Monday, July 11, 2016

A better picture, please.

Kenya's property market is in a bubble. The bubble is still inflating, and if it doesn't get deflated gently, it will burst very painfully. Real estate prices are almost totally unmoored from their true values, and what's keeping them up there is hope, greed and fear (and a generous helping of dishonest money). Everyone's a property speculator and dealer. All power to them, but when the music stops, there'll be plenty of people left without chairs. When the tide goes out, you'll realise how many people were swimming commando. Take your pick of trite metaphor, but don't say you weren't warned.Wallace Kantai
According to Hass Consult, a construction company, "15,000 units were released into the market in 2013" in Nairobi. According to Hass Consult, Nairobi alone needs 200,000 units per year to satisfy the demand for housing across all segments. Taken together with Mr Kantai's assertion of a housing bubble and the reasons for the housing bubble, a few questions come to mind.

First, are banks at risk if the bubble bursts? Among the findings of the analysis of Imperial Bank's books was that a great deal of the insider trading was for the purpose of real estate investment/speculation both in and outside Kenya. Though no proof has been advance, it is alleged that much that is driving county real estate development is not credit advanced by financial institutions but hundreds of millions looted from county coffers. If the Ethics and Anti-Corruption Commission and the Asset Recovery Agency are to be believed, a significant proportion of the missing NYS billions will be found in high end real estate. So, how much of the real estate bubble is financed by the banking sector?

Second, if the banks are not exposed, are they complicit in turning black money white as the driven snow? It is now a statutory requirement that all transactions in real estate (that includes housing, too) must take place through registered financial institutions. Most of it takes place through banks. The Dubai Bank debacle exposed a seamy side to bank supervision: it is almost non-existent. Say someone manages to "obtain" a hundred million from somewhere and wishes to clean it swiftly, a bank would be a natural agency. (I'm reasonably informed that on an "investment" of five million, a hundred million could be "obtained" relatively easily.) A bank could use its accounting system to obscure the source of the hundred million, take its agency fees and arrange the purchase of real estate and quietly close the client account with the CBK's bank supervisors being none the wiser (or richer by a couple of million).

Third, how much of the speculation in Kenya's, especially Nairobi's real estate, is by foreigners or non-resident Kenyans? Of those foreigners, what proportion are laundering black money and do they care if they take a fifty percent haircut on their real estate investments? Again, given the need for these transactions to flow through registered banks, is it possible that we are incapable of keeping track financial inflows/outflows or unable to enforce statutory (and basic) KYC protocols in our financial sector? Whatever the answers are, there is much of the financial infrastructure that seems insulated from regulatory oversight and that has become the preferred conduit feeding air into the real estate bubble.

Fourth, how much of the bubble has been derivativised? Again, the hundred million shilling real estate "investment." Once the real estate has been bought and registered, it becomes available as collateral for other advances of credit which can either be used to invest in other real properties or, as is becoming increasingly popular, assets with a decidedly impermanent character such as Range Rovers, Jaguars, Ferraris, Porsches or Bentleys. If for whatever reason the hundred million is recovered from whence it was obtained, the hundred million investment is unlikely to be liquidated for that amount; more likely it will be between 50 million and 25 million shillings less. And that is the optimistic assessment if the 2007/08 US housing crash is any guide.

Finally, what happens when the crash comes? Will serikali middle class types suddenly flock en masse to Kitisuru, Westlands, Kilimani, Milimani, Upper Hill or Runda? I don't think so. The pain will be felt all over and more so in the civil service where, for sure, a painful round of austerity will ensue (that is, allowances will be pared down to the bone without mercy for the rank and file). "Asset managers" will find themselves without clients; only well-invested funds and "old" money are likely to survive the collapse. RMA might yet go the way of CMC. Will Nairobi come to resemble Sydney or Las Vegas, with rows upon rows of unoccupied, high end real estate attracting vandals and squatters? I wish someone had a better picture.

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