If you bought land at Sh1 million in Nairobi in 2007, that investment today is valued at Sh6.65 million to Sh11.45 million.
If the same amount were to be invested in government bonds, it would have appreciated to Sh3.82 million. If put in bank savings, it would have appreciated to Sh1.58 million. For equities, the amount would depreciate to Sh0.28 million due to inflation.
In the last decade and a half, factors like a growing population, technological advances and government interventions have transformed the value of Kenya’s real estate assets significantly.
At the same time, other assets that were highly preferred amongst the investor community a few years ago – like treasury bills, bonds and equities – have been growing less popular.
Sakina Hassanali, Head of Development Consulting and Research at Hass Consult, attributes this partly to rising concerns about the susceptibility of securities to the government high debt exposure. Kenya’s public debt stands at more than Sh10 trillion.
The government has been implementing austerity measures to manage the mounting debt and possibly restore investor confidence, but questions have emerged as to their sustainability.
The government, for instance, recently issued a $1.5 billion Eurobond to enable it buy back a $2 billion Eurobond that was issued in 2014 and is maturing in June.
To encourage uptake, the government promised investors an annual interest rate of 9.75 per cent. This was much higher than the 6.875 per cent on the previous bond.
In essence, however, means that the government took a more expensive new loan to repay the older one.
Other investors have been opting for real estate over securities due to the sector’s resilience. While securities depreciate with regard to the principal amount whenever there is inflation, real estate assets generate income and appreciate in value.
“Real estate properties have historically appreciated over time, making them an attractive option for investors seeking capital appreciation. In Nairobi, especially, the value of property has been increasing significantly, offering substantial returns,” Hassanali says.
According to the latest HassConsult Land price index, in the fourth quarter of 2023, the average price of an acre of land across the city’s suburbs grew fast, influenced by rising demand from investors.
The quarterly price rise of 3.3 per cent was the highest since the first quarter of 2015, offering the best sign yet that the property sector in the city is recovering from the dip occasioned by the Covid19 pandemic.
Fourteen out of the 18 suburbs in Nairobi recorded positive price movement in the quarter, as Muthaiga, Ridgeways and Loresho stood out in quarterly price growth at 3.7 per cent, 3.6 per cent and 3.1 per cent respectively.
In Nairobi's satellite towns, prices went up by 3.7 per cent in the quarter, the fastest growth since the second quarter of 2022.
Satellite towns that are served by better access infrastructure along the Thika Road, Mombasa Road and Ngong Road arteries continued with their steady price growth on both quarterly and annual basis, led by Syokimau, Ngong and Ruiru.
“Kiambu, which has recently perceived overpricing on high speculation, jumped to the head of the queue in quarterly price growth at 9.4 percent, pointing to renewed demand from investors looking to take advantage of the price stagnation seen in previous months,” poses Hassanali.
On an annual basis land prices in the suburbs rose by 4 per cent as satellite towns saw a price gain of 9.3 per cent, which was marginally better than the growth of 9 per cent recorded in 2022.
“Growth of land prices in satellite towns continues to outpace that of suburbs on higher demand as the cost per acre is within reach of more commercial and private developers,” notes Ms Hassanali.
According to Ms Sakina, although the weakening local currency and high inflation has raised input costs for developers, the Kenyan property market remains attractive to foreign investment, buoying asking prices due to augmented demand from these investors.
The elevated inflation, which averaged 7.7 per cent in 2023, has meant reduced spending power for both home buyers and rental customers, while the weaker shilling raised input costs for developers which in high-demand suburbs had inflationary effects on property prices.
Despite this, the property market offered a total return (capital gains plus rental yield) of 8.3 per cent in the fourth quarter of the year, illustrating renewed resilience in the face of the challenging conditions that also included high-interest rates.
All Nairobi suburbs recorded higher prices, led by Langata, Ridgeways and Spring Valley, while in the satellite towns, Juja, Kitengela and Athi River were top performers during the quarter, in terms of rental yield.
The best rental returns on an annual basis were found in Ongata Rongai (15.4 per cent), Athi River (15 per cent), Kitengela (11.6 per cent), Loresho (11.5 per cent) and Nyari (9.9 per cent).
These returns competed favourably with those of Treasury bills and bonds whose net returns ranged from 9.5 per cent to 17 per cent in 2023. The property returns from the best-performing satellite towns and suburbs also outperformed the NSE 20 Share Index, which had a return of -9.4 per cent in 2023, and bank savings that averaged 3.8 per cent.
Elevated inflation has reduced the spending power of home buyers and rental customers.
Photo credit: Shutterstock
“Despite inflation and buyer-seller valuation disparities, there is a growing confidence in the market, driven by factors such as improved infrastructure, a growing middle class, and a more stable economic outlook,” says Jonathan Malombo, Sales Manager, Safaricom Investment Co-operative (SIC).
Jonathan adds that real estate is also becoming very popular among investors because of the several tax incentives that the sector has been receiving from the government.
Recently, the government for instance slashed the rental tax rate for landlords earning rental income of below Sh15 million from 10 per cent to 7.5 per cent. This of course is meant to expand the government’s tax bracket, but what it translates to for the landlords and investors is higher earnings.
The government also recently introduced a Value Added Tax exemption program, that seeks to encourage more developers to participate in the affordable housing initiative.
Developers who sign up to the program are to access building materials at a subsidised cost, for them to make a profit while building the affordable houses.
“There is a sense of cautious optimism as the market assesses whether these changing regulations are here to stay and whether some of the incentives actually work, but by and large we are seeing an increase in appetite for real estate,” says Malombo.
The steady increase in the number of Real Estate Investment Trusts (REITs), which are considered as less risky real estate investment vehicles, has also been encouraging many investors to venture into the country’s real estate space.
Some of the authorized REITs in the country include ILAM Fahari I-REIT, Acorn Student Accommodation I-REIT, Acorn Student Accommodation D-REIT and LAPTrust Imara I-REIT.
Recently, the Capital Markets Authority (CMA), licensed NCBA Bank Kenya to be a REIT Trustee, a move that could see the creation of more REITs in the country.
There are only three other licensed REIT trustees in Kenya which include Housing Finance Company, Kenya Commercial Bank (KCB) and Co-operative Bank of Kenya.
“REITs provide several advantages to investors including exemption from double taxation, which guarantees better returns. Unlike assets such as land, they are also easy to liquidate at any time,” says Malombo.
Managed by people with the expertise, they are also safer investments. Unlike other businesses, whose incomes are affected by a lot of external factors, REITs also provide investors with stable and predictable income because they rely on rental income that comes to the asset regularly.
While they do have many benefits, Jonathan says that many Kenyans still however prefer owning property over investing in REITs because the former provides them with a greater sense of stability, control and thus satisfaction.
“REITs may provide more immediate disposable income, but owning property allows you to build equity over time,” says Malombo.
Official data shows that the average value for a property has gone from Sh7.1 million in December 2000 to Sh34.9 million in December 2023. Meanwhile, rents have increased four-fold since 2001.
“Rental properties generate regular cash flow through rental income, providing investors with ongoing income streams to supplement their earnings, secure their financial future and support retirement goals,” says Malombo.
Mark Dunford, the CEO of Knight Frank Kenya, holds the view that the opportunity for investors lies not just in the residential segment, but rather in all the real estate asset classes.
Despite unprecedented economic challenges, the hospitality sector for instance has been performing very well, with hotel occupancy rates increasing by 32 per cent in the second half of 2023, from a similar period in 2022.
The growth in hotel occupancy was driven mostly by a 29 per cent increase in visitor arrivals between January and October 2023, compared to a similar period in 2022.
In the office real estate segment, office occupancy rates increased from 71.5 per cent in H1 2023 to 76.5 per cent in H2 2023. This was largely attributed to the absorption of space in recently completed grade-A developments, even as grade B office developments continued to face challenges.
“Office uptake was slow due to economic challenges exacerbated by oversupply. However, this situation is gradually changing, with prime office monthly rent in Nairobi remaining stable at $1.2 (Sh159 at current exchange rate), per sq. ft,” poses Dunford.
In retail, Nairobi's retail sector adapted to market changes, with supermarket chains expanding into residential neighborhoods.
Notable retail centers completed during the review period included GTC Mall, My Town, Park Avenue Place in Nairobi, Promenade Mall in Mombasa, and Catholic Mall in Kakamega. Additionally, fewer developments remain in the pipeline.
The industrial sector also gained momentum in Kenya, with investments in industrial parks, Special Economic Zones (SEZs) and Export Processing Zones (EPZs) witnessed in 2023.
Alternative sectors such as healthcare and affordable housing also witnessed an increase in momentum, albeit with some implementation challenges.
“Developers and investors are exploring innovative strategies to attract buyers and drive sales, including offering flexible payment plans and focusing on high-demand segments such as affordable housing,” says Dunford.
