Kenya: Inside Kenya's Real Estate Sector

Nairobi — 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.


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).


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.

Commercial office sector performance: The commercial office sector performance in Nairobi improved, albeit marginally, with the asking rents increasing by 1.3 per cent from Ksh101.0 per square feet in 2017 to Ksh102.3 per square feet in 2018.

The occupancy rates increased by 0.7 per cent points from 82.6 per cent in 2017 to 83.3 per cent in 2018, resulting in a 0.2 per cent -point increase in rental yields from 7.9per cent in 2017 to 8.1 per cent in 2018.

"The slight improvement is attributed to the political stability that has led to increased economic activities and the continued positioning of Nairobi as a regional hub that has led to increased entry of multinationals," said Juster Kendi, a research analyst at Cytonn.

"We remain cautiously optimistic on the performance of commercial office space in Nairobi, despite the marginal increase in returns, and occupancy, as the sector has an oversupply of 4.7 million SQFT, and thus investors are likely to face challenges on exit, when selling and renting," she added.

Cytonn recommend investments in differentiated concepts such as serviced offices which have low supply with a market share of just 0.35 per cent and high returns with average rental yields of 13.4 per cent compared to a market average of 8.1 per cent.

Retail sector performance: The retail sector performance softened in 2018, with occupancy rates decreasing by 0.4 per cent points from 80.3 per cent in 2017 to 79.8 per cent in 2018, while the rents decreased by 3.8 per cent from Ksh185.3 per SQFT in 2017 to Ksh178.2 per SQFT in 2018.

This resulted in a 0.6 per cent point decrease in rental yields from 9.6 per cent in 2017 to 9.0 per cent in 2018.

"The decline in performance is attributed to increased supply of mall space, which grew by 4.8 per cent year-on-year in Nairobi to 6.5 million square foot in 2018 from 6.2 milion square foot in 2017, through the opening of malls such as the Waterfront in Karen and Signature Mall in Mlolongo, resulting in an oversupply of 2.0 million squarefoot," Kendi said.

Despite the current oversupply, the outlook for the sector remains positive, according to Cytonn, as the it continues to attract both local and international retailers driven by a conducive macro-economic environment, with an average GDP growth of above 5.0 per cent over the last 5-years.

Another driving factor is a low retail penetration rate of 35.0 per cent that serves as an incentive for formal retailers.

Hospitality sector performance: The hospitality sector has continues to depict signs of recovery following the slump between 2011 and 2015 that was caused by insecurity and terrorist attacks.

In 2018, serviced apartments recorded improved performance in 2018 with the average rental yield coming in at 7.4 per cent , which is 2.1 per cent points higher than 5.3 per cent recorded in 2017, attributed to the increased demand, which triggered an increase in charge rates, as well as increased occupancy rates with an average of 80.0 per cent in 2018, compared to 72.0 per cent in 2017.

"We attribute the improved performance of the hospitality sector to the stable political environment and improved security, making Nairobi an ideal destination for both business and holiday travelers," said Beatrice Mwangi, an assistant research analyst at Cytonn.

"In the hospitality sector, the investment opportunity lies in Kilimani and Westlands, which are the best performing areas with average rental yields of above 10.0 per cent. This is attributed to the good transport network in these areas making them easily accessible, proximity to business nodes such as Upperhill, good security given that the areas are mapped as UN blue zone areas, and availability of key amenities such as Yaya Centre, The Westgate Mall and Jomo Kenyatta International Airport (JKIA)," Beatrice added.

Land sector performance: The Nairobi Metropolitan Area land prices recorded a 7- year Compound Annual Growth Rate(CAGR) of 13.7 per cent ,and a 3.8 per cent year-on-yea price increase in 2018, driven mainly by provision of trunk infrastructure such as road network and the growing demand for development land especially in the satellite towns such as Ruiru and Syokimau.

This came as developers strive to drive the government's Big Four government agenda on the provision of affordable housing.

According to the report, the investment opportunity lies in Satellite Towns such as Ruaka, Utawala, Ruiru and Thika, evidenced by high capital appreciation of 16.2per cent, 17.5 per cent, 4.7 per cent , 7.7 per cent year-on-year capital appreciation, respectively, in addition to other areas such as Kilimani, Karen and Kitisuru, which had rates of 10.7 per cent , 10.3 per cent and 10.5 per cent year-on-year capital appreciation, respectively.

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