Paying the Investor early, for Equity Finance: The other ways of reducing the cost of Finance into a Project is to pay the Investor early into the project, through the first proceed that comes from sales of the Real Estate Investment Product. This is done through a systematic Tier formula, whereby a considerable amount is paid to the Investor or Lender in tier one and two, through negotiated interests that much lower than if the proceeds were paid at the end of the project.

c) Seeking Equity Partners in Potential Buyers: Another way or reducing the cost of finance is to seek equity partners in potential buyers. These are Buyers that you negotiate with so that they can pay a bigger percentage of the price of the sale units in off plan or initial stage, but at a much discounted price, such that the partners benefit through lower price premium discounts while the developer benefit in equity capital.

d) Selling Off-Plan to reduce to Capital Deficit: Selling off-plan still remains a viable way of reducing the cost of finance. The idea is to break ground at the site when you have raised a considerable amount through off-plan sales of Units.

e) Avoiding High Risk Finance Instruments, like Mezzanine Financing: Another way of reducing the cost of finance is to seek cheaper equity and debt finance instruments, and avoiding expensive debt instruments like Mezzanine Finance. One way of doing this is to negotiate the entire debt fund through one Senior Debt Capital.

f) Shop around for low mortgage rates, for development loan: When looking to keep mortgage or development costs down, the first place to start is to shop or find the best mortgage rates from various lender. Low rates help to minimize regular payments and reduce interest paid over the life of the mortgage.

h) Shorten your amortization period, for development loan: Another option to reduce the overall mortgage or cost of development loan is to trim down the amortization period. Long amortization periods result in lower regular mortgage payments but also accrue more interest over time. Shortening the amortization period has the opposite effect. Higher regular payments direct more to the principal balance owed and reduce the interest paid altogether.

THE CONSULTANT TO ENGAGE:

The Consultant to engage for this exercise is a Project Finance Consultant.

F.) THIS WEEK ON FREQUENTLY ASKED QUESTIONS (FAQs), AND ANSWERS

QUESTION:

What should I look out for while importing Building Finishes, as opposed to buying locally?

ANSWER:

We have seen a trend in recent past where developers imports building materials, especially finishes from other countries especially China, for reasons ranging from cost cutting measures to search of better quality materials. So what should you look out for during importation of building finishes and equipment, and what are the merits and demerits of this kind of procurement arrangement.

a.) What to look out for:

i.) Maintenance Feasibility: The first thing to look out for is the maintenance feasibility of the finishes or equipment in relation to the life cycle of the project. This include confirming the availability of local servicing specialist of plant for replacement or maintenance in case of breakdown or need for replacement.

ii) Taxes and other costs: The investors should also evaluate of work out the taxes and other costs associated with importation of the building finishes in relation to buying the materials locally, for comparable analysis. Other costs may include insurance, storage, and fixing accessories in cases where the equipment requires additional materials or equipment locally.

iii) Specification: It is important to thoroughly evaluate the materials specification in relation to local dynamics market dynamics related to use, whether, and technology. This means that the material or equipment should be compatible or fit for local conditions for use and application.

iv) Time:  Since “time is money”, it is important to consider the time for importing the materials and materials arriving at the construction site. Once you have paid for your order in full it will then take approximately 6 – 8 weeks to arrive in Kenya, which should be scheduled together with the construction contract period.

b.) Merits: One of the merits is that developers are able to access a wide variety of finishes to choose from, thereby having an opportunity to explore on their taste and preference. Another merits is the wide range of quality to choose from, due to the huge variety of materials. Cost saving has also been cited by many developer as a merits to importation of building finishes, mainly being as a results of savings in profits and overheads for traders of the same materials, once you import the materials yourself. The cost saving also comes in discounts and economies of scale once you purchase materials in bulk, for large real estate development.

c) Demerits: Demerits for importation of building finishes includes uncertainty of the life cycle of the finishes, especially equipment due to unavailability of servicing parts locally, which means that you would have to import the serving parts, say for Lift Elevators every time there is a breakdown. Another demerit is technical compliance, especially for fittings equipment, whereby you may end up having a fitting that does not comply with counterpart local fitting during installation. Sustainability of sale guarantee also become an issue because of logistical issue related to an equipment imported from another country, when you want to activate a replacement through a sale guarantee.

G.) THIS WEEK ON DEVELOPMENT COSTS ANALYSIS – NGONG AREA, KAJIADO COUNTY

This week’s focus on Development Cost Analysis is for Ongata Rongai in Kajiado County, this being another fast growing satellite towns in the Metropolitan area of Nairobi. The Development type in this area according to the land-use and county zoning regulations includes Apartment Blocks and Shopping and Retail Complex.

Below is an analysis of Construction Cost per Square Meter (SM), for the option of procuring the development project through a Building Contractor, or an option of direct procurement of the Materials and Labour through a Labour Contractor for recommended building types.

H.) THIS WEEK ON REAL ESTATE PRICE ANALYSIS –ONGATA RONGAI, KAJIADO COUNTY.

The Real Estate price analysis focus for this week is on land, sale, and rental prices for a 2 and 3 bedroom apartment in Ongata Rongai- Kajiado County. The data were obtained through surveys, and analysis of asking prices on property listings in Nairobi.

i.) Sales price – Apartment and houses

ii.) Rent price – Apartment and houses

iii.) Land price per acre (commercial/residential)

I.) CENTRAL BANK OF KENYA INTEREST RATE WATCH – (T-BILLS)

The money market remained liquid over the week ending 15^th January 2021, supported by government payments, which offset tax receipts. The interbank rate, which is an indicator of liquidity levels in the banking sector, went down by 2.36 percentage points to 3.730 percent, indicating reduced banking sector activities.

91 day T-bill plummeted by 0.01 from 6.895% previous week rate to 6.884%. CBK offered a total of Kshs4 billion, and bids amounted to Kshs5.014 billion, of which 5.012 billion was accepted. The volume of bids received increased week on week basis. 182 day T-bill increased by 0.04% from 7.479% previous week rate to 7.522%. CBK offered a total of Kshs. 10 billion, and bids amounted to Ksh 8.102 billion, of which Ksh 8.101 billion was accepted.  The 364 day T-bill increased by 0.08% from 8.363% previous week rate to 8.445%. CBK offered a total of Kshs10 billion, and bids amounted to Ksh 13.303 billion, of which all was accepted.

J.) KENYA EQUITY MARKET INDICES

Investors trading confidence at the Nairobi Security Exchange (NSE) increased in the week ended 15^th January 2021, as evidenced by increased trading activities attributed to earning recovery and the return of foreign investors to the local market. During the week, foreign investors assumed a net buying position by accounting for 42.89% of the total market sales and 90.16% of the total market purchases.

The NSE All-Share Index, NSE 20 share index, NSE 25 share index, and market capitalization, which are the main measures of the equity market’s performance, increased by 2.60%, 1.225%, 1.32%, and 2.60%, respectively. The I-REIT turnover increased by 254.66% during the week, indicating increased real estate activities.

K.) CURRENCY HIGHLIGHTS

The Kenya Shilling weakened against major international currencies but strengthened against regional currencies during the week ending 14^th January 2021. The local currency plummeted to a new historic low of Ksh110.10 per US dollar on 14^th January 2020, attributed to the declining dollar receipts from sectors such as tourism, a factor exacerbated by a growing demand for hard currency by investors

The usable foreign exchange reserves remained adequate at USD 7,807 million (4.80 months of import cover) as of 14^th January 2021. That meets the CBK’s statutory requirement to endeavor to maintain at least four months of import cover and the East Africa Community (EAC) region’s convergence criteria of 4.5 months of import cover.

L.) FACTORS THAT WILL SHAPE THE REAL ESTATE AND OTHER MARKETS IN THE NEXT ONE WEEK.

i.) The rise in diesel and kerosene prices 

The price of diesel climbed by the largest margin (Ksh 4.57 percent) since July 2020 on Thursday’s, 14^th January 2020 review by the Energy and Petroleum Regulatory Authority (EPRA), putting pressure on manufacturers and transporters already hit by the economic downturn due to the coronavirus pandemic.

The cost of transport is set to rise following an increase in the retail prices of diesel, a resource critical to different economic sectors, and with direct impact on the pricing of consumer goods. As a result, more money will be spent on food and transportation and less on household expenses such as rent. Businesses like construction that depend on transportation of goods are expected to adjust their cash flows to cater to the expected high cost of production amid a slowed economy attributed to the coronavirus pandemic. As a result, the cost of related items like building materials will go up, as transporters load the extra charges on traders.

ii.) Continued Depreciation of the Local Currency

The shilling hit a historic low of 110.5 on 14^th January 2021 against the US dollar as its value continued to depreciate week on week. Last week’s depreciation was attributed to the declining dollar receipts from sectors such as tourism, a factor exacerbated by a growing demand for hard currency by investors.

The continued depreciation of the local currency is expected to continue rising the cost of electricity as the forex levy will be passed to consumers, who are majorly the tenants and households. Consequently, the high cost of power is expected to lead to lease breaks in the commercial and retail sector, as tenants’ cash flow is disrupted. The weakening of the local currency against the dollar is also expected to contribute to higher retail prices, which is expected to reduce retail footfall as the cost will be passed to consumers. That is expected to reduce retailers’ income and hence increase the possibility for lease breaks. Furthermore, the continued depreciation will raise the prospects of higher consumer bills for Kenya’s import-dependent sectors, such as the construction sector, which relies on imported raw materials like steel, building material finishes and fittings. Sustained price increases in steel, finishes and fittings are likely to spill over into house prices and rents in the medium-term, affecting households across the economy.

M.) UPCOMING REAL ESTATE EVENTS AND TRADE SHOWS IN THE COMING ONE WEEK.

i.) Webinar: Distressed Commercial Real Estate Virtual Forum – The event will bring together institutional investors, fund managers, lenders, developers, and special servicers to foster insightful debate, meaningful professional connections and the exchange of crucial real estate market intelligence.

Date: 27^th January 2020

Time: 7:00 PM

Venue: Online

Event Organizer: https://www.imn.org/real-estate/conference/NYC-Distressed-Commercial-Real-Estate-Virtual-Forum/

ii.) Webinar: How to Understand Commercial Property Underwriting and COPE – The webinar will discuss how construction, occupancy, protection and exposure direct the property underwriter’s decision.

Date: 2^nd February 2020

Time: 11:00 AM- 12:00 PM

Venue: Online

Event Organizer: https://www.independentagent.com/Education/Webinars/Pages/live-webinars/HowToUnderstandCommPropUnderwritingAndCOPE.aspx

Writer of the Report:

This Report is written by Buildafrique Consulting Group, Kenya multi-disciplinary consultancy, that offers END-TO-END DEVELOPMENT CONSULTANCY, REAL ESTATE, and PROJECT FINANCE solutions through specialized subsidiaries. Among our solutions includes:

1. Feasibility Studies and Market Research.
2. Project Finance and Capital Raising.
3. Project Management.
4. Investment Design Appraisal.
5. Quantity Surveying
6. Construction Cost Consultancy
7. Physical Planning and Planning Permissions
8. Environmental Management and Impact Assessment
9. Real Estate Development and Structured Investment Solutions
10. Property Valuation
11. Marketing and Property Sales Agency
12. Property Management and Facility Management

Our Contacts:

• Office: Navigators, Kindaruma Road, Nairobi.
• Website: buildafrique.com
• Email: [email protected]
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Disclaimer:

The information contained in this report is for general information purposes only. While we endeavour to keep the information up to date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the information contained on the report for any purpose. Readers are therefore advised in all circumstances to seek the advice of Registered and Licensed professionals in all matters related to Real Estate Investment and Project Development.