The real estate sector grew 4.8 percent on average in the first three quarters of 2019 as compared to the same period in 2018.
According to the Kenya National Bureau of Statistics (KNBS) Quarterly Gross Domestic Product Report Q3’2019, the sector grew by 0.3 percentage points higher than the growth rate recorded over the same period in 2018.
The sector also registered a 20.3 percent increase in the value of buildings approved for the first nine months of the year to Kshs 121.3 billion, from Kshs 100.8 billion similar period of review in 2018, indicating the sector’s improvement during the year.
According to analysts from Cytonn Investments, the growth in the real estate sector is attributable to
- enhanced infrastructure, which continues to boost Nairobi’s positioning as a regional hub, and thus, attracted foreign investment,
- the huge housing deficit and the support accorded by the National Government to developers and buyers, in a bid to address the shortage, and
- stable economic expansion with the country’s GDP growing by 5.6 percent in 2018, in comparison to the five-year average of 5.4 percent.
While the real estate sector recorded growth, it also continued to face certain constraints, mainly in the form of
- oversupply in the commercial office and retail sectors, with a surplus of 5.2 million SQFT and 2.0 million SQFT, respectively,
- Insufficient access to financing and high financing cost for both developers and off-takers amidst slow private sector credit growth before the interest rate cap law was repealed, and
- delays in the processing of construction permits by some County Governments, namely, Nairobi, Kisumu, Kiambu, and Mombasa.
In terms of performance, commercial office, retail, residential, mixed-use developments and serviced apartments sectors registered average rental yields of 7.5, 7.8, 5.0, 7.3, and 7.6 percent, respectively, resulting to an average rental yield for the real estate market of 7.0 percent, 0.4 percent points lower compared to 7.4 percent recorded in 2018.
Therefore, with a capital appreciation for existing properties at 2.0 percent, average total returns came in at 9.0 percent, 2.2 percent points decline from 11.2 percent recorded in 2018.
“We attribute this to a decline in demand for property evidenced by the 3.4 percent points decline in the residential sector annual uptake, and the registered glut in office and retail spaces of 5.2 million SQFT and 2.0 million SQFT, respectively,” analysts from Cytonn Investments say.
However, it is important to note that development returns for investment grade real estate are still estimated to be approximately 20.0 percent to 25.0 percent p.a.
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