THE REAL ESTATE MARKET IN KENYA

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1 THE REAL ESTATE MARKET IN KENYA A client once told me you ve got to be quick if you re planning to snap up property in Kenya s capital. Bar the last year there has been a Rapid rise in properties for 7 years. Last year was a slower year due to uncertainty as Buyers are sensitive to risks associated with the political process and were therefore unlikely to make decisions but we have seen a change since mid-january this year. The Annual year on year rise has been 10.4% compared to last year which was 5.4%. The Expectation of 10.4% rise again this year as there has been a spike of demand especially for also all those who held back last year are closing deals now showing a strong first quarter. Also - Developers are now changing tact in terms of planning for developments i.e. making one beds and studios for investors and duplexes for home owners. The market is reacting positively to this. The real estate market in Kenya is well diversified in terms of income, geography and types. In terms of income, there is a clear segmentation of high, middle and low income. Kenya is a diverse country from the long coast line having prime beach properties, to the highlands dotted with large and small scale farms and arid and semi-arid lands to the north with hidden reserves in the forms of mineral and oil resources. The main property types include retail, office, residential, Industrial and special properties mainly found in cities, towns and urban centers. The key drivers of the real estate market include demographics, income, availability and cost of credit, government policy, advertising, price, and changing lifestyles.

2 The average value of a residential property in the country surged to KES29.8 million (US$287,367) in September 2017, from just KES7.1 million (US$68,467) in December 2000 equivalent to about 4.2 times increase. Residential The Residential sector performance is heavily dependent on household disposable income and availability of credit. On average Kenya s household disposable income has been on upwards growth. This means households are able to spend more on shelter and other basic needs. On the other hand the price of both rent and sale has also been on upward trend mainly because the middle and low income segments of the residential market have been having a huge supply deficit. While the low income segment of the market still has a huge supply deficit, sections of middle income segment market are operating at surplus in both sale and rental sub-markets. In most towns hosting county headquarters, rental markets are yet to mature and a bigger chunk of the population are locals who commute from their ancestral homes. The capping of interest rates in 2016 gave mortgage holders a huge relief. On paper the capping of interest rates has reduced the cost of borrowing. On the other hand it has made mortgage lending less attractive for financial institutions as they can get better returns investing in government paper. The housing shortage in Kenya remains high and more than 200,000 homes need to be built a year, but only 50,000 new units are being built annually, according to Lands Cabinet Secretary Jacob Kaimenyi, leaving around 150,000 Kenyans un-housed every year with middle-income earners and students in urban areas most affected. In Nairobi, more than 67% of all residents live in informal settlements. The proportion of owner-occupied households in the urban areas currently stands at just 18%, compared to 82% in rural areas. The huge demand:supply gap is aggravated by property developers concentrating on building houses for the high-income earners. To ameliorate the situation, the government, with the help of the private sector, is launching an ambitious housing development project. The Ministry of Housing seeks to accelerate development and access to affordable and adequate housing through public private partnership and plans to construct 300,000 units by the year 2017, said former Cabinet Secretary for Lands, Housing and Urban Development Charity Ngilu. Moreover to encourage building, the Kenyan government recently lowered corporate tax for real estate developers to 20%, from 30%.

3 Indications are that the sector will recover in 2018 attributable to high housing demand and the large housing deficit at 200,000 units annually, improving infrastructure and the growing middle class with higher purchasing power. Commercial The office market in Kenya, like the retail sector has experienced increased supply and is currently estimated to be in surplus. A significant number of office buildings in key office nodes of Upper Hill and Westlands have very low occupancy rates. The demand for offices spaces is usually driven by growth of the services sector. The major players in the services sector include Government, Financial institutions, Professionals firms and NGO s. For the last two years the education and health sectors have emerged as great consumers of office space with the opening of satellite college campuses and new hospital branches in major expansion drives. However, 2016 witnessed closures of some satellites campuses following orders from the Commission for University Education as well as the Ministry of Education. Mortgages In Kenya, most property purchases are for cash. Because of this, the mortgage market remains underdeveloped. Kenya s undeveloped mortgage market is one of the primary reasons for its acute housing shortage. In 2017, its size was just above 3% of GDP and there were fewer than 25,000 mortgage loans outstanding. In a recent report, the World Bank commended the role of Savings and Credit Cooperatives (Saccos) in providing affordable housing finance. The share of Saccosfinanced housing in Kenya is estimated at about 90%, since banks do not consider housing finance to be attractive.

4 Saccos provide a credit for housing finance that is much more accessible and is provided at a cheaper rate as compared to what many banks can offer, said Mehnaz Safavian of World Bank. Financing remains very costly in Kenya, not just for buyers but for developers as well and there is a need to reform the way that mortgages are structured to ensure funding can be released during construction, not just when properties are completed. Kenya s Economy Kenya s economy remains robust. In 2016, the economy expanded strongly by 5.8%, slightly up from a 5.7% growth in 2015, according to the International Monetary Fund (IMF), making it one of the fastest-growing economies in Sub-Saharan Africa. In Q2 2017, the economy grew by 5%, after growth of 4.7% the previous quarter and 6.3% during the same period last year, according to Kenya National Bureau of Statistics (KNBS). The economy is projected to expand by a healthy 5% this year and by another 5.5% in Kenya s industrial base has been shrinking over the years mainly due to a harsh operating environment. The major contributors to the harsh business environment include poor transport infrastructure, lack of reliable power, corruption and land issues. As a result, a number of manufacturing entities closed or relocated, while potential ones decided to invest elsewhere and settled for setting up marketing distribution operations in Kenya. On a positive note, the government has made tremendous efforts to improve the business climate. These efforts include massive investment in road, railway and sea port construction and /or expansion; power generation including investment in clean energy such as geothermal, wind and solar energy; and reducing the bureaucracy in company registration. These efforts saw Kenya move up the world ease of doing business index. While setting up new factories and plants following government efforts, may be a long way out, an area that is likely to see significant growth in the industrial sub-market is warehousing and logistics areas. With improved network of roads and a revamped railway line new warehouses and logistic centers present a major real estate investment opportunity in 2017 and beyond. Kenya s construction industry has been accelerating at a rapid pace and making a substantial contribution to the country s strong GDP growth figures on the back of major public works projects and rising demand for mixed-use and residential developments. However, the market is not without its challenges, and the funding and financing environment at all stages of project execution is tough, creating negative cost implications and a potential obstacle to the industry s long-term, sustainable growth. Given the strong growth in the sector and the number of projects in the pipeline, it is

5 unsurprising that there is significant interest in penetrating the local market. While there are challenges in terms of funding for the government and financing and cash flow for contracting firms, there are also substantial opportunities. However, in the longer term, the sustained growth of the sector will be dependent upon the ability to bring more private funding into projects on the ground. As one of the major markets of sub-saharan Africa, Kenya is of increasing interest as a real estate investment destination. The 44.2m-person country and its 4.2m-strong capital Nairobi act as a gateway to a regional East African market, which is approaching 150m people. Domestically, the economy has been outperforming much of the world, the population is expanding and incomes are on the rise. Given these basic demand trends, it is hardly surprising that Kenya, like much of the sub-saharan Africa region, is piquing the interests of a range of international funds and institutional investors. While there is undoubted potential in Kenya, the ability to tap into it is somewhat constrained, and affordability remains a concern. With a current nine percent contribution to the leading East African economic power house s GDP, the state of the real estate market in Kenya is on a roller-coaster. And the projections are enchanting. Fifty years down the line, real estate contribution to GDP is poised to astronomically shoot to two digits. The real estate will keep growing in order to cope with rapid growing population, the growing numbers of Kenyan middle class, an increase in demand on regional hub offices and an amplified government spending on infrastructure; all these factors will conspire to push real state to unimaginable levels. The industry is growing because Kenya is strategically located as we are four hours away from any direction within Africa. This has made Kenya to become the preferred regional hub for top multinationals and we can say that right now we are just scratching the earth and in the next years, this industry is going to experience an even bigger growth and the time to take part in this growth is now. Indeed, Kenya is headed towards the right direction, especially given the considerable Government allocations towards infrastructural expansion.

6 These positive forward-looking sentiments are further fortified by a key Bretton Woods institution s perspective. In its recent report titled Housing; Unavailable and Unaffordable, the World Bank projects that Kenya s total cumulative housing needs will continue to grow steadily up to 2050 where they will then begin to level. Kenya has been experiencing a property boom and this positive growth will keep looking up. We shall see many more global players coming into Kenya either through Joint Ventures, Private Equity or setting up subsidiaries in Kenya. We have at least witnessed some setting base in Kenya all the way from South Africa & UK. Noting that Kenya will also positively experience adopting of alternative building technology such as bricks, hollow blocks and expanded polystyrene technology the industry is set to grow even further. Still, the full potential that is presented by the real estate market is yet to be fully harnessed. This country is missing a major opportunity for job creation and economic growth to formalize the housing industry and encourage it to better serve low and middle income households. In addition, National and county governments should collaborate to create a productive cycle of savings and growth by fostering increased construction and financing of affordable housing. Kenya s devolved county governments have a key role in fostering increased construction and financing of affordable housing and they need to partner with private developers. They need to Zone areas of development in terms of industrial, residents, social amenities. These devolved units are also supposed to give tax waivers for developers who amongst other things, develop access roads and drill water for communities along with providing additional facilities which help communities. Real estate is certainly blowing towards the right direction, and investors who have set their sails appropriately are poised to cruise towards the tranquil waters of good returns to their investments.

7 Rental Yields Gross rental yields on Nairobi apartments are moderately good, at around 6.0% to 7%. Townhouses yield around 5.0% to 6.0%. Yields on detached houses are lower, at 4% to 5.5%. Nairobi property is attractive, with significant capital gains potential. The best combination of rental yield and capital gains seems likely to be offered by townhouses or apartments. Kenya has a large rental market, with about 84% of Kenyans currently renting houses. Foreign Demand of Real Estate In KENYA Foreigners are buying more in Kenya. Foreigners generally prefer the area within an arc from Nairobi s south west to north east. In the Riverside area of Nairobi, demand is high and property is being snapped up by moneyed investors. Because of security concerns and the recent breakdowns in the provision of the basic utilities, there is increased demand for accommodations within secure compounds with their own water supply and back-up generator. Kenya s property market has potential for higher rates of return compared to other jurisdictions. It is also relatively easy for foreign investors to enter Kenya s real estate sector and Foreigners can freely buy commercial class land in Kenya. The country has showed impressive improvements in transparency mainly due to the increased regulation of the real estate market as Kenya aims to become an economic hub for East Africa, according to Jones Lang LaSalle (JLL). Private companies and other

8 international advisors increasingly provide consistent data for the Kenyan real estate market. In 2013, Real Estate Investment Trust (REITs) structure and tax dispensation for companies were introduced, and the country s listed property market has developed considerably over the past few years. Since the introduction of REITs, international investors, particularly from South Africa, have flocked into Kenya s property market. Because of these positive developments, Kenya was included on the list of seven emerging real estate markets to watch for in Two years earlier, Kenya topped the global list of most improved real estate markets in the Global Real Estate Transparency Index released by Jones Lang LaSalle (JLL). Buying Guide Buy from a Reputed Agent to ensure that the developments or units being bought are legitimate as Leading Agents do their own developments plus also work with reputed developers. Check the person selling has legitimate title to the land they are offering and verify with known land lawyer; forged titles are common. Check infrastructure services and amenities not every home has council-supplied water, power and roads; some people rely on boreholes or you made need to arrange twice-weekly bowser deliveries. Survey previous works done by the developers or sample apartments to ensure quality of finishing of units bought will be of a good standard. Do background checks on consultants related to projects e.g. architects and contractors among others to ensure that projects while being constructed are done in the right way due to reputable consultants.

9 Land NAIROBI LAND PRICES, Q Nairobi Suburbs y-o-y change (%) Change from 2007 Average value (in mil KES per acre) Average value (in mil USD per acre) Langata Fold Eastleigh Fold Muthaiga Fold Donholm Fold Karen Fold Spring Valley Fold Runda Fold Gigiri Fold Westlands Fold Kilimani Fold Upperhill Fold Lavington Fold Parklands Fold Kitisuru Fold Loresho Fold Kileleshwa Fold Nyari Fold Ridgeways Fold