Impact of COVID-19 on Kenya’s Real Estate Sector

Prior to the COVID-19 pandemic, Kenya’s real estate sector was poised for growth in 2020 having begun to show signs of recovery in 2019 from the sluggish growth experienced in 2017 and 2018. This was evidenced by the sector’s growth, which came in at 5.3% in 2019, 1.2% points higher than 4.1% in 2018 according to KNBS Economic Survey 2020. In terms of performance, according to our Cytonn Q1'2020 Markets Review, the real estate sector recorded moderate activity with average rental yields improving marginally in the residential and commercial office sectors to 5.2% and 7.8%, respectively, from 5.0% and 7.5% in Q4’2019 as the retail sector registered 0.1% points drop in rental yields to 7.7% in Q1’2020, from 7.8% in Q4’2019. It is, however, important to note that, while the first Kenyan case of Coronavirus was reported in March 2020, its effects on the real estate sector had not been fully felt by the end of Q1’2020.

With the onset of the COVID-19 pandemic, unprecedented disruption to the Kenyan economy has been witnessed over the past few months, with the real estate sector experiencing shocks attributed to lockdown measures and diminishing disposable income by a majority of Kenyans. The immediate impact on the sector has been; (i) Reduction of the labor force and disruption of supply chains, which is expected to translate to longer development periods, (ii) A slowdown in building approvals as public offices such as City Hall remain closed, (iii) Reduced construction activities by developers in a bid to reserve their cash at a time when market liquidity is likely to decline, (iv) Little to no collections as Lands Registry was closed hence banks and mortgage buyers not releasing funding, (v) A slowdown in collections for those who have purchased off-plan real estate on installment plans, and, (vi) Reduced funding to the sector due to general risk aversion during the pandemic.

The government continues to adopt policy reforms geared towards cushioning the real estate sector through bills and regulations such as; (i) Lowering of the Central Bank Rate (CBR) to 7.0%, and, lowering of the Cash Reserve Ratio (CRR) by 1% to 4.25%n through the Central Bank  to increase the available cash for on lending, (ii) Announcing a Kshs 53 bn 8-point stimulus programme which, among others, seeks to offer soft loans to hotels and related establishments through the Tourism Finance Corporation (TFC) thus stimulating the hospitality sector, (iii) The Tax Laws (Amendment) Act 2020 amendment to the Retirement Benefits Act, which will allow the use of pension savings towards purchasing a residential home in addition to securing a mortgage loan, at a time when household incomes have been adversely affected by the economic downturn, and, (iv) The Business Laws Amendment Act 2020 recognizes the use of advanced electronic signatures and electronic signatures as a valid mode of execution of documents in Kenya. This is poised to improve the ease at which land transactions are carried out, at a time when government offices such as lands registries remain closed.

The current pandemic is expected to shape the future of the real estate sector post-COVID-19 given its implications on economies and health which have been dire, leading to an abrupt change in people’s way of life. This is expected to continue over a sustained period thus influencing occupiers and end-users of real estate in unprecedented and unique ways, which are expected to have implications for the real estate sector.

In conclusion, the impact of the pandemic on the real estate sector will be determined by its duration. The market is expected to experience a slow recovery post-COVID-19 as uptake will be subdued due to depressed income levels and changed priorities by prospective investors. Despite the continued negative impact of the COVID-19 pandemic on the real estate sector and the economy as a whole, we remain neutral on the real estate sector’s outlook. We expect the sector to be cushioned by, among other measures; (i) Continued public-private partnerships between County governments and private developers with the aim of driving the affordable housing initiative, (ii) Supportive government policies geared towards enhancing homeownership, and, (iii) The National Government’s use of monetary and fiscal policies to sustain liquidity in the economy.