For years, affordable housing has dominated conversations in the Kenyan real estate market. We've seen increasing volumes of affordable units coming onto the market, and the government has fuelled this dominance through tax incentives, policy and law reviews, and public-private partnerships.
The luxury market seemed to take a back seat for a while, especially as economies around the world struggled to recover from the Covid-19 pandemic and its aftershocks. This year, the real estate industry is recovering after a low season in 2023, and luxury property is winning.
According to the latest Housing Price Index by the Kenya Bankers Association (KBA), although affordable real estate is still dominating the market, activity in the affordable housing market declined significantly in the first quarter of the year, while activity in the high-income market segment shot up in the same period.
“Other notable shifts included a decline in housing activity in the low-market segment to account for 41.79 percent in the first quarter of 2024, down from 62.26 percent in the fourth quarter of 2023, while activity in the mid-market segment saw a rise from accounting for 20.75 percent to 27.61 percent in the quarter under review. The high-market segment registered a significant increase in activity from accounting for 17 percent of the fourth quarter of 2024 to 30.6 percent of all transactions in the first quarter of 2024,” reads part of the report.
There’s no doubt that luxury real estate or the high-income market is gaining mileage over the affordable market.
Real estate firm Knight Frank has ranked Nairobi's luxury property market 52nd in the world in its Prime International Residential Index, 2024. The ranking, which covers 100 cities around the world, reported that Nairobi's prime properties experienced a price growth of 2.5 percent in 2023. Nairobi outperformed major cities in the developed world such as London, Berlin and Tokyo.
The increasing demand for luxury real estate in 2024 can be attributed to several factors, which, if sustained, could herald a period of growth for this niche market. Firstly, economies around the world, including Kenya, are recovering. 2023 was an inflation year and central banks around the world tightened monetary policy to curb inflation.
This led to lower consumer spending and higher interest rates in the credit sector. Higher interest rates mean that fewer people have access to home loans to buy property. These measures appear to have worked, as inflation in Kenya and around the world fell significantly in 2024. Although interest rates appear to be coming down, they are still high.
The increasing demand for luxury real estate in 2024 can be attributed to several factors.
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According to this year's Wealth Report released earlier this year by Knight Frank, this painful process is the key to real estate market recovery in 2024. The report also states that inflation is no longer driving real estate markets around the world. It's geopolitics that is shaping markets. The more favourable the political climate, the better for the property market.
In 2024, with inflation down and economies recovering, there is more room for people to make money and the wealthy are doing well enough to invest in real estate. The Knight Frank report says that the number of wealthy individuals globally will rise by 28.1 percent between 2024 and 2028.
Forbes also reports that there are more billionaires in the world this year than ever before, with an additional 141 wealthy individuals joining the billionaire club. Although only a handful of these billionaires live in Africa, a new investment trend is also shaping the demand for luxury real estate.
The wealthy are not limited by geographical boundaries and they are willing to explore luxury real estate markets in locations other than where they live. This pattern is also in line with global investment patterns.
In 2023, there was a lot of movement as investors sought out the most favourable economies. With inflation and the cost of living and cost of labour soaring through the roofs, savvy investors fled unfavourable markets. Although Kenya's changing tax regime sparked speculation of investor flight, the country has retained its position as a global investment hub, hosting regional offices for some of the world’s largest tech companies such as Google and Microsoft.
In 2023, Amazon opened their office in Nairobi and many other investors have launched operations in Nairobi. Tatu City alone hosts about 78 local, regional and global business brands and in 2024, several major global brands were launched.
In February this year, the United Nations Population Fund also announced that 25 percent of its workforce would move from New York to Nairobi. Global and multinational brands do more than boost the economy. They bring in expats, who make up a significant percentage of the target clients for luxury real estate in Kenya.
Cost of Credit and Buying Power
Beyond cross-border investment, developers are also shifting their focus to buyers with higher purchasing power. Affordable real estate tends to move faster due to lower costs, which has encouraged developers and real estate firms to venture into this market.
In 2023, however, the high cost of credit and high cost of construction may have convinced real estate firms to rethink their strategies. According to the Hassconsult Land Index for quarter two of 2024, the real estate firm hinted that developers might be looking into areas with higher purchasing power as input and credit costs soar.
“The increase in the cost of credit and that of building inputs has negatively affected real returns for developers, limiting the propensity to absorb higher land costs in areas with lower purchasing power.”
The wealthy are willing to explore luxury real estate markets in locations other than where they live.
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Interest rates on bank loans have been pretty unpredictable over the last two years, making it increasingly difficult for developers and real estate investors to predict their returns. As of July 2024, the average interest rates in commercial banks stood at 16.84 percent. For retail borrowers, rates have risen to as high as 20 percent, making credit almost unaffordable for most buyers.
Data from the Central Bank of Kenya shows that as of 2023 December, there were only 30,015 mortgages in Kenya. Though the data does not show which income segments have access to mortgage, low income among potential borrowers is one of the factors identified as locking people out of the mortgage market.
As such, low-income earners who are often the target market for affordable units, present a significant risk to developers due to their limited purchasing power. Developers are currently dealing with high cost of construction, high cost of credit and high cost of land (even in the supposedly affordable locations). Luxury or high-income buyers represent higher purchasing power and better returns for real estate companies, which may explain the surge in interest in the high income, real estate market.
Low and middle income markets lead in returns on investment. These markets have more room for price growth. However, the luxury market is not lagging behind. According to the Hass Land Index, for the second quarter of 2024, land in Spring Valley had the highest increase in prices with more than 5.34 percent increase over the last quarter and more than 11.85 percent over last year. Land in Kilimani had the lowest quarterly price increase at less than 0.34 percent over the last quarter. Land in Kileleshwa had the lowest yearly price increase at about 0.41 percent over the last year.
In terms of rental yields, Loresho and Westlands were the biggest winners with an annual change of 10.3 percent and 12.0 percent respectively. Runda, Karen, Nyari and Kilimani did fairly well with estimated yearly rental increases of about 6.5 percent, 6.9 percent, 6.2 percent and 6.2 percent, respectively
According to Estate Intel, a real estate firm that tracks property data in Kenya and Nigeria, Westlands is one of the most sought after luxury locations. Lavington came in second, followed by Karen, Kilimani and Kileleshwa. The firm ranked luxury locations according to site views, leads and preferences.
Overall, Kenya’s real estate market is poised for growth this year and it’s a great time for investors to diversify their investments by looking at different market segments. Luxury real estate is one segment to pay attention to.
