Q2 EDITION
Investors Digest – INTO THE MARKETS
An insight into the Kenyan Real Estate market on its performance, investment opportunities and the current trends.
Residential Market
A decree from the State Department of Housing and Urban Development of the Ministry of Transport, Infrastructure, Housing, Urban Development and Public Works structured that all affordable housing development projects under the nation’s Big 4 Agenda will be required to meet the International Finance Corporation’s (IFC) Excellence in Design for Greater Efficiencies (EDGE) green buildings standard.
EDGE is a green building certification system that enables design teams and project owners to assess the most cost effective ways to incorporate energy and water-saving options into their buildings and is an innovation of IFC, a member of the World Bank Group.
For a building to attain the standard, it has to use 20% less energy, less water and less embodied energy in materials compared to a regular building as estimated within the EDGE software. This is a good move as it inclines with the National Government’s intent of reducing the country’s carbon emissions by 30% by 2030 and it seeks to implement green buildings amongst other measures such as the expansion of geothermal, solar, and, wind energy production.
We thus expect the new requirements will guide the designing and construction works by developers looking to venture into affordable housing with the aim of reducing or eliminating negative impacts on the environment, by adopting measures such as using less water, energy or natural resources.
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Construction and Building Plans
The Nairobi Metropolitan Services (NMS) established a new urban planning technical committee to handle building plans approvals in Nairobi County. This comes approximately two months after the disbandment of the Nairobi City County Pre-Technical Committee and the Nairobi City County Urban Planning Technical Committee by NMS director-general Mohammed Badi, citing corruption by its officials which led to delays in issuance of approvals. The new committee will process development permits issued as from March 18, 2020.
Currently, processing of construction permits in Kenya can take as long as two years, and the lack of improvements of the administration system has continued to cripple the ease of doing business in the construction industry. Delays in the approval system ultimately lead to unnecessarily high development costs for private developers thus pushing away potential investors. According to the Kenya National Bureau of Statistics (KNBS) Economic Survey 2020, the value of building plans approved in the Nairobi County Government decreased by 1.3% from Kshs 210.3 bn in 2018 to Kshs 207.6 bn in 2019, attributed to delayed issuance of approvals by the county government due to downtimes faced by the e-permit systems and the disbandment of the technical committee in charge of approving the permits. However, in January and February this year, the value of building plans approved by the Nairobi County was Kshs 42.0 bn and Kshs 54.9 bn, respectively, 139.9% and 460.4% higher than Kshs 17.5 bn and Kshs 9.8 bn recorded in January and February last year, respectively. This was attributed to the introduction of a weekly plan by the county government aimed at clearing a seven month backlog of pending building approvals that had accumulated in 2019 after the suspension of some planning department officials.
We at Adelante therefore expect the formation of the new committee will speed up approval processes by the county thus clearing the current backlog of pending building plans as well as encouraging both local and foreign investment into the county’s real estate sector which will in turn spur the sector’s growth.
We expect the real estate sector to record activities as the economy cautiously reopens following the COVID-19 closures, supported by the continued investor confidence country and the expeditious processing of building plan approvals in Nairobi County with the establishment of a new urban planning technical committee.
Land
The land sector within the Nairobi Metropolitan Area recorded several activities in 2019/2020 despite an overall slowdown in real estate development activities, attributed to a tough economic environment, and an existing oversupply of space within the commercial sector and the high end residential market. During the period under review, transactions in the land sector were driven by;
Increased focus on the affordable housing initiative by both the government and private sector developers. This has generated increased real estate activities especially in satellite towns where land is available in bulk and at affordable prices thus increasing demand for development class real estate,
Development of infrastructure which has opened up new areas for development leading to increased demand for development land,
Positive demographics with a relatively high population growth rate and urbanization rate of 2.5% and 4.3% respectively, against a global average of 1.2% and 2.0%, and a rising middle class with increasing purchasing power creating sustained demand for development land, and,
Reduced supply of development land at affordable prices in areas close to the Nairobi CBD resulting in demand for the same in satellite towns.
Despite the above drivers, the sector was constrained by;
Inadequate infrastructure leading to the growth of informal settlements such as slums, making land less preferred by investors especially in the urban areas in the wake of high urbanisation,
Inaccessibility to loans mainly due to low-income levels that cannot service the loans, the high interest rates and deposit requirements which lock out many borrowers. This has continued to cripple real estate development as it has resulted in low demand for property including land, and,
Reduced real estate development activities in the wake of the COVID-19 pandemic which has resulted in the disruption of construction materials supply chains and constrained development funding as investors adopt a wait and see attitude given the uncertainties in the market.
Some of the factors likely to shape the sector include;
Digitization of the Lands Ministry– In May 2020, the Ministry Of Lands and Physical Planning issued a notice to the public inviting them for public participation on the regulatory impact statement for the proposed Land Transactions (Electronic) Regulations 2020. If approved, the regulations will guide land processes in the country. We expect this to boost the real estate sector through faster land transactions thus reducing delays experienced by developers during the pre-construction period,
Government Land Repossession– In a bid to streamline the land sector in Kenya, the government is in the process of reclaiming all unclaimed and grabbed land in areas such as Kariobangi and Ngong , which is set to increase security in the fraud-ridden sector, and
Implementation of Land Management Reforms– Earlier this year, The National Land Commission (NLC) and the Institution of Surveyors of Kenya (ISK) agreed to form a joint team that will spearhead land reforms especially in the areas of research, land management, women land rights, compulsory land acquisition and compensation among others.
Performance Summary in 2019/20 Based on Zones and Locations
For our analysis, we classified the various nodes based on the zoning regulations and locations as below;
High Rise Residential Areas: These are areas characterized by high rise residential developments mainly apartments and include: Kileleshwa, Dagoretti, Githurai, Embakasi, and Kasarani,
Low Rise Residential Areas: These are areas zoned for low rise residential developments, mainly villas, townhouses and maisonettes and include; Kitisuru, Runda, Ridgeways, Karen and Spring Valley,
Commercial Zones: These are areas characterized by commercial office buildings in Kilimani, Westlands, Riverside and Upperhill,
Satellite Towns: Land in the area was categorized into serviced (site and service schemes) and unserviced land.
In 2019/2020, the land sector recorded an 8-year CAGR of 13.5% and an annual capital appreciation of 1.5%, compared to the (0.3%) recorded in 2018/2019, attributed to increased demand for land mainly in the low rise residential areas and satellite towns. Asking land prices in low rise residential areas recorded a 3.8% capital appreciation y/y, attributed to the availability of development land in these areas. Additionally, people are attracted to these areas as they are sparsely populated, thus offering exclusivity and privacy. Unserviced land in satellite towns such as Ruaka also recorded a capital appreciation of 3.8% y/y, attributable to the growing demand for land in these areas fueled by the demand for housing by the growing working population as the areas act as Nairobi’s dormitory, coupled by the improving infrastructure.
Satellite Towns-Unserviced Land
Asking land prices for unserviced land in satellite towns such as Ruiru, Limuru and Utawala, recorded a capital appreciation of 3.8% y/y, a marginal decline of 0.1% points from the 3.9% recorded in 2018/19. The relatively high capital appreciation is supported by the high demand for development land fuelled by; i) affordability in comparison to Nairobi’s suburbs, and ii) improving infrastructures such as sewerage systems and roads in areas such as Ruaka and Ruiru.
Nairobi Suburbs- Low Rise Residential Areas
Low-rise residential areas such as Karen and Runda recorded an average capital appreciation of 3.8% y/y, compared to the 0.9% y/y price correction recorded in 2018/19. The improved performance is attributed to a growing demand for development land supported by the resilience of the detached units residential market within the nodes evidenced by the 0.3% annual price appreciation in H1’2020, in addition to the relative affordability of land at approximately Kshs 84.2mn per acre as compared to the high-rise nodes, selling at Kshs 115.6 mn per acre on average. Additionally, family units are attracted to these areas as they are sparsely populated, thus offering exclusivity and privacy.
Satellite Towns- Site and Service Schemes
Site and service schemes recorded a 0.5% annualized capital appreciation, compared to the 0.5% y/y price correction in 2018/19. The capital appreciation is attributed to increased demand driven by the relatively affordable land at approximately Kshs 15 mn asking land price per acre and provision of infrastructure by the developers. Compared to unserviced land in the same areas, the asking price of serviced land recorded a slower appreciation due to decreased demand as buyers are not willing to pay a premium for the services provided, thus opt for unserviced land.
Nairobi Suburbs- High Rise Residential Areas
Asking land prices in high-rise residential areas stagnated, compared to a 1.6% price correction in 2018/19. The stagnation in asking land prices is attributed to reduced demand for development land given the reduced development activities due to the relatively high land prices averaging at approximately Kshs 116 mn per acre, compared to low rise residential areas and unserviced land in satellite towns averaging at Kshs 84 mn and Kshs 25 mn, respectively, in the wake of an economic slowdown in addition to the existing oversupply of residential units in the high-end market segment.
Nairobi Suburbs- Commercial Zones
Commercial zones recorded a 0.7% y/y correction in asking land prices, 1.5% points lower than the 2.2% correction recorded in 2018/19. We attribute this to the decreased demand for development land in the sub-markets given the relatively high asking land prices of Kshs 419 mn per acre on average thus developers are not able to achieve favorable returns from the investments, in addition to the existing oversupply of commercial office and retail spaces which stand at 5.2 mn SQFT and 2.8 mn SQFT, respectively, as at 2019.
Summary and Investment Opportunity in the Sector
Ruiru, Kasarani, Karen, Spring Valley and Ruaka are among the best performing submarkets in terms of capital appreciation, recording annual rates of more than 5.0% in 2019/20, while Ruiru offers site and service investors the highest expected returns averaging 5.8%.
Investment Opportunity
Given the above performance of the various areas, the investment opportunity in the land sector lies in sub-markets such as Karen, Spring Valley and Kasarani which recorded relatively high annualized capital appreciation of 5.6%, 5.4% and 5.7%, respectively, and satellite towns such as Ruiru and Ruaka for unserviced land, and Ruiru for site and service schemes which were the best performing sub-markets with average annualized capital appreciation of 6.2%, 5.2%, and 5.8%, respectively, supported by a growing demand for development land by the growing middle class and improving infrastructure.