Piracy cash ruled out of real estate boom

A World Bank, UNODC and Interpol study seeking to ascertain the destination of ransom money paid to Somali pirates has ruled out its influence on Kenya’s property prices.

The report says there is more to the real estate boom “than what is claimed in the streets and office corridors”. The report — titled ‘Pirate Trails: Tracking the illicit financial flows from pirate activities off the Horn of Africa’ — sought to clear speculation by assessing assumptions and perceptions on the flow of ransom cash.

It estimates that between $339-413 million (Sh29-35 billion) was paid in ransoms between April 2005 and December 2012.

Over the past eight years speculation has been rife that cash paid to the pirates off Somali waters could have seeped through Kenya’s porous borders to fuel the rapid increase in property prices.

‚Äú… this perception could not be further substantiated,‚Äù the report states, adding that Djibouti, Ethiopia and Kenya have all seen property price increases, putting them out of reach of a growing middle class.

The latest real estate report from HassConsult estimates that property values have increased by 343 per cent since December 2000, with the average value rising from Sh7.1 million to about Sh24.4 million in September 2013.

The World Bank attributes this hike to increased bank loans to the real estate sector, citing Central Bank data, flows of remittances and general supply and demand for houses.

“In addition to the acceleration of credit to the private sector, in Kenya, there is also a large informal economy that fuels the growth of the real estate sector. The largest of these, situated in the neighbourhood of Eastleigh in Nairobi, is a booming commercial centre with limited formal control by the authorities,” the report reads.

A Kenyan Revenue Authority study in 2009 found that Eastleigh‚Äôs informal economy contributed approximately $13 billion to the national economy ‚Äî nearly a third of the country’s GDP ($42 billion).

Many of the new skyscrapers in the neighbourhood were built over the last five years, attributed to Eastleigh being “at the centre of a network of trade connecting the Arabian Peninsula, Somalia, Kenya and East and Central Africa, with the Somali business community as the common thread”.

“When available data from both the formal and informal economy are reviewed, the increase in the price of houses appears more likely to be due to a number of factors unrelated to piracy.”

The report says the money pirates made “is a drop in the ocean” compared to the bank credit and diaspora remittances flows into the real estate sector.

“Consequently, the ransom payments cannot influence the property prices, as is suggested by many in the public and private sectors.”

It adds that available data suggest that the perception piracy proceeds fuelling real estate growth in Kenya “is an exaggeration”. It however could not establish the percentage of real estate finance through bank credit and remittances, or the exact other sources of funds to the sector.

The study does not rule out the possibility of a fraction of the piracy cash having been channelled into the sector, but rules out the possibility of such investments influencing prices.

“As a result of the opacity of money transfers into and out of Somalia, it is inherently more difficult to determine the flow of cash into the real estate sector and its source.”

It says shortage in supply of housing units and the increase in demand due to population growth pressures have also resulted in an increase in property prices over the last several years.

“Such an imbalance in supply and demand of houses, and greater access to bank credit, will inevitably lead to an increase in real estate price inflation,” it says.

It says that over the last five to six years, real estate prices have increased 400–500 per cent in Kenya, with prices in the Runda, South B and C and Kilimani areas of Nairobi increasing from Sh5 million to Sh25 million in the period.

Via: http://www.the-star.co.ke/

Original Article