Inside Kenya's real estate sector

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By Chacha Mwita

Published January 8, 2019

The real estate sector in Kenya registered a decline in performance in the just ended year-2018, attributable to a slowdown in demand for property amid growing supply.

The sector recorded rental yields of 9.0 per cent in retail, 8.1 per cent in commercial office, 8.0 per cent in mixed-use developments, 7.4 per cent in serviced apartments and 4.7 per cent in residential sector, resulting to an average rental yield for the real estate market of 7.4 per cent.

This is down compared to an average rental yield of 7.6 per cent registered in 2017.

The residential sector recorded a decline in performance with average rental yields dropping marginally by 0.5 per cent points, attributed to a decline in occupancy rates which reduced by 3.0 per cent points on average, from 84.0 per cent in 2017, to 81.0 per cent in 2018.

According to the Cytonn’s 2018 Real Estate Review, this was occasioned by increased stock in the market against minimal uptake.

‘’During the year, apartments performed better than detached units, with average annual uptake of 26.6 per cent compared to detached units’ 20.5 per cent , and average returns of 11.4 per cent , compared to detached units returns of 8.9 per cent ,” noted Wacu Mbugua, an assistant research analyst at Cytonn Investments.

“We attribute the growth in demand for apartments to their affordability especially as loans remain out of reach for a majority of aspiring homebuyers,’’ Wacu added.
 
Capital appreciation in Nairobi and its metropolis averaged at 3.8 per cent  in 2018 from 6.5 per cent  in 2017 and thus the real estate sector recorded a total return of 11.2 per cent in 2018 compared to returns of 14.1 per cent  in 2017, showing a slow-down in real estate operators’ performance.


According to Johnson Denge, Senior Manager Regional Markets at Cytonn, the slump in the 2018 real estate returns is attributable to: “a slowdown in demand for property amid the growing supply.”

This is evidenced by the 3.0  per cent  points decline in the residential sector occupancy rates and the 0.4 per cent  points decline in occupancy rates in the retail space on account of increased supply of mall space recording a growth of 4.8 per cent year-on-year in Nairobi to 6.5 million square-foot  in 2018 from 6.2 million SQFT in 2017.

“However, it is important to note that development returns for investment grade real estate is still estimated to be approximately 23.0 per cent to 25.0 per cent per annum in the mid and long term,” Denge said.


The real estate sector in 2018 however recorded continued investment across all themes driven by the political stability following the conclusion of the electioneering period in Q1 2018 and the continued positioning of Nairobi as a regional hub that has led to increased entry of multinationals, creating demand for residential units, retail space, commercial offices and hotels. 

Other factors that drove the sector include the kicking off of the affordable housing initiative which has gained momentum with the launching of projects such as the Pangani Estate in Nairobi, and the improving macroeconomic environment, with the country’s GDP growing by 6.0 per cent in quarter three 2018, higher than the 4.7 per cent recorded in quarter three 2017.

“Notably, the year witnessed more efforts towards delivering affordable housing, with policies and financing initiatives geared towards making it a reality. Out of the seven Nairobi Urban Regeneration Projects, Pangani Estate, a project that is expected to delivered 1,000 units to the market, was launched towards the end of the year and we expect more projects to follow suit before the end of 2019,’’ noted Patricia Wachira, a research associate at Cytonn.

According to the Cytonn Report, the sector is expected to record increased activities in 2019 supported by government’s focus on the affordable housing initiative which has gained momentum with the launching of projects.

The continued positioning of Nairobi as a regional hub is expected to further drive investments amid political stability.

The sector’s growth is also pegged on improving infrastructure such as the development of sewer systems,  construction of Ngong Road (Phase 2) and the Superhighway linking Jomo Kenyatta International Airport to Rironi area in Limuru along the Nakuru- Nairobi highway.

“ However, investors, have to conduct research to identify market niches and investment opportunities in the market given the overgrowing supply in some of the themes such as the retail sector, the office sector and selected markets in the residential sector, which is likely to affect occupancy rates, and thus returns,” Cytonn has adviced.

CHALLENGES

Among the key challenges the sector faced were uncertainty surrounding statutory approvals particularly in light of the ongoing demolitions of allegedly legally approved buildings, lack of financing as loans remain out of reach for a majority of aspiring homebuyers and oversupply in some of the themes such as the retail sector which recorded an oversupply of 2.0 million square-foot of space.

Another challenge was a tough operating environment characterized by low private sector credit growth, which averaged at 4.4 per cent as at October 2018, compared to a 5-year average of 14.0 per cent (2013-2018).


PERFORMANCE BY SECTOR

Residential sector performance: According to the report, the investment opportunity in the residential sector is in select areas that offer high and stable returns such as Runda Mumwe for detached units, Kilimani for upper mid-end apartments, and Donholm-Komarock, Thindigua for lower mid-end apartments. These areas recorded returns of 14.8 per cent , 11.5 per cent , 14.4 per cent and 13.8 per cent respectively. Continue reading

Source: The Exchange