For the five years that the developer of Baraka Estate in Nairobi has been in the real estate sector, the outlook has been quite promising.

Cheap credit from banks due to prevailing low interest rates, stable building costs and high demand for houses has made returns on investments worthwhile for Sterling Homes.

Now managing director Barack Pattni sees a threat in the horizon. "Apart from the violence and the rising cost of commodities, real estate business has done well over the last three to five years," said Mr Pattni.

Mr Pattni represents a number of property developers who have cashed in on the construction boom for reasonably priced houses targeting the middle and upper class.

While constructing Baraka Estate, the developer was able to push as high as 60 units a year into the market.

Most developers have relied on low interest rates brought about by high liquidity in the market, relatively stable construction cost and interest in the real estate industry to make decent profits.

However lately, there are signs that future profitability of the industry may be in doubt.

The rising fuel, food and other commodity prices which is driving inflation through the roof is creating a black cloud over the silver lining of the real estate business.

Construction materials, for instance, are heavily dependent on the cost of energy, the main input in the construction process.

Producers of paints, corrugated sheets, cement and steel bars, all of which take about 30 per cent of construction costs, have seen their expenses soar sharply and they now warn consumers to brace for further price increases as they pass on the additional expenses to consumers.

This has led property developers to raise the alarm that the ongoing construction boom is set for a slow down.

Bamburi Cement recently raised the price of its products by about 16.5 per cent. A 50 kilogrammes cement bag now costs Sh765 from Sh635. Other players, East Africa Portland Cement and Athi River Mining have since put cement consumers on notice, saying that a price increase was in the offing, driven by the rising input costs. The cement makers attributed the increase to rising costs of production triggered by rising fuel expenses.

This was when oil had not reached the $100 a barrel. Energy expenses account for between 40 and 50 per cent of the cement makers' costs.

Escalating costs

But with oil prices having risen by over 84 per cent to an average $125 a barrel since the start of the year, fears of imminent increase in prices of basic commodities are playing out in the open. It is clear that a sustained increase in prices will eat deep into the cement makers' profits which will in turn be passed on to the consumer.

The construction sector will also face escalating costs for steel products and corrugated sheets as rising world steel prices push manufacturers to revise their pricing upwards.

Steel costs have jumped 45 per cent on world markets in the last 15 months to reach slightly over $810 per metric tonne, according to Platts, a commodity news service.

"If construction costs rise then definitely it will eat into mark up margin and reduce business profitability," said Mr Pattni.

But worst of all, analysts say, is the revision of interest rates on loan products upwards to capture the rising inflation trends.

Such a decision will hit hard new home owners as interest rates payable will rise making it expensive to buy a house.

"It is only the government that can come up with measures to address such issues and save the industry," said Mr Pattni.