* Prices shooting up, analysts say momentum to run
* Some investors talk of bubble, mortgage firms disagree
* Construction sector bucks trend of global decline
By Helen Nyambura-Mwaura
NAIROBI, Oct 6 (Reuters) - Kenyans have got property buying fever in a big way and with more gains predicted foreign money is also boosting the country's hottest investment sector.
Kenya's position as a regional business hub and its improving governance are among the main causes. Explosive population growth and a rising middle class also mean demand is strong after decades of underinvestment in housing.
Analysts say the boom has further to run, as private sector investment flows are rising significantly for all sectors of the economy, not just real estate and construction.
The recent peaceful referendum on a new constitution has also diminished political risk in east Africa's biggest economy, which was hard hit by post-election violence in 2008.
The growth in construction came second only to tourism in 2009. By the second quarter 0f 2010, construction was the fastest growing sector and, combined with real estate, contributed 11.0 percent of gross domestic product.
From the capital Nairobi to sleepy rural towns, land values are soaring and construction projects mushrooming.
Prices started rising in 2003 after a new government came to power promising change following a 24-year rule characterised by a poor investment climate.
The feverish rises in house and land prices have some Kenyans worried a bubble may be forming, but most analysts say there is plenty of room for the upward momentum.
"There is nothing like a bubble in this market and it won't happen for years," said Frank Ireri, managing director at leading mortgage firm Housing Finance.
Kenya's only property index, conducted by real estate agency HassConsult, shows prices untouched by the global crisis are set to rise slowly as the economy recovers.
Kenya's economic growth is seen accelerating by at least 4.5 percent this year, from 2.6 percent in 2009.
The last time real estate prices rose dramatically was in 1994-1996 as Kenya's economy emerged from a period of high inflation, according to land economist Samuel Mwangi.
The price of an acre of land in Nairobi's trendy Upperhill business district -- where many senior government officials also live -- ballooned to 50 million shillings ($618,400) from 8 million then and held at that level until 2003.
Today, an acre is priced at 120 million shillings.
Apartments in Nairobi's middle-income areas now cost two to three times what they did in 2003 and analysts say most of the sales are on cash basis, rarely mortgaged.
HassConsult is developing 800 houses on 150 acres that was once a coffee estate. It hoped to have sold 50 units by July but sold some 150 instead and now has 230 villas snapped up.
Coffee was once Kenya's top source of foreign exchange, but many estates are now blanketed with properties.
"We can be romantic about it by saying they shouldn't be turning coffee farms into real estate but unless coffee becomes more profitable, it will continue," said Farhana Hassanali, property development manager at HassConsult.
Hello Developments, which targets domestic and overseas high-net worth individuals, said foreigners were drawn by the country's attractive climate, cosmopolitan culture, natural beauty and wildlife.
"All of them know Kenya and have an affinity for the place and wish to spend time here each year. They are also encouraged by the investment climate which is relatively investor friendly," said Ashton Towler, Director at Hello Developments.
FLUSH WITH CASH
Housing Finance's Ireri said demand for houses costing over 20 million shillings ($246,300) is matched by supply but that there are not enough units for anything below 10 million.
The government is offering incentives for developers to target the lower end of the market. But analysts say the half of Kenya's population still in poverty has yet to benefit. Hassanali said developers were selling houses off plan, or before ground was broken, side-stepping expensive loans. Prices may rise as much as 50 percent during a project's life.
Most buyers were business people flush with cash, she said, adding that developers often give landowners equity in the projects to cut expensive land costs.
Off-plan investors, however, should be cautious and run thorough background checks on developers and contractor, one architect warned.
"There are cases where people get their fingers burnt but it's not that often," said architect Charles Kahura.
The formal mortgage industry is small and conservative, only loaning to those that can pay, and at sustainable debt levels.
According to the central bank, there were only 14,951 outstanding mortgage loans worth 60.7 billion shillings by the end of June this year. Lenders typically lend up to 80 percent of the property's value.
"Unlike in the United States, leverage is not a major risk in our market," said Laila Macharia, chief executive of Scion Real, a firm investing in African property and infrastructure.
"The vast majority of buyers are still buying property with cash, and borrowing conservatively, this suggests people are purchasing within their means even for speculative purposes."
FAST URBANISATION
Analysts cite swelling incomes and large numbers of young people moving to urban centres and starting families, which fuel demand across all asset classes.
Kenya is adding one million people annually to its 38.6 million population, 22 percent of which is between 15-24 years.
Nairobi city authorities are also expanding boundaries to outlaying towns, but is yet to develop sufficient utilities.
Pete Muraya, a developer behind the 750-unit Fourways Junction now under construction, said the firm is investing 80 million shillings on a sewerage system because local authorities are not providing the service for the project.
Much of the demand is also riding on Kenyans' love affair with investment in plots of land.
"Our society is very much like the British. We have super normal faith in the value of bricks and mortar," said Aly Khan Satchu, a Nairobi-based commentator. "It's a cultural thing, a historical thing," he said of the former British colony.
While dissenting voices are few, some investors are cautious.
"There is a bubble coming fairly soon," said an expatriate in Nairobi in the process of selling his apartment. "When everyone says up, that usually means there is a crash coming."
(Editing by Ron Askew)