Why Real Estate is a Smart Investment in a Fluctuating Economy

Written by: Erick Ochieng

Edited by: Linet Kanario

Most developing countries, especially in Africa, are characterized by economic instabilities i.e. high surges and low dips. Residents in such countries ought to look for smart investments that beat the fluctuations and generate stable income. That said, one might wonder, what kind of investment is strong enough to outweigh the fluctuations. To answer this question, we will dive into a deep discussion of what, in our opinion, is the smartest investment in such economic conditions.

According to renowned global investors Robert Kiyosaki and Donald Trump, the answer is found in one word ‘control’.  There is only one investment that gives people control over the many aspects of generating and preserving wealth and that is… real estate. This centuries old investment is the secret to a reliable avenue for wealth creation, offering advantages such as passive income, appreciation and hedge against inflation. To bring the point closer home we will do a market analysis of our country, Kenya and show how real estate beats the deviations.

A picture of The Loft residences at two rivers by Centum Real Estate
A picture of The Loft residences at two rivers by Centum Real Estate

Understanding Kenya’s Economy and Its Real Estate Market

Kenya’s economy has experienced notable fluctuations in recent years, influenced by various micro and macroeconomic factors. In 2023, Kenya’s economy grew 5.2%, up from 4.8% in 2022, as agriculture rebounded, and services grew moderately. On the supply side, services accounted for 69% of the growth and agriculture for 23%, while on the demand side, household consumption accounted for 70%. Inflation edged up to 7.7% in 2023 from 7.6% in 2022, driven by core inflation (32% of the change), fuel inflation (26%), and cost-push inflation (9% year on year increase in the producer price index).

In the face of this economic turbulence, real estate demonstrated resilience, serving as a hedge against fluctuations. For instance, in the first quarter of 2024, statistics show that the real estate sector contributed 10.4% to Kenya’s Gross Domestic Product (GDP), marking an increase from 10.1% in the same period of 2023. According to the Kenya National Bureau of Statistics, real estate grew by 6.6% in the first quarter of 2024, from 6.2% in 2023 in the same period.

What Makes Real Estate a Smart Investment in Kenya

Despite the economic variances experienced in Kenya, these figures paint a picture of real estate sector’s ability to beat fluctuations. This was achieved through certain advantages that real estate boasts over other investments. These include:

  • Appreciation: Unlike currencies which are likely to go down in value, real estate increases in value over time due to increasing demand. When the population increases, the demand for houses rises, causing property prices to go up.
  • Cash flow: There is an assured and steady stream of rental income from real estate
  • Tax Incentive against depreciation: Once construction is complete a unit may be subjected to wear and tear and obsolescence that brings its market value down. The government gives an annual tax deduction that accounts for this depreciation, hence reducing the tax payment.
  • Creativity: The value of the property improves through creativity. For example, if one purchases a property, they can always improve the fittings and fixture to their taste hence increasing the property value.
  • Predictability: Once the construction of a project is done there is a guarantee of constant income hence one can easily predict their expected income in a certain period.
A picture of RiverBank apartments at Two Rivers by CentumRe
A picture of RiverBank apartments at Two Rivers by CentumRe
  • Leverage: Bankers easily lend loaners money for real estate purchases since there are less risks associated with it.
  • Amortization: In cases where a property was purchased via loan, rent can be channeled to pay off the debt.

Challenges in the Kenyan Real Estate Market

Just like most investments, real estate is not with its own challenges, some of these include high buying prices – especially in prime locations – which might be difficult to raise. Another challenge being a rigid regulatory framework, which requires a competent legal team or firm to navigate through and often is expensive. Lastly, there is a lack of prompt information on the real estate market which makes it difficult for investors to make timely decisions.

The challenges mentioned, however, are minimal compared to the significant returns and efficiency that real estate offers. This fact though does not diminish the hiccups caused and therefore should be addressed by coming up with proper policies that favor real estate purchases and giving financial incentives that support property ownership as well as timely research for proper speculation.