An investigation into patterns of property values in Nairobi

Abstract

Real property markets are well known for being remarkably imperfect. This therefore, complicates investment decision making owing to the high risks involved. This study addresses the problem of avoiding poor decisions by recognizing the pitfalls likely to be faced by different types of investors. Poor decisions in real property transactions are not likely to be merely random occurrences, but mostly systematic behaviors by different types of parties according to the roles that they play in the markets. The quality of " decision making depends on the extent to which any type of party is able to , .' come to terms with imperfect market environments. This study investigates decision making trends that are likely to be occasioned by market imperfections affecting different types of parties in different ways. The objectives of the study are to investigate the types of parties in real property transactions that are likely to make poor decisions and the extent of the resultant losses. Differences in figures from the three COl111nonmethods of valuation are recognized as losses or gains to different types of actors in the real property industry. This is because the methods give figures indicative of the' values the main actors may give or-receive in respect of any property. The parties are developers as indicated by the cost method, landlords and tenants as indicated by the income method and buyers and sellers as indicated by the sales comparison method Properties numbering 398, already valued in the process of being bought or sold over a period of not less than three years using the three methods are randomly sampled out from 19 randomly selected estates of Nairobi. They .~ are then statistically tested for the existence of three patterns, theoretically derived through literature review and market observations. The patterns are related to three social-economically different zones of Nairobi and are indicative of decision making trends by different types of parties namely, developers, landlords and tenants, buyers and sellers, rich, middle class and poor. The main finding of the study is that the patterns of property values or decision making trends are prevalent in most areas. The types of parties which make gains or losses in each type of zone are identified and the magnitude of the losses or gains estimated. Policy makers are informed of the happenings in the markets. They are also directed by the patterns to the markets in which they can intervene with better taxation, subsidy, advisory and participatory policies. Investors are informed of the consequences of investing in each of the differently classified areas of the city and advised on better investment approaches. Valuation professionals are given a better approach of assisting their clients in making prudent transactional decisions.