Investing in Nairobi Real Estate -Report

Macro

The construction sector comfortably maintains 1.7x GDP growth and accounts for 5.1% of GDP, while the Real Estate sector records growth at 0.8x GDP (7.9% of GDP). We expect ongoing transport infrastructure projects, coupled with a sustainable urban growth rate of about 4.0% to improve accessibility and transport
connectivity within Nairobi and rapidly growing towns, notably Mombasa, Kisumu, Nakuru and Eldoret.

Using approved plans as a basis of assessing property supply, we estimate a 3-year Compounded Annual Growth Rate (CAGR) of 9.6% of the aggregate value of approved buildings in 2015. An uptick in the number of approvals sought and building permits issued between 1Q15 and 3Q15 was noted, following the reduction of building permit fees to 0.5% of total construction costs, from a range of 1.0%-1.5%.

Residential building approvals have also recorded rapid growth with a 3-year CAGR estimate of 32.5%, partly attributed to City Hall’s recognition of share certificates as proof of land ownership in 2014. As at September 2015, the number of permits released in 3Q15 were 722 (+10.4% y/y).

Credit growth to the private sector has recorded a 3 year CAGR of 20.9% to September 2015. Building & Construction sector recorded a 3 year CAGR of 17.5%, whilst the Real Estate sector noted a 3 year CAGR of 20.8%- an indication of healthy credit appetite in both sectors. In 3Q15, 12.8% of credit advanced to the private sector was attributable to the real estate sector, while the building & construction sector accounted for 4.6% (5.0% in 3Q12).

The real estate sector growth and private sector construction activity assumes a negative correlation with interest rates (-23.6%) and currency depreciation (-15.9%), suggesting sensitivity of the sectors is present, albeit lower than would be expected. This may be an indication of high reliance on equity capital in real estate, particularly in the residential property space.

Additionally, despite the lending rates remaining relatively high between 2013 and 2015, ranging between 15.3% in August 2013 and 18.1% in December 2015, Non-Performing Loans (NPLs) attributable to construction and real estate sectors were reported to generally remain constant during the 3 year period, against an annual average NPL ratio increase of 19bps over the 3 years to 4.3% in 3Q15.

Office

2016 will see the highest ever delivery of new offices with an estimated 3.8 million Ft² expected to come on stream, beating the previously all-time high of 2.3m Ft² in 2011.

Riverside Drive and Parklands emerged as new office nodes, accounting for 14% of total supply.

Grade A office space increased marginally, by 2%, in 2015, Waiyaki Way accounting for 61% of the Grade A office space delivered in 2015 while Grade B office market accounted for 50% of total supply in 2015, recording an increase of 38%.

Waiyaki Way and Westlands remain the premier locations for many tenants, recording take up levels of 81% and 62% respectively for new office space delivered in 2015.

There was a slowdown in the growth of commercial office rental rates, with average asking rents increasing by 7% in 2014-2015. This is significantly lower than the 13% increase recorded in 2013-2014.

Grade A office space continued attracting higher average asking rents compared to Grade B office space at KES 133 and KES 100/Ft²/month respectively.

The fractional sales market experienced a surge in 2015, rising by 85%, from 0.6 million Ft² to 1.1 million Ft², and accounting for 57% of the total supply in 2015. It is anticipated that the total amount of office space sold fractionally will decline by 18% in 2016.