Of all the tasks that make up daily life, I
particularly hate shining my shoes. This generally leads to two outcomes: I’m
often guilty of wearing smart suits with scuffed shoes. Importantly for
Nairobi’s economy is the second outcome – the shoeshiners around Nation Centre
tend to have a very loyal customer. I get two benefits out of this: I get a
nice, gleaming pair of shoes, and I tend to overhear some very interesting
conversations.
Take the other week, for instance. As I was
getting my shoes polished, the shoeshiner was multitasking – on the one hand
busy with brushes and soft cloths; on the other having a rapid-fire
conversation with a friend of his. The content of the conversation was what was
striking. The two gents discussed, at length, the acquisition of a building in
downtown Nairobi, for the princely sum of ‘three-fifte’ (presumably KSh 350
million). The discussion went on at length (which led to my hope that the
shoeshiner would be uncharacteristically slow that day). From the conversation,
it emerged that the two men were third tier agents of some sort – at the
periphery of the Kenyan property industry – but the conversation was
eye-opening all the same.
It is said that one sure sign of the
impending stock market crash in 1920s America was when paper boys and (you
guessed it) shoeshiners began avidly discussing stock tips with their
customers. Before the 2008 crash, again, the canary in the coalmine was when
everyone was a day trader (or at least entertained themselves by watching day
traders on financial news channels).
Kenyan shoeshiners discussing hundreds of millions of shillings in
property investment may soon be written about in business books as the sign of
a frothy time.
There is no doubt in my mind whatsoever
that the Kenyan – and especially Nairobi – property market is caught in the
throes of a seriously overvalued market. Professionals in the industry, being
interested parties, often disagree, but the property market long ago broke the
laws of financial physics and took off into the stratosphere.
One-acre plots changing hands at hundreds
of millions of shillings. Properties doubling in price in eighteen months. Three-bedroom
apartments with no amenities to speak of selling at prices in excess of twenty
million shillings. The sign of the times for me was a few months ago, when I
saw a listing in the newspaper for an acre of land in Lavington, Nairobi, of
around KSh 125 million an acre. This is more expensive than beachfront land in
Greenwich, Connecticut (an online listing last week had a 5.6 acre property there
selling at the equivalent of around KSh 55 million an acre). Why is Greenwich
significant? It is the bedroom community for New York City, and also
headquarters of many of America’s hedge funds. This is a town which is called
home by the famed ‘Masters of the Universe’ of the financial industry – people
whose wealth is measured in the billions of dollars. And that property in
Lavington? In the face of properties valued upwards of half a billion
shillings, that price now seems quaint.
The arguments about demand and supply may
be half-valid, but they long ago ceased making any sort of sense. Speculators
of all kinds now seem to be on the loose, and the result is a housing market
that has priced itself out of reach of the middle class.
Let me illustrate this. A two bedroom flat
in Westlands (information, again, gleaned from random listings online) rents at
KSh 75,000. The equivalent apartment costs KSh 18 million. Thus, if one was to
finance it through a mortgage (with a 10% down payment, 15-year period, and at
10.9%, currently the best rate on the market), one would be forking out KSh
194,000 per month in mortgage payments to the bank. Take the interest rate to
15%, and the payments balloon to KSh 252,000 per month. A quarter of a million
shillings. Every month. For fifteen years. I’ll let that sink in for a moment
or two.
What this means is that mortgages are
inaccessible except to the very few, and the old buy-to-rent model is no longer
a financially viable one in this day and age. Young people trying to get onto
the property ladder are left to gaze wistfully at the property pages in
newspapers and websites, and a crucial element in building a Kenyan middle
class is now impossible.
Buy land in Kitengela!, I hear some of you
shout. Well, that’s now on the market for more than KSh 2 million an acre,
often in places where there is no all-weather road, and few services such as
water, electricity and sewer lines. It is getting to the point where Namanga,
on the Tanzanian border, will become Nairobi’s new bedroom community.
It’s bordering on the criminal. Regulators,
municipal authorities, counties and the central government are all at fault.
Developers build willy-nilly, charge whatever they desire, and are rarely on
the hook for deceptive advertising (the definition of Karen in Nairobi is now
on the slopes of the Ngong’ Hills).
What can be done? That’s a lengthy
discussion for another column. For now, however, if you’re looking to get onto
the first rung of the property ladder, you’re out of luck. Or you can just
speak to your friendly, humble shoeshiner.
Also published in the Business Daily on September 2 2014 at http://www.businessdailyafrica.com/Opinion-and-Analysis/Why-Kenya-s-real-estate-scene-is-a-bubble-waiting-to-burst/-/539548/2437872/-/item/0/-/royfv/-/index.html
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