One of Africa’s best-performing markets for investors, in the past 14 years Kenya’s property prices have increased three-fold, including a 9.6% year-on-year leap from 2011 to 2012, according to HassConsult, a local property development and services firm. Investment returns are in excess of 28%, figures from the Kenya Property Developers Association show. The sector is dominated by Nairobi, which delivers two-thirds of Kenya’s $47bn economic output.

Yet economic development blueprints for industrialisation and devolution will deliver direct and cascading benefits for the sector nationwide. In parallel, reforms to institutional, legislative and financial bottlenecks will help encourage more sustainable growth over the long term.

Solid Fundamentals 

Driven by shortfalls in supply and high demand, Kenya’s real estate fundamentals are stable, although its performance has been mixed in recent years. The global economic crisis combined with rising construction prices prompted a number of private sector developers to slow execution or postpone expansion plans. The sector’s GDP contribution has fallen from 23% in 2003 to 4.3% in 2012. More recently, growth rates shrank from 3.6% to 3.3% year-on-year in 2013.

Tight fiscal policies have also delivered a reduction in private sector activity over the past 18 months. Real estate growth fell from 4.6% in 2011 to 2.3% in 2012 in the private sector segment, as available credit dropped 81% from KSh96.24bn ($1.1bn) in January 2011 to KSh17.85bn ($203.5m) in December 2012, according to the World Bank.

However, the short- and medium-term outlook is far more robust due to a number of factors. The real estate sector suffered in part not only from exogenous pressures, including a tightened credit environment, but also from the complexity of Kenya’s devolution initiative, a constitutionally mandated shift of powers from the national government to 47 newly formed counties. However, with devolution more or less finished, the benefits of the transition should be immense for developers, who will be able to benefit from increased efforts to develop urban areas outside of Nairobi. Allocated 40% of GDP, post-devolution all local governments have published substantive real estate development plans. Progress in this first year has been understandably slow – just 40% of development funding has been disbursed – but the private sector is quickly moving to exploit improvements in national infrastructure. The eight-lane KSh30bn ($342m) Nairobi-Thika Highway is the sector’s paragon. Completed in 2012, the 40-km corridor has seen adjacent land values increase fivefold in two years, delivering super-normal returns, attracting retail, commercial, high-end residential, industrial and mixed-use developments, including the 130,000-sq-metre Garden City and 830,000-sq-metre Two Rivers projects.

Of course many counties will take several years to attract the necessary capital to finance developments based upon local capacities to execute and deliver projects on budget and on schedule, but the moves are encouraging. Even as the counties begin to spark developments in more remote areas of the country, in light of Kenya’s urbanisation rate of 4.3% – double the global average of 2%, above the African average of 3.6% – the government is also committed to overhauling the development of Nairobi, extending transport infrastructure, encouraging new satellite cities and revamping the city’s master plan.

The rollout of the Vision 2030 plan should also yield returns, given the housing and infrastructure projects in the framework. These are helping serve as catalysts for new industrial townships located on improved transport corridors, several of which have already broken ground.

Finance

As with so many African markets, financing in the residential segment is a sizeable bottleneck. Kenya has just 22,000 mortgage accounts, despite an unusually high rate of financial inclusion –76%. According to a 2012 survey titled “Centre for Affordable Housing Finance in Africa”, only 11% of Kenyans earn enough to support a mortgage and uptake is significantly lower due to high commercial bank interest rates (see Banking chapter). The average is 17%, but rates have proven volatile. From 2010 to 2012 rates ricocheted from 15% to 13% to over 20%. There are a few exceptions – Chinese firm Erdemann partnered with the Development Bank of Kenya to offer the lowest market mortgage rate of 8.5% to buyers at Nairobi’s Great Wall Apartments – but a lack of commercial mortgages have depressed demand in the market and skewed construction toward high-end developments.

Commercial rates remain high due to a number of factors. Principally, these are poor credit profiling and market data, high risks associated with investments in the property sector and reliance by commercial banks on short-term financing to back long-term loans. Construction loans are comparatively more common with an uptake of 3.4% of the top 60% of income earners and 3.8% of the bottom 40%, according to the South Africa-based Centre for Affordable Housing Finance in Africa. The consequent low level of debt in the market is conducive to a property boom, yet remains profoundly subject to levels of market liquidity and inflation.

Talk of a Kenyan middle class driving real estate, relative to other sectors, may currently be overplayed. The Kenyan National Bureau of Statistics defines middle-income households as earning between $260 and $1330 per month. Many middle-income residences, typically above KSh1m ($11,400), remain beyond their reach, and lower tiers should also be considered floating without the means to withstand economic shocks.

Speaking to local press, Sakina Hassanali, head of research and marketing at HassConsult, said, “At a profound level, the failure of the mortgage market to provide a new route to home ownership is now shaping the Kenyan property market in a way that cannot be sustainable.”

Additionally, according to Nelly K Mbugua, managing director of Citiscape Valuers and Estates Agents, incentivising mortgages uptake for first-time buyers should also be taken more seriously. “The tax relief amount first-time buyers can currently claim is not sufficient and does not really encourage them to take out a loan,” Mbugua said.

Deepening Liquidity 

Secondary mechanisms are also essential in the Kenyan market. Femi Adewole, director of business development and operations at Shelter Afrique, a pan-African finance institution that supports the development of the housing and real estate sector in Africa, told OBG, “Large pools of long-term capital are available in pension and investment funds, but these are not yet prepared to put their capital into mortgages. While informal sector co-operative funds are available, the reality is that the depth of capital in these sectors is too shallow. It requires further incremental development.”

Returns in the market are high, with an average internal rate of return of 35%, according to the Kenya Property Developers Association (applicable principally to portfolio returns), yet risks are inflated by poor property development capacities that often lead to delays and cost overruns. With many developments speculative, sales are not guaranteed. Accordingly, the introduction of regulations for real estate investment trusts (REITs) by the Capital Markets Authority (CMA) in July 2013 has provided the means to tap latent liquidity stored in banks, insurance and pension funds (see Capital Markets chapter). REITs may provide an attractive mechanism to securitise developments in the Kenyan context. Edwin H Dande, managing director of British American Asset Managers, told OBG, “Under current laws there may be an added advantage to REITs employing both special purpose vehicles and limited liability partnerships (LLPs) for new developments. Sale of the LLP does not require a transfer of the asset, which would be subject to capital gains tax. This enables investors to securitise their investments on new properties.” No REIT has yet been launched, but as of April 2014 the CMA had issued five management licences.

Lack Of Homes 

The lack of mortgages has exacerbated Kenya’s housing deficit. A report by lender Old Mutual 2014 found that Kenya has a standing shortfall of 2m low- and mid-tier affordable homes below KSh1m-2m ($114,000-228,000). Results of the 2012 National Housing Survey have yet to be published, but according to the Kenya Property Developers Association, construction meets just 7.5% of demand. Combined with the high rate of urbanisation, this has resulted in ballooning demand at the lower end of the income scale. According to estimates in 2006, the most recent such figures available, 29% of Kenyans were landless, meaning that they have no land title or tenure; this population was concentrated in Nairobi (96.2%), the north-east (73.9%), and coastal provinces (49.4%). Over half of the nation’s current 45m population is also below 18 years of age, creating significant pipeline demand.

Residential Gains 

However, outside the low-end of the housing market, developers have seen some encouraging figures. Prices across residential real estate have more than tripled since 2000, according to the HassConsult Property Index. Average prices across Nairobi have all more than doubled over the past decade, rising 24% from $224,000 to $278,000 between 2009 and 2013. High-end properties have tripled their value since 2002, earning Nairobi the top African city position in the 2013 Knight Frank Prime Global Cities Index. Prices peaked at approximately KSh53m ($604,200) in the second quarter of 2013, according to HassConsult, clustered in Nairobi’s west and higher-end suburbs, such as Gigiri, Hill View Estate, Karen, Kitisuru, Kyuna Estate, Muthaiga, Nyari, Rosslyn and Spring Valley.

Optiven

Properties in Nairobi’s mid-tier, including Brookside, Kilimani, Mountain View, Nyali, Parklands, State House, Upperhill, Valley Arcade and Westlands, have also seen property values double in the past decade, peaking at around KSh24m ($273,600).

However, fiscal policies, inflation and investors holding off beyond the 2013 elections have recently cooled the market, and investment saturation in high-end property is cooling growth for the second consecutive year, dropping from 25% to 4.9% in 2013. Across all tiers of standalone houses, townhouses and apartments, HassConsult reported sales growth contractions of 95.7%, 98.4% and 103%, respectively, between 2012 and 2013. Still, a recovery is expected in this high-end market in 2014.

Rentals 

Domestically, Nairobi’s rental market has performed well surging 10% over the past year across all zones. Indeed, from 2002 to 2013 rentals have doubled across the board, although at varying scales. According to HassConsult, the most desirable areas reached KSh200,000 ($2280) in the fourth quarter of 2013. Nairobi’s mid-tier neighbourhoods peaked at approximately KSh117,000 ($1334) in the same quarter, while areas classified as less-desirable saw properties trail at around KSh38,000 ($433).

Kenya’s 6% rental yields fall short of the 7.5% subSaharan Africa’s regional average, according to South African commercial property management company Broll, but market demands are rapidly maturing. In central urban areas, demand for proximity to services has not been met by available housing stock.

Market demand is now for smaller houses, apartments and even bedsits beyond Nairobi. Some 90% of Nairobi’s residential stock approved in 2013 is for apartments, equivalent to around 14,000 units. The need for high-occupancy real estate is now at the centre of both market requirements and urban planning (see Construction).

Jackson Mwaura, chief planning officer of the state-owned National Housing Corporation, explained, “The NHC is embracing vertical housing due to several factors. Principally, this is due to diminishing suitable serviced land, which restricts our developments to smaller plots. Secondly, Kenya’s insufficient transport infrastructure restricts property developers from utilising land distant from urban centres of employment, and thirdly, restricted financing options in the domestic market has created both demand for smaller units and cost control measures in construction.”

Out Of Town 

Developers are also looking beyond urban confines with the development of master-plan communities for middle and upper classes. A number of projects have already broken ground along new commuter belts and Vision 2030 corridors. The 1000-ha Tatu City in Kiamba County, northeast of Nairobi, will provide a mixed-use development including industrial, commercial and retail space, with a residential capacity of 62,000. Backed by free land for investors in real estate, tourism, hotels, health, education, trade, water, transport, information and communications technology, and banking, the estimated KSh1.2trn ($13.7bn), 890-ha Machakos Dream City was launched in 2013 south-east of Nairobi. Some 60 km south of Nairobi on the Mombasa Highway, ground has also been broken on the KSh800bn ($9bn) Konza Technopolis.

Retail & Industry 

Seven large shopping malls are currently under construction in Nairobi and Mombasa and three in Eldoret, while a national expansion of retail properties is under way (see Retail chapter). Existing malls in Nairobi are also expanding and upgrading. Completed in 2013, the Thika Highway has two large developments: the 130, 000-sq-metre Garden City and 47,000-sq-metre Two Rivers. Opening in 2014, the Garden City Mall will have a 50,000-sq-metre retail area.

Indeed, Kenya’s retail sector has outperformed the 9.6% regional average in sub-Saharan Africa, with 10.5% investment yields and rentals for prime retail space commanding rents of $22-35 per sq metre, Broll has reported. Industrial real estate has also benefitted from improved transport infrastructure. Industrial rental yields were the highest of any sector in 2013, outperforming the 11% sub-Saharan Africa average at 12%, according to Broll.

Vertical Integration

The commercial property segment faces a different set of circumstances from the residential segment. The largest collection of commercial space is in Nairobi, where there is already a spate of office towers and a steady level of demand thanks to the city’s role as a regional headquarters for multinationals. However, the speed of development is exceeding current demand, with an estimated 1.24m sq metres in the pipeline.

Average office rents have also increased by 135% from some $7 to $16.50 per sq metre between 2003 and 2014, growing at a combined annual growth rate of 12.3%, according to Knight Frank figures. Indicative of the EAC’s rising tide, Kenya’s 9.5% investment yield remains in line with the sub-Saharan African average as Kenya is yet to fully capitalise on its regional hub status.

Average rentals since 2009 have delivered rates of $11.17 to $14.89 per sq metre and sales of $1613 to $1835 per sq metre, according to Axis Real Estate. Rentals are currently expected to lead market trends, following a 2014 increase in commercial property taxes from 17% to 34% that will inevitably dampen sales (see analysis). Meanwhile, rezoning of residential districts has permitted the transition of CBD businesses to the periphery where space requirements are easier to satisfy.

Outlook 

Economic fundamentals of Kenya’s real estate market remain strong as it is mainly a cash market with low levels of debt and assured pipeline demand. Ongoing legislative reform is building investor confidence in the market as improved transparencies provide greater certainties of market performance. Reform to land zoning regulations is also enabling development distant from established urban employment centres, supported by improvements to services infrastructure. Nationally, Vision 2030 and Kenya’s increasing role within the EAC will feed greater investment into the real estate market.

However, in order for Kenya to capitalise on its latent economic value, improved financial access is essential to ensure the inclusion of Kenyans within domestic real estate and property ownership growth.