Most investors today are bumping their money into real estate as an alternative investment. Over the recent years we have seen real estate companies popping up with an anticipation of tapping into the so called ‘safe and resilient investment option’. For instance, in 2015 real estate investors received a whopping 29% return on investment. This sector of the economy has been boosted greatly by rapid urbanization and growth of the middle class in Kenya, coupled with huge government investments in infrastructure. This has led to massive investments in towns that were marginalized and termed as ‘interior’. The introduction of the devolved form of government saw investment and development opportunities opened up for the taking. These opportunities propelled both domestic and foreign investors to move their money to the sector.
Take for instance, the announcement by Stanlib Kenya of introducing Real Estate Investment Trust (REIT) by the end of 2015 making Kenya the second country in Africa after South Africa to introduce REIT into the market. Seeing this opportunity, most companies even those conservative reluctant ones finally decided to take a piece of this lucrative sector offering services ranging from agency, consultancy, mortgages, insurance etc. Real estate is now among the most profitable, vibrant and attractive sectors in Kenya. We have seen residential and commercial buildings take shape, skyscrapers standing tall unperturbed.
The number of commercial buildings in Nairobi is on the rise backed up by high plan approvals over the past four years, but uptake rate still stagnating leading to an oversupply of retail and office space. In 2016, the value of commercial buildings approved for construction in Nairobi rose to a four-year high even as market reports indicated that demand was lagging supply. A report by Britam Real Estate Tracker in April, 2016 had indicated an oversupply of all types of retail space in Nairobi and in big malls countrywide, another report released by Knight Frank, a property management firm, on 1st December, 2016 had also indicated that Nairobi had an oversupply of commercial office space.
Data from the Kenya National Bureau of Statistics (KNBS) shows that plans to develop commercial buildings worth Ksh. 13.7 billion were approved in the month of October, 2016 up from Ksh. 10.3 billion in September, 2016. Whereas, the value of residential buildings approved dropped in October, 2016 to Ksh. 15.5 billion from Ksh. 17 billion in September, 2016. In 2015 the uptake of commercial space was at 1.33 million square feet against a supply of 2 million square feet, compared to 2014 when the uptake was 1.3 million square feet against a supply of 1.7 million square feet. Demand for residential units has also stagnated with most developers targeting high end users leaving the bottom of the pyramid undeserved. Kenya’s housing deficit is estimated to stand at more than 300,000 units annually countrywide.
A report by Knight Frank in September, 2016 showed the value of luxury homes in Nairobi shot up by 40% over the past five years due to high investments in Real Estate. However, over 2015 to June, 2016 the survey showed house prices and rents for primes residential areas in Nairobi fell by 9.2% with a fall of 2.3% in the third quarter of 2016. Luxury home prices in Nairobi start from Ksh. 80 million, with rent for apartments starting at Ksh. 250,000 and Ksh. 300,000 for townhouses and standalone units The pressure on rents is due to oversupply in the market as buyers are looking for long-term capital gains by targeting only properties that result in good returns. The report by Kenya National Bureau of Statistics indicated that developers are ignoring market reports showing a slow uptake of commercial space and hoping for a possible spike in 2018 after the next general election in 2017.
With those massive developments, the real estate sector more so in Nairobi is now flooded, thus calling for investors and developers to turn to other prime towns in Kenya where the cost of land and construction is relatively cheaper. Take for instance Eldoret town where the sector is booming with construction of 12 commercial buildings of up to 14 floors each underway. This boom was brought to the limelight by the Ksh. 40 billion Sergoit Golf and Wildlife Resort, a development projected to have 2,000 villas, 5-star hotel, 3 golf courses, a hospital, a shopping mall and a private airstrip on a 3,100-acre piece of land. The area market performance has occupancy rates for retails at 80% and those of residentials being at 83.3%. When the returns for the area are compared with those of Nairobi; for Nairobi returns for retails stand at 11.3% and for residentials at 10.8%, for Eldoret returns for retails are at 6.6% and for residentials at 7%. Eldoret being a transit town, the performance of real estate is rapidly increasing, supported by conducive climate factors, its centrality in the region and unrivaled position as an investment destination for athletes. Other prime areas to consider tapping into include Mombasa, Kisumu, Nakuru, among others.
With the current housing deficit in Nairobi alone standing at 80,000 units annually for low income to lower-middle income earners as per the Planning and Housing Executive Committee, while the high-value properties i.e residential homes and office space having a high supply than demand as per the Knight Frank survey, developers should turn their focus to low-end housing. Though real estate sector players remain optimistic despite the market reports pointing to the contrary. It remains to be seen whether the developers gamble will yield positive returns. But nonetheless, real estate remains a very superb investment opportunity, with the rental returns being at 9.7% and about 80% of Kenyans living in rental houses.