By Ian Henderson
Managing Director Superior Homes Limited.
First to ask the question ; is there really a bubble? I don’t think there is. There was a bubble in the USA, the UK and Europe which grew until it burst in 2008 and on that occasion the growth was tangible, mistakes clearly evident in hindsight and the impact on commerce and society huge.
My own business in the UK has only now gained the ground that was lost in 2008 when commercial rents tumbled and rental voids increased. After nearly ten years we are now back to the rental incomes that makes up the lost ground.
In the years leading up to 2008 some banks allowed customers to ‘self-certify’ their earnings when completing mortgage applications and they then lent money to the value of up to four times annual earnings without any real due diligence.
The loan funds could then be used to fund the purchase of a property that was valued at only 95% of the loan which created a situation where the lender was exposed if the borrower defaulted.In the USA loans were made against second rate properties such as poorly constructed houses, houses in run down areas and trailer homes.
The exposure to risk was exacerbated as the market crashed and values fell , which is one reason why it is wise to restrict loans to a maximum of 70% of the asset value.
The easy availability of money lead to a very buoyant housing market; developers found very few projects were rejected. Off plan sales were further strengthened by speculators buying several houses by paying 10% deposits and signing binding sale agreements and a great deal of easy money was made by speculators ‘flipping’ houses to new owners once they are completed.
As we all know good things don’t last forever and in the space of a month the market crashed. The world’s largest bank had to be bailed out by the UK government, all banks reigned in lending, many speculators caught holding contracts with no buyers to sell on to left their deposits behind them and developers went bankrupt in their hundreds. Now that was a bubble.
Northern Rock UK were a particularly irresponsible company in this regard. Concentrating more on sales targets and less on if the customer could actually repay the loan, they made catastrophic mistakes such as 110% lending. Believe it or not, you could walk into a branch with no deposit and walk out with enough to buy your property and also an extra 10% to spend as you wish. Crazy times indeed!
Kenya on the other hand is a tighter ship. The cost of money to developers and to home buyers can swing dramatically but it is generally high at around 16 to 24%. Banks are cautious and they must be convinced of the business case before lending only up to 70% of costs. In recent years property development has attracted a number of professionals who can deliver good product and there is a healthy choice in the market which dissuades speculators – and there are comparatively few as a result.
The industry is very flexible and when sales dry up, developers are quite prepared to rent out completed units on returns of around 6% and wait until the market picks up. Yes, the Kenyan real estate market does go up and down but not yet to the extent of a bubble which may be about to burst. The construction, lease and sale of go-downs, however, may be another matter altogether.