I love real estate. I love the way one can convert an idea make it into a concept then finally into a livable space.
But, you hear it in the news all over. It is doom and gloom in the Kenyan real estate sector in Kenya. People are being auctioned off. Yet, ironically, the auctioneers are complaining that they do not have customers. Banks on the other hand are refusing to give loans because they fear customers will default. This is a death spiral.
My first disclaimer: I am no economist. These are just my observations.
During the economic boom following the end of rule of (now Late) Daniel Arap Moi, there was an equal boom in the real estate market. Property prices were doubling, tripling. Everyone became a real estate expert. There was an explosion of signs from “ägents” all over. People started “flipping” all manner of plots in far flung areas and you could not understand how they got customers. But they did. These plots, were in areas that lacked roads, water, electricity and social amenities. To be frank, these were empty pieces of land. Yet, they were hot cakes. We had chama out of town weekend excursions to view these pieces of land. It was madness. Many times you would feel odd or a “fool” when you chose not to indulge in the craze. The “smart” people always managed to get a customer as they flipped this land. For many these pieces of land were an investment for the future.
Do not get me wrong, there were people who were successful in making good deals. This was hard though as alot of money was chasing few good deals. Good deals rarely made it to the open market. They were “snapped up”. The end result was high prices. This discouraged some of us who were interested in real estate. We were disillusioned. Our offers, whenever we had a chance to bid, were scoffed at. “That is too low” were many retorts. Phone calls were never returned. It was clear. The property was gone.
We thought this was going to be our normal experience as a potential real estate investors in Kenya. The market and the Kenyan real estate sector was not for novices, many of us thought. But things, in my opinion, began to change in 2016. That was when I noticed an upsurge in auction notices in the newspapers (Monday paper to be precise)
My thinking is that we had two reasons for the boom in the real estate sector. First, like in many sections of the economy, the change of guard in 2002 increased investor confidence and people began to invest. It was a feel-good period that fueled the economy. The second cause of the real estate boom, in my view, was artificial to an extent. Our economy is a liberal business environment that is attractive investors. This is good. This also bad as our economy began to attract “dirty” money . This illicit money is what in my view squeezed out sensible economics in the real estate sector. This money began chasing every real estate opportunity that appeared. When opportunities dried up, more projects were created. More people bought. Banks entered the fray and fueled the cycle with loans against highly priced properties that defied economic sense. The cycle continued unabated for years. The real estate market was on steroids. Everybody liked it. “You can never fail in investing in soil” is a famous saying in Kenya.
Like every such cycle, there is a down turn. Always. I am not sure what triggered this down turn but I can see the squeeze on the “dirty” money – through some well publicized efforts like the “War on Corruption” and replacing the old Kenyan currency – having a significant impact. It is not uncommon nowadays to hear people say, “there is no money”.
The result of this squeeze has seen the market begin to correct its prices, albeit slowly. The ugly side of this downward price correction in real estate is the suffering of people who were holding onto highly priced property as an investment or holding huge loans that need high repayments. This damaged people and families. I have seen it first hand. It is terrible.
Are we at rock bottom yet? I cannot tell.
But in any gloomy situation you have the contrarians. Always. The ones who see the opportunity and take a leap. Like Peter ( The unassuming millionaire) who I recently blogged about, is still making a good return from real estate in this “economy”. Also Ken, a finance guru, who is in my opinion, a great real estate investor, is churning out real estate projects in this market that are profitable. He has a flurry of people who want to invest in his projects ( I need to blog about this amazing guy). It is possible.
My learning from all this:
- Life is about “booms” and “glooms”. There is always going to be a bubble. Something that excites people. Something that makes people at times act crazy. These bubbles burst. Always. People have poor memories. This burst will be soon forgotten. We are human.
- Learn to identify a bubble. If the deal does not make economic sense, walk away. This, I know is impractical due to what I have mentioned in one above. I have been a victim of this craze.
- Learn to identify a burst. You need to sense when the opportune time to invest has arrived. I can bet the majority will probably not see the burst easily. The reason is that there is a grey area between the boom and the gloom. The two interchange gradually. Stick to number 2 above by appraising each investment to know whether it make sense to invest.The numbers do not lie. Once you see a shift in the economics then you know it is time. There are other indicators to watch for e.g. increase in the auction section of the newspaper, increase ” for sale signs”.
- Be brave to go against the grain like Peter and Ken. In life there are moments that can significantly change your life. That is when you are brave. Being brave in bursts is important. You will be discouraged. You will be laughed at. However, you have to go back to number 2 above and look a the numbers. If it makes sense then forge ahead.
- Finally, you need money. With bursts there will be a shortage of money due to fear. Without money you will not be able to invest. I believe that in market bursts, new models to raise funds are needed that attract investors to your projects. Again, the numbers do not lie. My eyes have been opened by the likes of Ken, who seem to attract funding despite “the economy“.