Fate of property market in new currency drama

In a move that still has the country talking, last week, Central Bank of Kenya (CBK) Governor Patrick Njoroge announced that the current Sh1,000 note will cease to be legal tender from October 1.

Those holding this currency have been advised to deposit it with commercial banks, their other options being limited to exchanging it for foreign currency at forex bureaus or spending all of it before the October 1 deadline.

Although CBK’s move has since been challenged in court by activist Okiya Omtatah and East African Legislative Assembly MP Simon Mbugua in separate petitions, the directive is sending jitters across the property market.

CORRUPTION

Ms Diana Kituku, a financial engineer who consults for investors in the industry, reveals that some stakeholders are expressing uncertainty over the short-term and long-term impact of the move.

“The move was necessary to combat corruption and black market trades. However, as people struggle to move money that they had previously hoarded back to the formal economy, we can expect some teething troubles as the economy adjusts,” Kituku says.

Johnson Denge, the Senior Manager for Regional Markets at Cytonn Investments, downplays the effect of the move to mop up the Sh1,000 note, saying that demonetisation is A normal practice across the world, citing India as a case study.

India’s latest demonetisation exercise took place in 2016, though it is important to point out that the announcement of demonetisation was followed by prolonged cash shortages in the weeks that followed, which created significant disruption throughout the economy.

CASH SHORTAGE

Drawing lessons from India, Kituku is of the opinion that Kenya might be facing an acute cash shortage in the coming days as people rush to deposit to banks to exchange their old notes for new ones.

“What this means for the property market is that in instances where developers pay for their goods and services in cash, we may witness biting delays due to lack of cash.

"In India, services such as transportation of building material were disrupted as transporters refused payment in demonetised notes. Manufacturers of paint, cement, steel and other building materials had to reduce production in the few months following the demonetisation as they were hit by the cash shortage.”

Denge expresses optimism that a cash shortage is unlikely to occur if the government manages the process efficiently.

“How the property market will react is entirely dependent on how CBK will run the process of demonetisation. It is important that they produce sufficient new notes and circulate them into the economy at a rate that will not leave any gaps,” Denge says.

PRICES

Kituku predicts that in the days following the mop up of Sh1,000 notes, we might experience a slight increase in property prices as people with liquid cash rush to spend it by purchasing property, an assertion that Denge is doubtful of.

He posits that prices in the mainstream property market will largely remain the same.

“People do not purchase homes using notes and coins. Mainstream developers too hardly ever pay for materials and labour in cash. Most of these transactions are done electronically, little will change in this front.

"Be prepared however to witness slightly lessened demand for homes as people resort to a wait-and-see attitude in the next coming months."

For contractors and individual builders serving the low-end market where many factors of production are paid in cash, it is possible, according to Denge, that there might be a rush to acquire and stockpile material such as building stones, sand and timber as people with old Sh1,000 notes rush to spend them.

LOANS

Should we experience a cash crunch, this low-end segment, mostly in rural areas, is likely to be affected the most especially in terms of casual labour as the labourers are almost always paid in cash.

Denge is anticipating an economic boom that will last a few months after the demonetisation deadline.

According to him, as people inject more cash into the banking system, the fiscal well-being of the country will be improved and banks will be more likely to issue out loans to property developers and buyers.

This, he says, might even lead to lower interest rates being charged on borrowers by banks.

Kituku agrees with Denge, adding that as more people take their wealth into the formal economy, the taxman will have an easier time tracking defaulters and widening the tax net. A wider tax net, she states, will definitely buoy the economy.

DO NOT PANIC

Both experts advise property investors not to panic. “Investors will be flooded with a lot of information in the coming weeks from experts and charlatans alike. It is important for investors to seek advice only from their banks and accredited investment institutions. The CBK should also conduct wide-reaching public-education exercises,” Denge advises.

Kituku says: “My main advice to investors is that they should avoid rash decisions because even if property prices fluctuate greatly in the coming weeks, the market is likely to self-correct and return to normal a few months later.”