Performance of the Real Estate Sector in Kenya

The real estate sector contributes 9% of Kenya’s GDP, according to a Real Estate Report released by Cytonn Investments today.

According to the report, in Q3/2015, the construction and real estate industry had the greatest growth at 14.1%, compared to 10.1% in financial services and 7.1% growth in agriculture.

In Kenya, the Real estate sector has consistently outperformed other asset classes in the last five years, generating returns of between 25% and 30% and making it the most lucrative business to venture in with zero losses.

Residential units in Kenya generate an average rental yield of 5%, while commercial space generates an average yield of over 9%. The report indicates that the total Return, including rental yield and appreciation, is in the region of 28% High Returns Recent Developments Market Outlook.

The real estate sector in and which was previously dominated by individual developers has now seen entry of more institutional developers such as Saccos, private equity firms and foreign institutions in major towns around the country.

According to the Cytonn Report, the development of REITS in the capital markets, as a way to raise funding and exit real estate developments, is likely to attract more institutional investors. The industry however continues face challenges such as unfavorable interest rate environment, something that dominated the industry the better part of the year 2015.

Rapid population growth of 2.4% per annum is creating increased demand for housing, as families grow and consumer needs change to reflect independent living. The demand has also been aided by the high urbanization rate of 4.4% per annum in the Nairobi area and the metropolis.

The ‘new middle class’ have created a huge opportunity for integrated housing developments such as mixed used developments and master planned communities. Improved infrastructural developments have opened up new development areas in areas such as Athi River, Mlolongo and Ruaka. These include improved roads, expanding airports, and the Standard Gauge Railway, electrification, ICT and telecommunication systems.

REITS development is set to make it easy to access capital to develop, as well as facilitate exit of developments to the public markets, which in turn increases the transparency of the sector. Pension schemes and insurance companies now allocate more than 16% of their portfolio to real estate, a trend set to increase with more trustee and investor education in the sector. Kenya has enjoyed improved political stability creating a suitable environment for local and foreign direct investment

Owing to the high returns in the real estate sector, such investments have been mainly focused on real estate developments.

Article by Juma Fred.