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Nairobi dropped 10 places in a ranking of the world’s hottest high-end property markets as the high cost of loans and political uncertainty slowed appreciation of house prices.
The Wealth Report 2013 by global property consultancy Knight Frank shows average property prices in Nairobi’s high-end estates rose by 10 per cent in 2012, placing Kenya’s capital in position 11 out of 80 cities surveyed.
Knight Frank attributed Nairobi’s drop to the increased lending rates, and political noise that heightened in the months prior to the March 4 General Election.
Knight Frank (Kenya) managing director Ben Woodhams told the Business Daily that attacks by Al-Shabaab terrorists, which prompted Kenya’s military incursion into Somalia, had also tempered property price increases.
Indonesia’s capital city Jakarta was ranked the hottest property market as prices in the city’s high-end estates rose 38.1 per cent, followed by Bali which recorded increases of 20 per cent, Dubai-UAE (20 per cent), Miami-US (19.5 per cent), Sao Paolo-Brazil (14 per cent), Gstaad-Switzerland (13.2 per cent), Auckland-New Zealand (12.7 per cent), Los Angeles, US, (12.5 per cent) and Shanghai, China, (10.8 per cent).
The cost of borrowing rose sharply in late 2011 after the Central Bank of Kenya (CBK) increased its benchmark rate to 18 per cent from 6 per cent in a bid to stabilise the weakening shilling and tame run-away inflation.
The domino effect was an increase in lending rates for both developers and borrowers, which slowed uptake of construction loans and mortgages as the cost of loans rose above 25 per cent.
Kimiti Wanjaria, a director of real estate developers Serene Valley Properties, said high interest rates made it costly for both developers and borrowers, slowing both construction and uptake of complete units.
But for him the low point came midway through the year, as election fever paralysed business. “Towards the third quarter business plummeted because of the elections,” said Mr Wanjaria.
In its 2012 report, Knight Frank had foreseen the General Election, high interest rates and insecurity in the Coastal region as factors that would dethrone Nairobi and Mombasa from their positions at the top two hottest property markets globally.
“Recent events such as the kidnapping of tourists staying on the north coast and a sharp rise in interest rates to almost 25 per cent also highlight the potential vulnerability of some emerging prime markets,” said the property firm’s Wealth Report 2012.
Despite the drop, Nairobi’s prime property market rose the highest among Africa cities, and was only joined by Cape Town, South Africa which took position 28. Average prices in equivalent areas went up marginally by 1 per cent.
Property in Kenya’s Coastal areas did not make the list in 2013 despite being placed second in 2011. Average prices in high-end areas increased by 20 per cent at as per the 2012 report.
“The startling performance at the top end of Kenya’s housing market is a particularly interesting example of this. Price growth in both the Kenyan capital Nairobi and the country’s Indian Ocean coastal hot spots outstripped all other Prime International Residential Index (PIRI) locations, with Nairobi,” said the Wealth Report 2012. Other reports also showed that Nairobi’s star-status dimmed in 2012.
The Hass Consult Composite Index showed that returns in satellite towns outside Nairobi performed better than the capital.
The Hass Consult Composite Index looks at rental yields and asking prices of stand-alone houses, town houses and apartments across 43 suburbs in Nairobi and neighbouring counties.
At the time Hass Consult said that select suburbs within Nairobi had “peaked”, which acted as an incentive for investors to look outside Nairobi.
Hass Consult said that affordability in Nairobi’s high-end areas was affected by high interest rates that discouraged would be home-owners from taking loans.
Mr Woodhams said that the market has begun to recover, with prices starting to go up after conclusion of elections and interest rates beginning to fall.
Last week the CBK lowered the base rate by one percentage point to 8.5 per cent, which ought to give commercial banks the cue to start lowering their lending rates.