Kenya’s real estate sector is expected to rebound this year after experiencing a slowdown in 2017 due to political uncertainty attributed to the prolonged electioneering period forcing investors to be cautious in making purchase decisions.
The sector was further constrained by oversupply in some segments such as the commercial office, and credit constraints due to the interest rate cap that resulted in a slower credit to the private sector growth from a five-year CAGR of 14.4 percent to a low of 2.4 percent as at October 2017.
Development activity reduced evidenced by the 18.4 percent reduction in the value of building approvals in Nairobi between January and July 2017 to 149.5 billion shillings from 183.2 billion shillings during the same period in 2016.
According to Cytonn, real estate will recover in 2018 due to high housing demand improved infrastructure and expanding the middle class.
“Investors, however, have to conduct research to identify the niches in the market given the increased focus by institutional developers, which, while clearly an indication of growth, will result in stiff competition as clients and investors demand quality developments,” observes Cytonn.
Further, they cite government incentives to spur affordable housing development; growing businesses creating demand for office and retail space.
The value of building approvals reduced by Sh33.7 billion between January and July 2017 to KSh149.5 Billion.
Capital appreciation in Nairobi and its metropolis averaged at 6.5 percent in 2017 from 18.0 percent in 2016 and thus the real estate sector recorded a total return of 14.5 percent in 2017 compared to returns of 25.8 percent in 2016, showing a slow-down in real estate operators’ performance.
“The slowdown in performance was as a result of a steep decline in capital appreciation brought about by stagnated land and property prices indicating slowed demand in 2017,” said Elizabeth N. Nkukuu, CFA, Cytonn’s Chief Investment Officer.
Nkukuu added that developer returns, however, remain high at an average of more than 25.0 percent given that real estate is a long-term investment, with a capital appreciation of 17.4 percent over the last 6 years.
“Despite the setback in 2017, we expect the residential market to pick up in 2018 especially in the mid and low mid end segments as investor appetite for the same continues in a bid to curtail the housing deficit while also gaining impetus from the expected government’s affordable housing initiative and probable increase in credit to the private sector, if the interest rates cap law is revised, which is set to encourage more activity from the developers’ side,” said Johnson Denge, Cytonn’s Real Estate Manager.
Commercial office Sector
“The opportunity in the sector lies in Grade A office space, with 10.0 percent yields, as it accounts for only 10.0 percent of office space in Nairobi and in serviced offices which have high yields of 13.4 percent compared to conventional office space at 9.2 percent,” added Mr Denge.
Cytonn expects reduced development activity of malls in 2018 due to the current large supply.
“However, our outlook for the sector in 2018 is positive as the sector continues to attract both local and international retailers driven by a conducive macro-economic environment, with an average GDP growth of above 5.0 percent over the last 5-years, a low retail penetration rate of 35.0 percent that serves as an incentive for formal retailers compared to a formal retail penetration of 60.0 percent in South Africa , and closure of spaces occupied by underperforming retail chains such as Uchumi and Nakumatt, hence opening up an opportunity for other retailers in the Kenyan market.”
The sector is expected to recover in 2018 supported by increased international arrivals due to sustained demand for business and tourism travel, increased government incentives, increased marketing efforts by the government and the industry players and a stable macroeconomic environment.