Shrinking Demand Leads to Dar es Salaam’s Low Residential and Office Yield

Dar es Salaam has low residential and office yields at 5.2 percent and 6.4 percent, respectively compared to other cities in Sub-Saharan Africa which are attributed to the shrinking demand resulting in reduced rents mainly in the residential and office sector.

According to the report released by Cytonn Investments, the retail sector in Tanzania has relatively competitive yields at 9.4 percent compared to Kenya’s and Accra’s at 9.6 percent and 9.5 percent, respectively.

A bulk of real estate property, especially housing, in Tanzania is dominated by individual home-builders who account for over 70.0 percent of the total supply.

The public sector through local governments, National Housing Corporation, Tanzania Building Agency, account for approximately 12.6 percent of the supply while residential private developers cater for approximately 3.9 percent.

The housing demand is estimated to grow by 200,000 units annually with the cumulative deficit currently at 3.0 million units, according to National Housing Corporation (NHC).

The factors driving the growth of real estate in Dar es Salaam include:

    1. Stable Economic Growth:

Tanzania has had one of the fastest growing economies with GDP growth averaging at 6.6 percent annually since 2012 driven mainly by growth in mining, construction, financial services, and information and communication sectors.

   2. Influx of Multinational Players: 

The discovery of gas in 2015 and the presence of a seaport has attracted multinational companies in the transport, manufacturing and mining sectors, who demand institutional grade real estate including housing, offices, retail as well as hospitality facilities,

   3. Positive Demographic Dividend:

Tanzania has a population of 56.9 mn people growing at 3.1 percent p.a., compared to the global average of 1.2 percent p.a. and the East African average of 2.9 percent p.a. This translates to a density of 60.5 people per SQKM (Kenya has 87 people per SQKM). 32.3 percent of its population is urban and growing at 5.3 percent p.a. compared to the global average of 2.1 percent p.a. and the East African average of 5.1 percent p.a, thus creating demand for real estate,

    4. Infrastructural Development: 

The government has invested in infrastructure through construction of roads to remote areas such as Kigamboni through the construction of the Kigamboni Bridge, implementation of the Bus Rapid Transit System and ongoing construction of a Standard Gauge Railway to ease accessibility, thus boosting real estate growth in out of town areas,

   5. Institutional Funds:

Government corporations such as National Housing Corporation (NHC) and Watumishi Housing, pension schemes such as National Social Security Fund (NSSF), Government employees pension Fund (GEPF), Local Authorities Pension Fund (LAPF), among others, have been at the forefront of real estate investments.

   6. Housing Deficit:

As per the National Housing Corporation, housing deficit in Tanzania stands at an approximately cumulative 3.0 mn units and expanding by 200,000 units per annum. The gap has attracted interest from both the public and private players especially for the lower-mid end and low-end segments, evidenced by the various masterplan communities by NHC, Watumishi Housing, Avic, across the country.

The real estate sector has been facing fundamental challenges, among them:

a). Access to Credit: 

Credit growth fell from 24.8percent in 2015 to 7.2 percent in 2016 and to 0.3 percent in August 2017, attributable to a rise in the risk premium due to an increase in non-performing loans and thus banks preferred to lend to the Tanzanian Government.

b). Unfavorable Government Policies: 

The implementation of austerity measures such as surplus income cuts for government employees thus restricting their property purchasing capabilities, as well as a strict new tax regime by the new government since 2015 resulting in reduced spending, leading to the low purchasing power of real estate consumers.

c). Insufficient Infrastructure:

 Various parts of Dar es Salaam such as Mwenge, parts of Mikocheni and Kigamboni lack requisite infrastructures such as adequate water connection, mains sewers, mains electricity and proper road access hindering the growth of real estate as developers have to incur extra costs to provide these services.