THE STATE OF REAL ESTATE

 In the first half of 2019, the real estate sector has shown increased activity. This has been supported by several factors including the positioning of Nairobi as a regional hub, continued National Government support for the affordable housing initiative, expansion by multinational corporations and retailers into the country, and the improving macroeconomic environment, with the country’s GDP growing by 6.3% in 2018, 1.4% points higher than 2017. Even so, oversupply in some sectors, insufficient access to financing and high financing cost continue to challenge both developers and end users of real estate. In this article, we summarize the state of real estate in the first half of 2019.

I. Residential Sector

There has been a marked increase in investor interest in residential real estate. Evidence of this is the launch of a,multiple projects such as the joint venture between the UN’s Habitat Housing Cooperative Society Limited and Afra Holdings, which aims at setting up 8,888 units in Mavoko. Other notable projects launched in the first half of the year include Actis Garden City –based Mi Vida Homesalong Thika road, Cytonn’s Applewood in Karen, and Deltar’s project to be located in Batu Batu Gardens, Parklands.

On the affordable housing front, the 2019/2020 budget allocation was raised by 61.5% to 10.5 billion shillings, indicating the government’s support in actualizing this arm of the Big 4 Agenda. Notably, the National Treasury launched the Kenya Mortgage Refinancing Company (KMRC) after a successful mobilization of capital from key shareholders and international financial institutions. There have also been attempts to make housing more accessible, through Housing Finance’s reduction of the average mortgage size by half to cater to lower mid-income earners, the launching of KMRC, and the bomayangu.go.ke portal to allow citizens to register and apply for affordable housing units online.

Karen and Runda recorded the highest price appreciation in the high-end residential market in Nairobi. In the upper mid end section, Runda Mumwe and Loresho posted average returns of 6.2% and 5.8%, respectively, the highest in their segment. This is due to their proximity to high end neighborhoods, thereby attracting mid-income earners seeking exclusivity but in relatively affordable areas.

Apartments in Ruaka and Thindigua performed the best in the satellite nodes, recording average total returns of 8% and 6.1% respectively. Their growth is credited to infrastructural developments and proximity to shopping amenities. Both areas also draw in expatriates due to their proximity to foreign organizations such as the UN and foreign embassies.

II. Commercial Sector

Performance has been slow in the commercial office sector, with a slight decline in average rental yields and occupancy rates compared to last year. This is largely due to a surplus in office space, which tenants use as a bargaining chip to reduce or maintain rent. The capping of interest rates on loans offered by banks has also created a tough operating environment for small and medium sized enterprises (SMEs), leading to slow growth in private sector credit. Overall, Gigiri, Kilimani and Karen were the best performing commercial office nodes in the first half of 2019, recording rental yields of 9% and above and indicating increased demand by businesses and multinational companies. These areas are preferred because they offer quality Grade A offices and good infrastructure, which enable them to charge a premium on rental charges.

In the commercial retail space, Westlands and Kilimani were the best performing nodes with average rental yields of 12% and 10.5% respectively. Much of this is attributable to the location – both lie within affluent neighborhoods hosting middle – high-end income earners with relatively high consumer purchasing power.

III. Hospitality

There has been an upward growth trajectory in the hospitality sector over the last year. This is reaffirmed by the recent hospitality sector activities such as the increased presence of international hotel groups like Marriott, Radisson Hotel Group and Accor. The factors which support the sector’s performance include the improving air transport operations, continued marketing of Kenya as an experience destination, improved security, and political stability, which have continued to boost tourists’ confidence in the country and thus making it a preferred travel destination for both business and holiday travelers.

IV. Land

In March 2019, the Government of Kenya announced plans to incorporate blockchain technology into the land’s digitization process. This is part of an effort to end human interference in the Lands Ministry by helping track all land transactions in the country. It is hoped that the use of blockchain will lead to an efficient, transparent and fair system of land transactions. A pilot version of the Lands Information Management System (LIMS) went live on 1st April 2019, as announced by the Ministry of Lands. The system is expected to shorten the lands registration process by from 73 days to 12. Hopefully, it will result in time saving, cost reduction and transparency in the registration of land.

V. Infrastructure

Infrastructure in 2019 has been characterized by several highlights. For starters, the sector was allocated 324.7 billion shillings in this year’s budget, 22.5% less than the amount allocated in 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. Also notable is the beginning of the construction of the Western Bypass in April. The 17-billion-shilling project linking the Northern and South bypasses starting from Gitaru and terminates at Ruaka. The increased provision of infrastructure is expected to increase accessibility and reduce traffic congestion, resulting in increased demand for property in satellite towns.

*Data courtesy of Cytonn H1’2019 Markets Review

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