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The mystery of Kenya’s property boom

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What is driving Kenya’s property boom

WHAT Kenyan home buyers want is a picket fence, friendly neighbors and safe streets for their children to play in. For 13m shillings (about $125,000), well-off Kenyans can buy a nice-looking semi-detached house with about a quarter of an acre of garden.With most of its residents commuting to Nairobi along a new motorway, it is one of the Kenyan capital’s first exurbs. But what is driving Kenya’s property boom?

Nairobi has long been a city of colonial villas for the wealthy and privileged, and teeming slums for almost everyone else. But a building boom is starting to change that. At the edges of the city, and in towns nearby, new suburbs are fast replacing coffee plantations. Towards the center aging bungalows give way to towering apartment blocks. Property prices have increased almost fourfold since the early 2000s, according to reports from Institution of Surveyors of Kenya.

It certainly feels like a frenzy. Property brochures littering shopping malls; empty plots of land sports signs announcing that they are not for sale, to deter con artists who try to sell land they do not own. And yet behind it is a mystery: nobody is quite sure where the money is sourced.

Is the property boom fueled by a mortgage boom?

One thing that is not fueling the activity is a mortgage boom. According to estate agents, just 22,000 home loans exist in the whole of Kenya, and half of these are reckoned to be to bank employees at preferential rates. Loans at market prices are punishingly expensive, carrying interest rates around 15% or higher. Rents, by contrast, are cheap: mortgage repayments can be two to three times as dear. As a result, almost nobody gets a mortgage to buy a house to live. Other stories

Instead, the vast majority of properties are sold to investors, who pay in cash. They are not interested in rental yield. They just want a relatively safe store of money in a country that has high inflation and an underwhelming stock market. Extended families will often club their savings together to buy a property as a sort of family trust fund. It helps since owning land is seen as a signifier of wealth in Kenya. “If you own land, in the worst-case scenario, you can still grow crops. Many tell how, despite their misgivings, they are still persuaded by his family to invest in some property outside Nairobi.

Source of Funds

The source of this glut of cash is unclear. Some come from savings; some from emigrants who repatriate earnings from abroad. But there are hints of less salubrious sources. The spoils of corruption are rarely kept in foreign bank accounts these days. Instead, are invested at home. And just as Russians are blamed for inflating house prices in London and New York, in Kenya some blame wealthy Somalis.

Many well-off Kenyans worry that a crash is coming. But since the bubble is not puffed up by borrowing, that seems unlikely. The commercial-property market may deflate a little since shopping malls are built in places where the population density is far too low to support them. The challenge for investors is to find tenants to fill all the new houses. They had better hope that Kenyans do want to live the suburban dream, picket fence and all.