Nairobi Metropolitan Area Land Report 2018, & Cytonn Weekly #17/2018

Transcription

1 Nairobi Metropolitan Area Land Report 2018, & Cytonn Weekly #17/2018 Real Estate During the week, Kenya National Bureau of Statistics (KNBS) released the Kenya Economic Survey 2018, which tracks the socio-economic factors affecting the Kenyan market over a 5-year period. The key take outs from the report were: Real Estate, Building and Construction Contribution to GDP: The real estate and construction sectors contribution to GDP increased to 14.1%, an increase of 0.3% points compared to 13.8% recorded in 2016; real estate sector s contribution to GDP increased by 0.1% points to 8.5% from 8.4% in 2016, while building and construction to GDP increased by 0.2% points to 5.6% from 5.4% in However, both sectors slowed down in terms of growth rate, with the real estate sector recording 6.1% growth compared to 8.8% in 2016, and the building and construction sector growing by 8.6% compared to 9.8% in This slower growth rate is attributable to the tough operating environment experienced in the year 2017 following the negative effects of the protracted elections, as well as drought and inflationary pressures that dampened the country s overall economic growth to 4.9%, from 5.9% recorded in 2016, hence affecting purchasing power of potential clients, Source: KNBS

2 Source: KNBS In terms of details of the report: Construction Sector: Cement consumption decreased by 8.2% to 5.8 mn tons in 2017 from 6.3 mn tons in 2016, indicating a slowdown in construction activity, mainly attributable to the prolonged elections period in Q3 and Q4 of 2017, that resulted in real estate investors adopting a wait-andsee attitude, as well as the decline in credit advancement to the private sector, which averaged at an estimated 2.4% in 2017, compared to 4.1% in 2016, Value of New Buildings and Approvals: The value of new private buildings issued with certificate of occupancy by Nairobi City County (NCC) increased by 10.2% to Kshs 85.6 bn in 2017 from Kshs 77.7 bn in 2016, attributable to continued increase in residential developments which accounted for 85.0% of all private completions. This is positive in the sense that we continue to see great efforts towards addressing the huge housing deficit of 2.0 mn units. Additionally, the number of public buildings completed increased by 9.6% to 1,164 units. The value of building plans approved by the NCC, however, decreased by 28.1% to Kshs mn in 2017 from Kshs mn in 2016 which in our view is due to constrained financing following tight lending standards employed by lending institutions, Infrastructure: In 2015/2016, the total development expenditure on roads by the National Government increased by 61.7% to Kshs bn, however in 2016/17 the expenditure grew by 33.0% to Kshs bn and in 2017/2018, the growth rate is expected to slow further to 14.2% as the government realizes its infrastructural plans. The most notable infrastructural developments in 2017 were: (i) Commissioning of the Standard Gauge Railway Phase 1 and the beginning of phase 2 in September 2017, (ii) expansion of Outer Ring Road and Ngong Road in Nairobi County, (iii) Planned construction of the Western Bypass, Dongo Kundu Bypass in Mombasa, as well as Nuno-Modogashe Road in North Eastern Kenya, Hospitality Sector: The accommodation and food sectors contribution to GDP grew by 0.1% points to 1.2% in 2017, from the 1.1% registered in The sector indicated strong signs of recovery, despite the harsh political climate, with growth coming in at 14.7% compared to 13.3% registered in This is mainly due to the recovery of the tourism sector where earnings grew by 20.3% to Kshs bn in 2017 from Kshs 99.7 bn in The number of international visitor arrivals also increased by 8.1% to 1.4 mn in 2017 from 1.3 mn in 2016 with holiday travelers accounting for 68.4% while business travelers, in-transit and others accounted for 13.7%, 5.9% and 12.0%, respectively. However, the number of holiday and business travelers decelerated in Q3 and Q4 of 2017 by 1.8% and 2.4%, respectively, following the uncertain political period as well as negative travel advisories by western countries such as United States and United Kingdom (UK). Hotel bednight occupancy rate increased by 0.9% points to 31.2% in 2017 from 30.3% registered in 2016 with the Coastal region and Nairobi accounting for most of the bed-night occupancy at 12.5% and

3 7.3%, respectively, of the total available rooms. The number of international conferences also reduced by 15.9% from 227 in 2016 to 191 in 2017 while local conferences increased by 2.4% from 3,755 to 3,844 over the same period. The report attributes the strong performance of the sector to enhanced security and intensified efforts by the government to market Kenya as the ultimate tourist destination. The KNBS findings are in line with the Cytonn Hospitality Report 2017 which had projected that (i) international arrivals would come in at 1.4 mn in 2017, (ii) business tourists arrival would decline by 0.4%, and (iii) a slight increase in the accommodation and food sector s contribution to GDP to 1.2%. The hospitality sector is set for more growth driven by growth in Meetings, Incentives, Conferences and Exhibitions (MICE) and domestic tourism as well as continued marketing efforts by the government. As indicated in the Cytonn Annual Market Outlook for 2018, we expect the Kenyan real estate market performance to recover in 2018 driven by(i) attractive returns in the residential sector on the back of a high housing deficit and government incentives such as a 15.0% tax reduction for developers constructing more than 100 affordable housing units per annum, increased infrastructural development and increased focus by the government on affordable housing, and (ii) the expected growth of the hospitality sector. Also during the week, JLL released the JLL East Africa Hotel Market Review The key take outs from the report were: 1. The key factors shaping the hospitality sector in the region in 2017 include: i. Entrance of many international hotel operators, which has led to supply outpacing demand. The report noted that the supply growth is also softening thus creating an opportunity for the hotel market performance to recover, ii. Hotel investors in the East Africa region are largely local investors who have access to prime land locations and easy access to capital, and, iii. Due to the growth of international brands looking to penetrate the markets, the new and upcoming supply is increasingly of investment grade quality with the aim of attracting the foreign investors. 2. Performance: Addis Ababa recorded the highest revenue per available room (RevPAR) at USD 192 compared to a regional average of USD 109, attributable to high demand from clients coming from non-governmental organizations, corporates and diplomats. In terms of occupancy, Kampala had the highest bed occupancy at 56.0% compared to a regional average of 51.6%, attributable to high demand from Uganda s domestic tourism as well as regional tourists. The table below shows the performance summary of the hotel markets in East Arica;

4 Hotel Market Performance in East Africa City Deal Pipeline (Rooms) ( ) International Arrivals (2017) Average Daily Rate (USD) Average RevPAR (USD) Average Room Occupancy Rates Nairobi 1, mn % Addis Ababa 3, mn % Kampala mn % Dar es Salaam mn % Kigali mn % Average 1, mn % Addis Ababa and Nairobi have the highest number of rooms expected to be delivered in the period Ethiopia s market recorded the highest RevPAR at USD 104 compared to regional average of USD 79, attributable to demand from diplomatic and corporate markets. Addis is home to the African Union offices, the UN Economic Commission for Africa, foreign missions, regional NGO s as well as the UN Conference Centre and the fast paced growth of the Ethiopian Airlines which currently serves 101 destinations, Dar es Salaam s market performance has been dampened by the shift of government operations to Dodoma as well as stalled entry of foreign firms, registering a decline of 13.7% in the average RevPAR and a 5.6% decline in bed occupancy rates during the period Kampala performed fairly well with average RevPAR increasing by 11.9% in 2017 to USD 4 compared to the East Africa average of USD 79, driven by increase in domestic and regional tourism Kigali recorded a slight increase in average RevPAR of 2.8% to USD 73. However, as per the report, bed occupancy rates in Kigali recorded a decline in 3.9% attributable to the sharp increase in average daily rates which rose by 5.7% during the year Nairobi s performance was subdued registering the sharpest decline in RevPAR at 17.8% to USD 60 in However, it is expected to recover on the back of high tourist arrivals growth, public sector support for tourism, as well as new air routes in the long term. Source: JLL Hass Consult also released the 2018 County Land Index which tracked trends in the land sector across 10 Kenyan Counties including Nairobi, Kiambu, Kisumu, Kwale, Nakuru, Mombasa, Machakos, Kilifi, Uasin Gishu and Kakamega as well as 75 towns from within the tracked Counties. The main take outs were: i. Land prices recorded a slow growth at 7.4% in 2017, compared to 12.1% in 2016 attributed to the protracted elections in 2017 as well as poor credit access in the private sector, ii. Annual price appreciation in 2017 was highest in Kisumu and Mombasa with 14.7% and 9.9%, respectively. However, Kiambu and Kisumu counties recorded the strongest price increases with a 5-year cumulative growth of 98.7% and 88.2%, respectively. This was attributed to good economic performance as well as continued infrastructural developments in the said counties. Kiambu continued to attract investors due to affordable land prices with an average price per acre at Kshs 32.3 mn compared to Nairobi s Kshs mn (which is the highest nationally), good infrastructure and its close proximity to Nairobi CBD, as per the report, iii. For the tracked towns, Ngata Town in Nakuru registered the strongest annual price growth recording 20.7% in 2017 attributed to high land prices in Nakuru town that have pushed investors to other areas away from the Nakuru CBD. This was followed by Utange in Mombasa County, which recorded 17.1% growth, Kitengela with 16.6%, Embakasi with 14.9% and Bamburi with 14.8%, iv. The worst performing towns were Thika whose prices declined by 4.1%, followed by Gilgil, Thome,

5 Naivasha town and Ridgeways, which declined by 1.9%, 1.7%, 1.1% and 0.8%, respectively, and, v. Upperhill recorded the sharpest price growth with the average price per acre coming in at Kshs mn as of December 2017, from an average of Kshs mn in County Land Prices Summary County 5-year Growth (Uncompounded) Appreciation (2017) Current Average price per Acre (Kshs) Kisumu 82.2% 14.1% 7.0 mn Mombasa 50.6% 9.9% 49.8 mn Nakuru 81.8% 9.5% 4.6 mn Machakos 53.6% 8.4% 13.3 mn Kiambu 98.7% 7.3% 32.3 mn Kilifi 66.1% 6.9% 15.7 mn Kwale 52.1% 6.6% 10.0 mn Nairobi 68.3% 4.2% mn Uasin Gishu 67.1% 3.8% 5.2 mn Kajiado 58.6% 3.0% 9.7 mn Average 67.9% 7.4% 33.6 mn Source: Hass Consult Other activities observed during the week included: i. In a bid to address the shortage of accommodation in Kenyan universities, five joint venture firms including Kesa, Meridiam, JV Unicamp, PDM-Roko-CBA Capital Consortiums and a Chinese company, Chinese Overseas Engineering, have been chosen to build 23,400 hostel rooms in various universities across the country including Moi University, Embu University and South Eastern Kenya Universities (SEKU). Moi University intends to build a 14,000-unit facility; Embu University will have a 4,000-bed facility while SEKU will have a 5,400-unit facility. Under the proposed PPP model, the hostels developers will gain returns on their investment through a built to rent operation for years, after which they will recover their principal and interests then hand over the facility to the respective institutions of learning. The public-private partnership model has been floated over the last couple of years as the most efficient way to address the housing shortage in local universities but most partnerships such as the Kenyatta University and US-based Africa Integra for the construction of a 10,000-room facility at a tune of Kshs 5.1 bn, are yet to materialize due to the various challenges that face PPP models, but remain unaddressed, such as the inability to transfer public land to Special Purpose Vehicle, the long-term nature of PPPs, as well as vague compensation models for the private partners, ii. In line with the government s Affordable Housing Initiative, Tatu City developers, Rendeavour announced plans to incorporate a 300-acre affordable housing project within Tatu City that will see development of 10,000 affordable units that will be priced between Kshs 1.5 mn to 5.0 mn. The Development is set to commence by April 2019, iii. The government through a concept paper in regards to the affordable housing initiative, intends to work with county governments and the National Social Security Fund(NSSF) to fasten the provision of affordable housing. The county governments will aid in developing the much-needed land banks as per the government target of a total of 6,800 acres across various counties; 3,000 acres in Nairobi, 1,200 in Mombasa, 1000 in Kisumu, 800 in Eldoret and 800 in Nakuru. To this end, the County Government of Homa Bay signed a memorandum of understanding during the

6 week, with the National Government for the development of 2,000 affordable homes where the County will provide 18 acres for the cause, iv. In a bid to further enhance the home affordability, the government has also proposed the following legal amendments: Amendments to the Stamp Duty Act to exempt first time home buyers from the tax when purchasing social and affordable homes, The NSSF Act to increase member contributions to Kshs 1,080 from the current Kshs 400. This will provide a broader capital base for the pension fund which has been at the forefront of social housing provision, and, The Income Tax Act to offer higher tax rebates of Kshs 8,000, under the Home Ownership Savings Plan, to employees saving with mortgage institutions. Currently the tax rebates stand at Kshs 4,000 also through the Home Ownership Savings Plan which has been in effect since We commend the Kenyan Government s concerted efforts, especially in the legal reforms front, aimed at driving the affordable housing initiative which is expected to bear fruits by matching the purchasing power of potential home buyers as well as pulling in the private sector in delivery of the 1.0 mn homes by 2022, as exemplified by various private developers such as Rendeavour who have committed to contribute to the initiative. We expect the real estate sector to improve on its performance this year given the recovery of fundamentals that support the sector s growth such as (i) a rebounding tourism sector, (ii) intensified infrastructural development, (iii) economic growth recovery, and (iv) increase in household income due to an expanding middle class. Liason House, StateHouse Avenue The Chancery, Valley Road Generated By Cytonn Report A product of Cytonn Technologies