Where to Invest Real Estate and Areas to Avoid in 2018

• By James Maclean

The economy is expected to rebound in 2018 following a difficult 2017. Some of this rebound will trickle down to the Real Estate market but developers and property owners should not expect things to normalize immediately. In this instance, where should Real Estate Investors focus their attention in 2018?

Key 2018 Macroeconomic trends

2017 saw a significant reduction in consumer spending and both local and international investment.

This slowdown was largely due to two factors: The prolonged presidential election, and a legislation driven slowdown in lending.

The election period led to a “wait and see” attitude in everything from large-scale investment to supermarket spending. Assuming the political climate remains calm, we expect this consumer confidence to normalize rapidly in 2018.

In addition to this, the interest rate cap led to a massive reduction in SME and Real Estate Loans. Simply put, the cap made the margin between lending to companies and investing in government securities too low to warrant the additional risk. A reversal of this cap would lead to a significant increase in investment and give a well-needed boost to the economy.

During a recent press conference in September the Central Bank Governor, Dr Patrick Njoroge, commented that the interest rate cap on loans would soon be reversed admitting that it had been “problematic in many ways”, analysts expect this reversal to take 6-12 months.

International investors continue to fund large scale infrastructure projects including the improvement of major highways, feeder roads, rail networks; and airport facilities.

These schemes coupled with a government led incentives – e.g. the Energy Regulation Commission (ERC) proposed late night commercial and industrial power tariff discounts – will lead to an increase in manufacturing demand and output.

But what does all this mean for the Real Estate sector?

Read: Kenyan Real Estate Sector is Poised for Rebound in 2018 

Where to invest Real Estate in 2018

Low Income Housing Development – There continues to be a significant undersupply in low to middle-income housing (Kes 2 – 10 million price range) as highlighted in the Government’s plan to build a million units of public rental housing over the next five years.

This sector is undersupplied because margins remain razor thin. If the government creates the relevant incentives to widen this margin, Low-income housing could be a boom market for 2018.

Existing Commercial Properties – Businesses looking to move office in 2017 firmly adopted the “wait and see” election approach mentioned above. A major upswing in office inquiries is therefore expected in Q1 2017.

Existing commercial property backed with impatient capital is currently very affordable and the right property purchase should be able to provide 12%+ yields over a 5+ year horizon.

Student Housing – Universities are keen to move to the European model of housing all first-year students on campus.

This guaranteed tenanting makes the development of student accommodation very attractive to yield investors.

Warehousing and Factory Development – The increase in manufacturing will increase demand for warehouses. Long lease warehousing has been – and continues to be – one of the most attractive Real Estate investment opportunities in the continent.

Secondary City Retail – Nairobians now have ample options for consumer spending, however the majority of the county towns remain undersupplied. The county retail must be customized to fit its demographics.

Developers will need to avoid copy pasting the Nairobi model.

Real Estate Areas to avoid in 2018

High income residential – There continues to be an oversupply of High income residential within Nairobi and its environs. The reality is that until the mortgage market opens up, there are very few people able to spend Kes 20M+ on a residential unit.

Nairobi Large Scale Retail – The widely mentioned oversupply in malls within Nairobi has not curbed developer’s enthusiasm for the sector. Almost weekly we are approached with new proposals for Retail developments in and around the countries capital.

In 2017, the vacancy rates increased, a trend expected to worsen in 2018 as we see more demand for convenience shopping and online retail offerings.

In summary, the country in expected to bounce back in 2018 although the impact on the Real Estate sector may take a little longer to fully materialize.

The outlook is significantly brighter if the Banks are incentivised to start lending again, but dimmer if political uncertainty returns.

Despite these factors, Real Estate investment remains a great low risk investment option, especially for people looking at longer term investment horizons.

Image: Kigali Heights, a project by Fusion Capital which has been nominated by Africa Investment Property awards for best office and best mixed-use developments.

James Maclean, Executive Director of Real Estate at Fusion Capital. Fusion is a Private Equity Firm focused on Real Estate investment and Fund Management
based in East Africa.