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Real estate rent bubble in Nairobi threatens US style property crash, it is claimed

A rapid rise in property prices is taking a toll on mortgage financed investors who are finding it increasingly difficult to service the loans since rents are not sufficient to cover the monthly mortgage repayments.

At the heart of the problem is the fact that rents in many parts of Nairobi suburbs are facing a property price bubble as they have not increased at the same pace as property prices. There is a concern that rising default could force banks to be choosier in backing real estate development projects.

Such a scenario, warn property experts, could lead to a crash of the industry, as happened recently in the US.

‘If you are buying such property purely as investment you are likely to get into problems. Due to the high property prices many people have had to look for money elsewhere to top up their monthly mortgage repayments since the rents they collect are not enough. Prices are very high yet the real value is very low,’ said Godfrey Mutuma, a director at Vidmerck, a Nairobi based real estate firm.

Property prices in Kenya started rising five years ago mainly because of high economic growth. Five years ago, a three bedroom flat in Lavington, Kileleshwa or Westlands would sell for about $54,000 and obtain a rent of around $450 a month. Now a similar property costs around $160,000 to $200,000 but only fetch a rent of around $900.

Mortgage companies confirmed the rise in defaults and said that one problem is that to encourage home ownership good deals were offered but now investors can’t afford their loans.

‘Mortgage repayment schedules show that if you depend solely on rent to repay the chances are very high that you could default. You have to top up by more than double the rent amount,’ explained Mutuma.

According to George Laboso of the Mortgage Centre, Kenya Commercial Bank’s mortgage division, investors should try to see their way through financial problems as eventually rents will catch up.
‘From experience we have seen that rents always catch up with the monthly mortgage repayment after the fifth year,’ he said. ‘There is no cause for alarm. Unlike in the US where mortgages were given to people who could not afford them in Kenya we are responding to demand and people’s ability to pay is checked thoroughly,’ he added.

But Mutuma is not convinced. ‘If we carry on like this we might have a market crash,’ he said, adding that he believes that rents are likely to stagnate and even fall in some areas.