A real estate bubble burst is always imminent. In a country where the real estate industry contributes a good chunk of the GDP, it is important to understand what a burst means. A real estate bubble burst happens when there is decreased demand in housing thus leading to an increase in property inventories. These issues in real estate begin with a misconception that land and building investments will always do well no matter what. This coupled with little investment wisdom and an over-inclination to risk. It is important to know what a failing real estate industry looks like. This will help you decide if you should cash out or hold on until the wave passes. It could also help you decide if you are the kind of person who invests in real estate.
More inventory
This refers to the number of properties on the market ready for sale. A healthy market sells a certain number of properties every month. If this number goes down, it means that there are more houses in the market. This means that the inventory takes longer to clear than it would in an ideal market. For example, if 10 houses are sold every month then it will take 5 months to sell 50 properties. However, if only 5 properties are sold then it will take 10 months to sell those same properties. There will be more inventory than usual. More inventory may indicate that there are more development and more people selling their properties. It could also mean that fewer people are buying houses. If the demand is low then prices will have to be reduced which negatively affects the market.
Longevity on the market
In an ideal situation, a property stays on the market for about a week. This is usually the most critical time for the property. After the first week then the possibility of selling the property starts decreasing. If the property stays past a month then there is more worry about whether the property will sell at all. If more and more properties are staying on the market for too long it means that people have little interest in buying properties. Again, little to no interest means the necessity to reduce prices and therefore a weak real estate market.
Accelerated appreciation
Every once in awhile property prices will be increased. This increase is brought on by increased demand. If there is more demand than supply then obviously the only way to balance things out is to increase the prices. However, in some cases, the prices will be increased abruptly and at an accelerated pace. This trend goes until it reaches a peak after which it comes down hard. This is when the market crashes.
More price reductions
Just like there are appreciations there are also price reductions. These are brought on by decreased demand and more supply. The price reductions are meant to reactivate demand. A price reduction is also used as a remedy for a longer than desired market presence. If these price reductions become frequent then it means that the market is weakening. Developers have been forced to reduce their rents significantly to stimulate uptake of space. An example is Rosslyn Riviera Mall that offered half a year’s worth of free rent. It means that the market is no longer supporting buyers and sellers as it should.
Higher tenant turnover
Tenant turnover is the frequency with which tenants are moving out of your building. If this is high in one building then that is choked up to issues in that particular building. However, if it is a situation happening overall then there is a problem. If this is followed up with downgrades then it is safe to say that it is becoming harder and harder to hold tenancies. If tenants are finding alternative accommodations then landlords are not making enough money. This will affect the contribution that the real estate will make to the GDP in that particular period. This could be a sign of a failing industry.
Longer vacancies
How long is it taking for landlords to fill vacancies? The demand for housing in Nairobi and Kenya, in general, is pretty healthy. However, if it comes a time that landlords have trouble filling vacancies then there could be a bigger issue. The industry could be weakening due to decreased demand in rental housing. Another good example of this is how long it has been taking for malls to rent out their spaces. The longer this prevails the higher the chance that the market will be affected in the long term.
Smaller expos
A few years ago the Kenya Homes Expo saw perhaps the least attendance ever. This was amidst the numerous successful and highly attended events in the years preceding that particular one. This shows decreasing interest in real estate as an industry as opposed to just the event. That particular expo was in the wake of the post-election violence so perhaps this could explain the dismal attendance. They’re still quite a bit of fear towards real estate investment at such delicate times.
Political instability
Political instability is a sure sign that the real estate industry is about to fail. After an event, the entire economy is left in shambles. The real estate industry is one of the elements affected the most. People buy less and developers slow down. This leaves the industry weak for a while until things start to get back on track. In some cases, price reductions are necessitated to jump start things again.
Reduced building material uptake
How is the construction material market looking? If building materials are not being bought then it means that buildings are not coming up. If buildings are not coming up then it means that developers are not keeping in tandem with the demand for housing. This leaves the market imbalanced with less supply than demand. If developers are shying away from building this is a good sign that the market and overall industry is not doing well and that there could be an impending crash.
Speed of construction
The speed at which developments are coming up matters. If developments are coming up too fast then there is a risk of flooding the market at the same time. A good example of this is how malls sprung up all over Nairobi and its environs within a period of five years. In the end, these malls remained empty for extended periods of time. If they are coming up too slow then there could be a delay in supply which again is not good as the demand may get out of hand during that time thus driving prices up.
How to Survive a Failing Real Estate Industry
Due diligence
If you are looking to invest in real estate, it is imperative that you do your research first. How is the market looking? Is there a chance that it is headed for the cliff? The market operates in cycles. Which part of the cycle is the market currently in and how soon until the next phase hits? These are important questions to answer as it will make the difference between success and failure in real estate. If you invest at the right time then you have a better chance of surviving when the market is not doing quite so well. It helps to engage professionals too.
Affordability
The issue with the real estate industry in Kenya is the abundance of luxury housing and property. This leaves the supply for affordable housing insufficient. It creates an increased supply for luxury properties and housing too. You should, therefore, opt to do affordable properties. Target the real middle class. If you walk around the newly build malls and developments you will find that spaces that had been previously advertised in bulk have now been partitioned and are advertised in smaller chunks. This is a good way to go around the difficult times in the market.
Investment wisdom
Wisdom is going to be your biggest asset. Your investments should be executed with wisdom. This you will get from doing your due diligence. You will get it from debunking myths like that real estate investments are a sure thing. If you think that you can never go wrong investing in real estate then just walk around the upcoming commercial properties. See just how many of these properties are sitting vacant. If you are going to enter real estate and remain there then it is best to work with facts. Get yourself a mentor. Do not be obsessed with risk on the assumption that you are guaranteed to enjoy a bigger reward.
The real estate industry contributes an important chunk of the Gross Domestic Product. It works in cycles, goes up and down at different times. It has some attractive returns too. However, it is important to err on the side of caution when investing.
