Following several years of sustained growth, the outlook for Kenya’s construction sector remains positive as the industry benefits from the elevated levels of public spending outlined in the Vision 2030 development strategy. With a host of infrastructure projects planned, as well as increased housing demand, contractors are set to profit from a continuation of the robust upward trajectory of recent years. Backed by regulatory reform under the newly formed National Construction Authority (NCA), the industry should also see improved enforcement of standards and training.
Although the slowdown in capital inflows into infrastructure and real estate projects between 2009 and 2011 impacted real growth rates, the sector as a whole (public and private investment combined) has nonetheless delivered average annual growth rates of 15.26% between 2008 and 2012 on an unadjusted basis, and the construction industry’s value has increased 76%. The industry’s GDP contribution is steadily climbing, from 3.8% in 2007 to 4.1% in 2012. This climbed further in 2013, with the sector growing 5.5%, figures from the Kenya National Bureau of Statistics (KNBS) show. The economic survey 2013 conducted by KNBS estimates that the construction sector’s contribution to GDP will soon increase to 5%.
While Kenya’s growing commercial and residential markets – a factor of the country’s rising rate of urbanisation – will be important contributors, particularly as large projects such as Tatu City development in Greater Nairobi begin to break ground, industrial and infrastructure projects, including oil, gas and transport activity, remain integral to the construction sector’s near to mid-term growth prospects.
Infrastructure received one of the highest budgetary allocations in the 2012/13 budget, equivalent to $3.2bn across roads, energy, rail and port developments. The ceiling for development expenditure for the 2014/15 financial year, including donor-funded projects that will invariably benefit the construction sector, is expected to increase to $5bn, or 9.6% of GDP. Funding for a number of construction projects has come from donor states, including China, which has in recent years played a large role both in project financing and execution, but the government is also turning towards sovereign debt – having sold a $2bn eurobond in 2014 to help raise capital for some of its capital spending – and it is in addition reforming capital market regulations to allow for real estate investment trusts (REITs).
Vulnerability To Austerity
Fiscal constraints have been a barrier to continued growth. A combination of a tighter spending programme, combined with hefty outlays under the devolution process and during the 2013 general elections, has slowed down payments to contractors. Government disbursements slowed in the first six months of the 2013/14 financial year, down 16.4% on the targeted KSh685bn ($7.8bn), which in turn has impacted cash flow for contractors on government projects. The Central Bank of Kenya (CBK) has reported a higher incidence of construction loan defaults. “Delayed receipts from the government of Kenya for completed projects or contracts affected repayment patterns of customers in the building and construction sector,” said CBK in a credit officer survey report released in February 2014. “Non-performing loans were higher due to a delay in payments from our customers contracted by government, particularly in construction, and the revised CBK guidelines require six months before customers in arrears can be reviewed otherwise,” Joshua Oigara, group CEO of Kenya Commercial Bank, told local press in March 2014. To address the issue, the government instituted regulations that required a 30-day turnaround on payments upon project delivery.
Tight monetary policies also saw credit available to the private sector plummet 56% in 2012, although building and construction saw a nominal KSh200m ($2.3m) rise – the only sector to do so. Total private sector credit to the sector in 2012 was KSh18bn ($205.2m), equivalent to 15% of the national total, placing it among the top-four recipients. Growth rates in private sector construction activity fell from 2.4% in 2011 to 1.9% in 2012.
However, private developments are helping to mitigate some of the challenges related to government development. For example, commercial bank lending affecting the sector expanded by 2.3% to KSh70.8bn ($807.1m) in 2013, mainly as a result of increased financing of real estate development, the KNBS reported. Consumer demand is growing in tandem. Building plans approved in the housing sub-sector increased 34.2% to KSh243.1bn ($2.8bn), up from KSh181.1bn ($2.1bn) year-on-year.
The construction industry is also undergoing significant reform, in terms of regulations and enabling legislation. Central to these efforts is the establishment of the NCA. Created in 2012 and under the purview of the Ministry of Lands, Housing and Urban Development, the NCA’s mandate is to regulate and oversee the construction industry and coordinate its growth and conduct.
All contracting companies and workers are now required to register with the NCA, and qualifications are being audited. Initially publicly funded, the NCA will eventually be self-financed by 2018 through a 0.5% construction levy on all contracts over KSh5m ($57,000) with a projected annual balance of $46.5m.
The NCA’s debut has corresponded with a growing preference for foreign contractors in large infrastructure and property development projects that has clearly illuminated shortfalls in the capacities of domestic construction firms. The construction sector is defined by a large, seasonal informal sector, dominated by small and medium-sized enterprises.
The government has put an emphasis on developing public-private partnerships (PPPs) for large infrastructure projects and enacted PPP Act 2013 to provide for the participation of the private sector in the financing, construction, development, operation, or maintenance of infrastructure or development projects through concession or other contractual arrangements. To improve the capacity of local contractors, a number of efforts are ongoing to improve skill and technology transfer and local participation (see analysis). These efforts from the NCA include continuing professional development training conducted annually across the country to improve entrepreneurial, management and technical skills.
Joint ventures with foreign firms are increasingly being used to improve technology standardisation, supply chain and project management, for example. The NCA has enacted regulations mandating that all foreign firms must now contract a minimum 30% of work and material from local firms.
Expanding the ability of local contractors to fulfil more rigorous requirements will be essential given the raft of large-scale infrastructure projects currently being pursued. The portfolio of projects – such as the $28bn Lamu Port Southern Sudan-Ethiopia Transport (LAPPSET) corridor – which includes extensions to Mombasa’s port and the construction of a new three-berth port facility in Lamu with an adjacent refinery – exceeds domestic capacities as the government pushes ahead with a national re-engineering of transport infrastructure. Nor is the LAPSSET development the only such project on the table. So too is a standard-gauge railway connecting Mombasa to the interior of the East African Community and a new pipeline linking Kenya’s current refinery in Mombasa to Nairobi, along with expansions to airports in Nairobi, Isiolo, Kisumu, Mombasa and Eldoret. Additionally, development corridors are being lain down through road networks connecting Kenya’s coast to neighbouring countries (see Transport chapter).
The government has also initiated the expansion of power generation facilities across the country to a cumulative generating capacity of 6400 MW, principally through renewable sources, notably geothermal (see Utilities & Environment chapter).
As is the case in markets from Ghana to Algeria to Ethiopia, contractors from abroad – notably China – continue to play a significant role. Chinese firms were specifically courted under Kenya’s 2005 “Look East” policy, and Chinese firms currently play a visible role in Kenya’s construction sector, with a large number of the tenders tied to the Vision 2030 strategy’s infrastructure projects.
Indeed, Chinese contractors have played a significant part in project delivery, participating in the construction of the $350m Thika Highway, which was finished in 2013, but there are plenty more to come.
The Export Import Bank of China has provided 85% financing to both the $200m Nairobi Southern Bypass, awarded to China Wu Yi, and the $635m Jomo Kenyatta International Airport redevelopment and greenfield expansion, awarded to Chinese firms Anhui Civil Engineering Group and China Aero Technology Engineering International Corporation. The state-owned conglomerate China Communications Construction Company also holds contracts for construction of the $2.66bn, 480-km standard-gauge railway between Mombasa and Nairobi, $484m phase-one port construction at Lamu, $66.7m Mombasa port extensions, and is a contractor in the $250m northern corridor transport improvement project. Other foreign companies involved in the construction sector in Kenya include US firm Tetra Tech, which signed a $25m contract with Konza Technopolis Development Authority to develop phase one of the Konza Techno City.
Building material production in Kenya has traditionally been unable to meet demand. With notable reserves of limestone and gypsum nationwide, cement industries, for example, are expanding operations with an eye on both national and regional markets (see Industry chapter). In 2012 Kenya’s cement producers churned out roughly 4.6m tonnes of product, and more is planned: ARM Cement has announced plans for a new 1.5m-tonne plant in Kitui county, and Nigeria’s Dangote Group has also announced plans to open a new factory in the country.
The expansions are certainly much needed. Although prices have eased in early 2014 as a result of margin pressure on producers, prices have traditionally been high in the cement segment, particularly outside of Nairobi where distribution costs are higher, and constructions costs increased by 7.2% in 2013 alone, the KNBS has reported. While Nairobi remains insulated by its proximity to several cement plants, outlying regions can expect 25% increases in cement prices, with transport costs in Kenya riding high at around $0.20 per tonne per kilometre. A new mining levy for cement producers of KSh7 ($0.08) per 50-kg bag was rolled out in 2014 and is likely to be passed on to consumers.
According to a report by the African Competition Forum, between 2000 and 2012, Kenyan cement prices were the second-highest out of a select group of six African markets, including South Africa. The prices have prompted an investigation by the Competition Authority of Kenya into price-fixing and cross-shareholding in the cement sector. “We have seven players but the prices of cement do not reflect that sort of scenario,” Francis Kariuki, the director-general of the Competition Authority of Kenya, told international media. “South Africa, for example, has fewer players but the price of cement there is cheaper. Here the price of cement continues to rise and Kenyans are paying a damn high price. This is certainly a red flag.”
Perhaps unsurprisingly, alternative and low-cost building technologies are slowly building traction in the market, although prefabricated material remains peripheral. Precast concrete technology is gaining popularity and is already employed in the Kenya Ports Authority’s port expansion at Mombasa and construction of the Kisumu Superhighway. The state-owned National Housing Corporation is also developing a $11.5m pre-fabricated expanded polystyrene panels factory outside of Nairobi.
In addition, industry is also projecting a minimum 10% cost hike from local government transport levies. Costs increases will also be incurred from a 7.5% value-added tax introduced in 2013, and the increase in construction permit fees from 0.01% to 1.5% by local government.
Moreover, since 2012 formal labourers in the construction industry are now guaranteed a minimum salary of KSh416 ($4.70) per shift, excluding housing allowances, presenting a minimum annual cost of approximately $1250 per employee. The lack of adequate infrastructure can also be a challenge, particularly for large-scale greenfield projects. Servicing land can be 30% of construction costs, according to the Kenyan Property Developers Association.
For those looking to build in the residential segment in urban areas, there are additional costs to consider as well. The Centre for Affordable Housing Finance in Africa has priced the cheapest new-build developer houses in Kenya at $22,350 in 2012. Prices are significantly higher in Nairobi and other large cities. African Development Bank analysis indicates a 3-10% price difference in construction costs per square metre between Nairobi and other regions of Kenya. Construction costs in Kenya equal an estimated 42% of total development costs for a housing unit. The cumulative effect is that cost increases have pushed many developments in the residential and commercial segment beneath the regulatory radar, compromising both quality and safety, particularly in lower socio-economic tiers where informal activity is common.
Although the Vision 2030 raft of projects will drive a large proportion of activity, the devolution of certain powers to the 47 newly created counties should help stimulate new construction outside of Nairobi and Mombasa.
The Vision 2030 Metropolitan and Investment Plans Initiative will outline urban development plans for Mombasa, Kisumu-Kakamega, Nakuru, Eldoret, Wajir, Garissa, Mandera, Kitui, Mwingi and Meru. County governments have already begun consolidating land for turnkey industrial zones, and undertaking the necessary infrastructure improvements such as pipes and roads, to realise them.
However, Greater Nairobi, extending around 20 km from the City of Nairobi into Kiambu, Machakos and Kajiado counties, is the largest urban agglomeration and unsurprisingly attracts the bulk of large-scale developments. To help ensure the smooth execution of these projects, the Nairobi Integrated Urban Development Master Plan (NIUPLAN), developed in conjunction with the Japan International Cooperation Agency, will be published in 2014 – one of a spate of such initiatives, including 2008’s Nairobi Metro 2030 plan and the Spatial Planning Concept for Nairobi Metropolitan Region (NMR), prepared in 2013, that look to replace Nairobi’s original 1973 master plan.
Interim NIUPLAN planning proposes a dual strategy approach, favouring redevelopment within the NMR and decanting key services and industries into new satellite growth centres. Within Nairobi, proposals include establishment of the central business district (CBD) as a city precinct, redevelopment of Moi Avenue, New Square development in the CBD area, reorganisation of the Eastleigh Airforce Station area, development of the Capital Complex and Nairobi riverfront. Proposed reorganisation of Nairobi’s industrial area will be complementary to the development of six new satellite towns. The satellite towns will ostensibly be situated within 60 km of NMR. Serving the aviation sector, “Aerotropolis” is proposed near Thika municipality, north of Garissa Road, 40 km from Nairobi CBD.
Around 20 km further, a Knowledge and Health City is proposed north of Limuru Road. A Transport New Town with a projected population of 100,000 is slated for Kajiado County and a Sports City in Machakos County is also on the table.
In Machakos County, some 30 km east of the city, a proposed cyber city has broken ground. The $14.5bn Konza Technology City, launched in 2013, is expected to provide 200,000 jobs over 20 years in business process outsourcing and IT enabled services.
Additionally, the NIUPLAN has earmarked local centres Thika, Kikuyu, Kiambu, Machakos, Tala/Kangundo, Kajiado, Limuru, Karuri, Juja, Mavoko, Kitengela, Loitoktok, Gatundu, Gitunguri, Kathiani, Kiserian, Namanga, Isinya, Bissil and Sultan Hamud Magadi as priority towns, growth and market centres for development.
Also outlined are nine mass rapid transport corridors spiralling out from Nairobi Rail Station. With a 20% average calculated economic internal rate of return, these corridors will reduce Nairobi’s traffic congestion, estimated to cost the city $570,000 a day, and facilitate further real estate redevelopment.
However, while expanding out is necessary to accommodate the increased demand for land, particularly for industry, expanding up is also a central part of the city’s plan.
Tom Odongo, Nairobi City Council’s executive committee member for lands, housing and physical planning, told OBG, “Providing services to a large city area is not economically attractive so our planning is centred on developing a vertical and compact city.”
The revision of building height restrictions from 90 metres to 350 metres has spurred new high-rise developments including the 40-storey UAP Centre and the 30-storey Britam and KCB Centres; the move offers the potential to provide for a more cost-effective way to reduce Kenya’s housing shortage of more than 2m units (see Real Estate). “Within Nairobi’s CBD, state and railway land has lain neglected and has not been redeveloped. These areas now constitute prime real estate within Nairobi, equivalent to 800 ha. If this area can be redeveloped as mixed-use property it could stabilise the market. The government estimates that it could provide approximately 100,000 residential units within this area,” Odongo said.
Kenya’s construction industry is entering a period of significant growth at the centre of the Vision 2030. The pressure on existing market mechanisms to perform will be intense. While regulatory reform will strengthen domestic industry capacities and enable the government to provide value-added benefits to all stakeholders, improved regulatory oversight will incur increased costs across the sector, with pronounced impact on lower socio-economic tiers and the informal sector. Kenya’s large-scale infrastructure projects are likely to remain dominated by foreign firms in the near- to mid-term. However, the country’s developing economy will deliver new national and regional growth opportunities across the sector.
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