The real estate sector continued to outperform other asset classes in 2016, supported by high demand from both individuals looking to purchase real estate, as well as increased institutional investor demand, leading to the sector realising high returns. According to Cytonn’s 2016 Real Estate Review, the rental yields averaged about 5.8% for residential houses to 10.0% for commercial sector and capital appreciation in Nairobi and its metropolis averaging at 18.0% leading to the sector’s average returns at 25.8%.
“Real estate continues to provide investors with attractive yields and capital appreciation, culminating into attractive total returns, as witnessed by the 25.8% total return the sector has delivered in 2016,” said Elizabeth N. Nkukuu, CFA, Cytonn’s Chief Investment Officer. “The asset class returns were attractive compared with the stock market which registered a negative 8.5% performance, while the bond market made a 0.2% capital loss with the average yield on the 364-day bill being at 11.6%,” added Elizabeth.
In the high-end residential market, Karen and Runda were the best performing with total returns of 12.7% and 11.3%, respectively. Their main advantage was the continued relaxation of strict zoning regulations, good infrastructure and proximity to major shopping hubs.
Apartments in the upper middle income segment in areas such as Kilimani and Kileleshwa recorded slower uptake and lower price appreciation due to oversupply of units in these markets, while developments in areas such as Kikuyu and Ruaka recorded higher appreciation driven by demand from institutional developers and homeowners, seeking to capitalise on the opportunity afforded by the increased infrastructural development. ‘’Developers and investors have now shifted focus to satellite towns such as Kikuyu and Ruaka due to the relative affordability of land prices, the growing population and high appreciation of property in these areas supported by robust infrastructural development, including the Northern and Southern Bypasses’’ said Johnson Denge, Cytonn’s Real Estate Manager.
In the commercial sector, the office sector remained stable with occupancy declining marginally, from 89% in 2015 to 88% in 2016 due to increased office space supply, which is currently at 3.6 mn square feet in Nairobi alone. “Despite decreasing office occupancy, the yields remain attractive at 9.4% driven by demand from growing companies in professional services, SMEs and global corporations seeking Grade A office space for their regional operations’’, said Mr Denge.
Karen emerged as the best performing market in the retail segment with a high yield of 12.5% and high occupancy at 96%, with yields driven by high rental rates averaging Kshs 216.7 per square foot, versus an average of Kshs 186.9 per square foot for Nairobi, due to its up-market location and retail offering.
“The retail segment has grown in other regions such as Mt Kenya and Kisumu as seen through increased mall space supply in these areas, said Mr Denge. “With occupancy at 90% and rent at Kshs 151 per square foot, Mt Kenya was among the best performing retail markets, with a 10.1% yield’’, he added.
The industrial sector recorded average performance with rental yields of 5.8%, rent at Kshs 35 per square foot, sale prices of Kshs 6,313 per square foot and 85% occupancy levels. Developers are increasingly shifting to emerging industrial zones such Athi River and the Eastern Bypass due to availability of large tracts of land at relatively lower prices compared to key industrial nodes such as Baba Dogo and Industrial Area.
In hospitality, serviced apartments in Nairobi outperformed hotels due to higher occupancy, which was 90% on average, compared to hotels at 33% occupancy levels. Overall the sector showed signs of recovery, witnessed through a 13.9% increase in international arrivals in the period between April and May, as a result of (i) improved security, and (ii) increased government efforts towards marketing of Kenya as a tourism destination. Investors have demonstrated confidence in the sector through the opening of hotels and serviced apartments in various parts of the country.
According to Cytonn’s Report, the returns in the real estate will remain attractive driven by i) high housing demand and the large housing deficit at 200,000 units annually, ii) improving infrastructure, iii) the growing middle class with higher purchasing power, and iv) growing businesses and SMEs creating demand for office and retail space.
The report is available online at: Cytonn Real Estate Markets Review – 2016.