July 10, 2019 Real Estate

In H1’2019, the real estate sector continued to record increased activity supported by;
i. The positioning of Nairobi as a regional hub
ii. Continued National Government support for the affordable housing initiative
iii. Expansion by multinational corporations and retailers into the country
iv. The improving macroeconomic environment, with the country’s GDP growing by 6.3% in 2018, 1.4% points higher than the 4.9% recorded in 2017.
The key challenges that continue to face developers and end users include;
i. Oversupply of the commercial office and retail sectors with a surplus of 5.2 million square feet and 2.0 million square feet respectively as of 2018.
ii. Lack of access to financing and high financing cost for both developers and off-takers following the capping of interest rates.

The Residential Sector
In H1’2019, we continued to witness an increase in investor interest in the residential sector in Kenya. The most notable projects launched during the period were;
i. The United Nations’ Habitat Housing Cooperative Society Limited 8,888-units joint venture project with Singapore-based consortium Afra Holdings, to be located in Mavoko.
ii. Actis Garden City Apartments along Thika road
iii. Deltar’s project to be located in Batu Batu Gardens, Parklands.

On the affordable housing front, major highlights during the period were:
i. The 2019/2020 National Budget allocation towards affordable housing initiative was raised by 61.5% to Kshs 10.5 billion from Kshs 6.5 billion in the previous 2018/2019 budget, indicating continued government support towards the actualization of the affordable housing initiative,
ii. The National Treasury launched the Kenya Mortgage Refinancing Company (KMRC) after a successful mobilization of capital from key shareholders and international financial institutions.
iii. Leading mortgage financier in Kenya, Housing Finance (HF) announced plans to reduce its current average mortgage size by 50.0% in a bid to tap into the growing demand for home loans from the lower mid-income class,
iv. The Government of Kenya announced the relaxation of affordable housing regulations to include high income-earners of Kshs 100,000 and above and also launched the bomayangu.go.ke portal to allow citizens to register and apply for affordable housing units online.

Market Performance
Overall, apartments performed better in H1’2019 with average total returns of 5.5%, 5.5%, and 6.3% for the upper mid-end, lower mid-end suburbs, and satellite towns, respectively, in comparison to detached units at 3.8%, 4.5%, and 4.1%, for high-end, upper mid-end, and satellite towns, respectively.
Apartments also recorded higher annual uptake of 22.4%, compared to 19.7% for detached units. This is as apartments have a wider market due to their relative affordability to homebuyers, which also sustains their price growth.

Unit Type Category Analysis
1.Detached Unit
a) High End
The high-end market recorded a marginal price appreciation of 0.1%, from an average of Kshs 199,625 per SQM in H1’2018 to Kshs 201,275 per SQM in H1’2019.
Select markets namely, Rosslyn and Kitisuru, recorded a depreciation of 2.6% and 0.4%, respectively. This is mainly as a result of the decline in asking prices, as areas like Kitisuru and Rosslyn reach their price ceilings, amidst a tough financial environment, which has led to a decline in effective demand.
b) Upper Mid End
The upper mid-end segment recorded the highest total annual uptake and returns in the detached units sector at 20.3% and 4.5%, respectively. This is due to areas such as Runda Mumwe and Loresho, which posted the highest average returns in the upper mid-market of 6.2% and 5.8%, respectively
This is also attributable to their proximity to neighborhoods such as Runda for Runda Mumwe, and Lower Kabete and Kitisuru for Loresho, which make them appealing to the mid-income earners seeking exclusivity but in relatively affordable areas.
c)Satellite Towns
Ruiru and Athi River Towns were the best performing satellite towns in H1’2019 with average returns to investors of 6.0% and 5.0%, respectively.
This is attributable to the presence of good infrastructure such as the Eastern Bypass and Thika Superhighway for Ruiru, with relatively low land prices for development enabling their affordability to the majority of home seekers.

a) Upper Mid End
The upper mid-end sector posted relatively high annual uptake of 25.1% on average, owing to demand from real estate investors seeking to tap into the upper mid-end rental sector to support demand from long-stay foreigners seeking highly accessible areas with plenty of amenities.
This is evidenced by the growing trend of serviced and furnished apartments in areas like Kilimani and Riverside, which attract relatively high rental rates.
Riverside recorded the best average returns to investors in the upper mid-end sector with 5.9%, compared to the upper mid-market average of 5.5%
This is due to the area’s proximity to key nodes, namely Westlands, CBD and Lavington, with further support by demand for luxury apartments especially from foreign nationals
b) Low Mid End
The lower mid-end suburbs posted average returns of 5.5% with a positive marginal price appreciation rate of 0.6%.
The performance has been sustained by demand for affordable units particularly from the constant urbanization and the growing middle class.
Langáta had the highest total returns in the lower mid-end apartment category, at 6.8% owing to its appeal among the young working population due to its proximity to key commercial nodes such as Mombasa Road, the CBD, Kilimani as well as Upperhill
c)Satellite Towns
Apartments in satellite towns were the best performing category with average total returns of 6.3% (a price appreciation of 1.5% and a rental yield of 4.8%), attributable to relatively low land prices, with majority of the towns currently experiencing major infrastructural improvements enabling developers to develop and sell homes at relatively affordable prices, thus boosting uptake.
Ruaka and Thindigua were the best performing nodes recording an average total returns to investors of 8.0% and 6.1%
This is attributable to increase in infrastructure improvements such as the incoming Western Bypass and Westlands Link Road for Ruaka, proximity to shopping amenities such as Two Rivers, Ridgeways Shopping Mall and Rosslyn Riviera.
Both areas also attract expatriates demand due to their proximity to foreign organizations such as the UN and foreign embassies

3.Commercial Sector Offices

In H1’2019, the commercial office sector recorded a decline in performance recording 0.3% and 2.3% points decline in average rental yields and occupancy rates, to 7.8% and 81.0% in H1’2019, from 8.1% and 83.3%, respectively in FY’2018.

Asking rents decreased by 5.3% to an average of Kshs 96.6 per SQFT in H1’2019, from Kshs 102 per SQFT in FY’2018  Asking prices increased marginally by 0.5% to Kshs 12,637 in H1’2019 from Kshs 12,573 in FY’2018.

Gigiri, Kilimani and Karen were the best performing nodes in H1’2019, recording rental yields of 9.2%, 9.2%, and 9.0%, respectively, attributed to increased demand by businesses and multinational companies, as a result of their superior locations, offering quality Grade A offices, which enable them to charge a premium on rental charges.

Thika Road and Mombasa Road continue to record the lowest returns with average rental yields of 5.9% and 5.4% in H1’2019, respectively. This is attributed to low-quality office space and traffic snarl-ups that have made the nodes generally unattractive to firms.

The most improved nodes were Karen and Parklands which recorded rental yields of 9.0%and 8.9%, respectively, driven by increased occupancy rates of 2.6% each, as a result of its serene working environment away from the key commercial nodes such as the Nairobi CBD, thus attracting high-end clientele and premium rental rates.

4. Retail Sector

The retail sector performance softened, recording a 0.8% points decline in rental yield to 8.2% in H1’ 2019 from 9.0% in FY’ 2018.

This is due to the retail space surplus, recording an oversupply of 2 million square feet which saw average occupancies drop by 3.5% points from 79.1% in FY’ 2018 to 75.6% in H1’ 2019.

Average rents declined by 4.9% to Kshs 170.0 per square foot per month from Kshs 178.2 per square foot per month FY’2018.

The decline in rent is attributable to property managers’ adoption of innovative pricing models such as reducing rental charges and rent-free grace periods of up to 6 months in order to attract tenants.

Westlands and Kilimani were the best performing submarkets driven by relatively higher rental rates as the areas are affluent neighborhoods hosting middle – high-end income earners with high consumer purchasing power and thus investors are willing to pay higher rents for retail space in the area

5. Land Sector Land

The land sector in the Nairobi Metropolitan Area recorded a 0.5% year over year decline in the asking prices, 4.3% points decline compared to the 3.8% growth rate in H1’2017, attributed to an overall slowdown in real estate investment activities.

On the other hand, un-serviced land in satellite towns such as Ruiru and Limuru registered a 4.1% annual capital appreciation on average, attributed to the relatively high demand for land in these areas fueled by the affordable housing initiative in addition to satellite towns acting as Nairobi’s dormitory with majority of the population moving away from the congested Central Business District.

The investment opportunity in land is in Satellite towns, in markets with high returns such as Limuru, Ruiru and Utawala which recorded annual capital appreciation rates of above 5.0% in H1’2019 and Syokimau- Mlolongo areas for site and service schemes recording an average 3.5% capital appreciation.
Infrastructure Updates

The National Treasury read the FY2019/2020 budget on 13th June 2019. According to the budget, the infrastructure sector was allocated Kshs 324.7 billion, 22.5% lower than the 2018/2019 budget.
The funds will be directed towards ongoing road construction projects as well as road rehabilitation and maintenance, completion of Phase 2A of the Standard Gauge Railway, the Lamu Port-South Sudan-Ethiopia-Transport (LAPSSET) Corridor project and the Mombasa Port Development Project.
Construction of the 17.4 km Western Bypass by the China Road and Bridge Corporation commenced in April. The Kshs 17 billion project starts from Gitaru, linking to Southern Bypass and terminates at Ruaka, in Kiambu County. The increased provision of infrastructure is expected to increase accessibility and reduce traffic congestion, resulting in increased demand for property in satellite towns such as Ruaka and Limuru.

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