As stock exchanges across East Africa continue to suffer from low domestic participation and foreign outflows, real estate brokers have thrived, buoyed by a preference for land and housing over investing on capital markets.
Across the region, market capitalization averages 20.87% of gross domestic product (GDP), compared to a global average of 133.8% in 2020, according to the World Bank. This means that almost 80% of the income earned in the countries goes to sectors such as real estate, which economists say look attractive but not productive in the long term.
“People want land. It is considered the ultimate form of wealth, and from an early age they are educated to know that success means owning land,” said Rufas Kamau, market and research analyst at Scope Markets, a currency trading based in Nairobi.
As a result, East African stock exchanges are dominated by foreigners, who flee the markets at the slightest shock.
The Nairobi Stock Exchange, which has always had between 60 and 70 percent foreign investors, has suffered severe foreign outflows in the past two quarters, causing the total market capitalization to fall by more than $2.5 billion, said Kenya’s Capital Markets Authority.
Yet, compared to some higher-income countries like Germany and Switzerland, Kenya ranks higher in terms of home ownership rates, at 61 percent, according to the 2019 census.
In a previous interview with East Africathe CMA has called culture the biggest challenge to wealth accumulation in capital markets.
“Most potential investors are more fond of tangible assets that they can touch and feel, like real estate, while capital markets can be perceived as complex,” CMA said.
Real estate is actually a resilient asset, especially during times of inflation, but as people are under pressure to buy, they don’t invest, according to Eric Musau, head of research at the Standard Investment Bank in Nairobi. thoughtfully. “The problem is that most of the purchases may not have been well thought out, as an investment, given other aspects, including liquidity, diversification and the age of the investor,” said he declared. East Africa.
“Buying a property also requires a high upfront cost, which could lead an investor into over-indebtedness if not thought through properly.”
In Uganda, most people view capital markets as alternative investments and channel their income into land and property, according to Calvin Bateme, research analyst at Crested Capital, a Kampala-based brokerage firm.
“This is because most people are unfamiliar with capital markets and others see them as too complex,” Bateme said. East Africa.
Analysts say lack of information is not the only reason why East Africans prefer traditional investments like land and real estate to stocks and securities.
“There is a generally low tax regime on holding land, even in areas with well-developed infrastructure. This has made land rent-seeking viable and has been able to come at the expense of economic activity, contributing to making Kenya an expensive place to do business,” Mr. Musau said.
Regulations, which include the ability to advertise and the nature of advertisements, also encourage ownership at the expense of stock markets.
“Because capital markets are volatile in nature, advertisements can only be informative and not persuasive, but property sellers can freely advertise and convince potential buyers, and this is a regulation that applies to the whole region,” Bateme said. East Africa.
“You can invest any amount in the stock market, but for real estate you will need to take out a loan or save for quite a long time,” Bateme said.
“Diversification is key so they don’t tie all their assets to one asset class, which is common for real estate investments,” he said.