General Market Analysis
In Q1’2019, the real estate sector recorded an array of activities across all sectors supported by:
- Continued demand for investment property from multinational individuals, firms and the growing middle class,
- The Kenyan Government’s efforts towards provision of affordable housing as part of its Big 4 Agenda,
- Continued infrastructural improvement, which is opening up new areas for development.
The key challenges that continue to face developers and end users include
- Access to financing with private sector credit growth coming in at 4.4% in October 2018, compared to a 5-year (2013-2018) average of 14.0%,
- High land and construction costs, especially in the Nairobi Metropolitan Area,
- Increased supply in selected sectors such as the commercial office and retail sectors with a surplus of 5.2mn SQFT and 2.0mn SQFT, respectively, as at 2018.
In Q1’2019, we continued to witness an increase in investor interest in the residential sector, particularly due to the ongoing focus on bridging the affordable housing shortage in Kenya. Market performance was as follows:
The detached market registered subdued performance with an annual price depreciation of 1.5%, 2.4% and 1.4% for high-end, upper mid-end, and, lower mid-end markets, respectively. This is in comparison to apartments which posted average annual appreciation of 4.9%, 1.2% and 2.2% for upper mid-end suburbs, lower mid-end suburbs, and, Satellite Towns, respectively. Overall, apartments recorded an annual uptake of 23.6% in comparison to detached market’s 18.1%. This is as a result of increasing demand for affordable homes where apartments are more affordable to home buyers as compared to low rise properties.
- Detached – The lower mid-end market registered the highest annual average returns of 2.7% in comparison to the high-end and upper mid-end markets, which posted 1.9% and 1.7%, respectively. The subdued performance is as a result of select markets experiencing price depreciations due to a decline in demand for up market properties particularly due to high cost of financing and relatively low mortgage affordability in the market.
- High-End – The high-end market registered an annual price depreciation of 1.5% as a result of decline in asking prices in markets such as Kitisuru and Lower Kabete as developers attempt to attract buyers. Karen registered the highest annual returns in the high-end market with 7.3%, in comparison to other high-end markets, with an average of 1.9%. This is evidenced by the relatively high uptake during the quarter of 20.0% on average in comparison to the high-end market average of 18.0%. Karen’s demand is driven by its vibrancy especially due to the social amenities it hosts in comparison to markets like Runda and Kitisuru.
- Upper Mid-End– The upper mid-end market posted average annual uptake of 18.7% and a price depreciation of 2.4% on average. This is owing to select markets such as South C and Lang’ata posting a decline in asking prices at 9.3% and 13.3%, respectively, attributable to a general market correction in these sub-markets.
- Low Mid-End – Ruiru had the highest returns in the lower mid-end market with 6.7% and an annual price appreciation of 2.1%, as a result of relatively high demand particularly from lower mid-income class working in Nairobi seeking a serene and easily accessible environment that is also in close proximity to commercial nodes.
- Apartments – Apartments performed better compared to detached units with annual price appreciation averaging at 2.2% – 4.9%. This is due to increased demand for these units as they are more affordable in comparison to low rise units. Evidently, annual uptake for high rise units was relatively high averaging at 23.7%, 26.0%, and 21.1% for upper mid-end suburbs, lower mid-end suburbs, and Satellite Towns, respectively.
- Satellite Towns – Thindigua registered the highest annual returns amongst Satellite Towns, owing to an annual price appreciation of 4.1% driven by demand from young population working in the CBD as well as expats working in surrounding international organizations. However, Thindigua and Kikuyu also posted quarterly price depreciation of 0.7% resulting from price discounts offered by developers during the season in a bid to attract clientele amidst increasing market competition.
In Q1’2019, the commercial office sector recorded a marginal decline in performance recording 0.1% and 0.9% points decline in average rental yields and occupancy rates, to 8.0% and 82.4% in Q1’2019, from 8.1% and 83.3%, respectively, in FY’2018.
The negative performance was largely driven by a reduction in asking rents by property managers to attract tenants as a result of a surplus of office space that stood at 5.2 million SQFT as at 2018 giving tenants a higher bargaining power. Asking rents decreased by 1.7% to an average of Kshs 100 per SQFT from Kshs 102 per SQFT in 2018, while asking prices remained stable at Kshs 12,574 per SQFT.
In terms of Nairobi submarket analysis, Gigiri, Westlands and Parklands were the best performers in Q1’2019 recording rental yields of 9.6%, 9.1%, and 9.1%, respectively, as a result of their superior locations hosting multinational companies and offering quality Grade A offices, enabling them to charge a premium on rentals.
Areas affected by traffic snarl ups, low quality office space and are not necessarily primary business nodes such as Mombasa Road and Thika Road had the lowest returns with average rental yields of 5.8% and 6.2%, respectively.
Nairobi CBD’s performance improved as rental yields rose by 0.6% points, to 8.2% in Q1’2019 from 7.6% in FY’2018 driven by 1.4% and 5.3% points increase in rental rates and occupancy rates respectively attributed to the node’s attractiveness to Small and Medium Enterprises (SMEs) as a result of its affordable rental rates and large customer base present in the Central Business District.
During Q1’2019, the land sector recorded an overall annualized capital appreciation of 0.5%, with site and service schemes in areas such as Thika and Ruai recording the highest annualized capital appreciation at 2.2%, attributable to the growing demand for site and service schemes as they are relatively affordable at an asking price of approximately Kshs 14.4 million per acre compared to urban areas with relatively high asking prices of up to Kshs 488.3 million per acre and also due to the provision of infrastructure by developers.
Serviced land in satellite towns recorded a 2.2% annualized capital appreciation, 1.7% points higher than the market average of 0.5%, and 0.1% points higher than un-serviced land in the same location. The appreciation is attributed to increased demand due to relatively affordable land at approximately Kshs 14.4 million asking price per acre and provision of infrastructure by the developers.
In Q1’ 2019, we noted the following activities in the infrastructure sector;
- The Kenya National Highways Authority (KENHA) announced the start of the construction of the Western Bypass starting from Gitaru linking to Southern Bypass and terminating at Ruaka, in Kiambu County. This road will include 17.4 km of service lanes, seven interchanges at the major junctions of Wangige, Kihara, Ndenderu, Ruminyi, Kabete, Banana and Ruaka, five underpasses and three-foot bridges. The project is financed by the Exim Bank of China and is being undertaken by the China Road and Bridge Corporation, at a cost of Kshs 17 bn,
- China Road and Bridge Corporation (CRBC), a Chinese engineering and construction firm, is set to secure a Kshs 2.5 bn contract to refurbish the Nairobi commuter railway network.
- The planned improvement and construction of new roads and railway system will lead to better accessibility and reduce traffic congestion that is usually rampant during peak hours. Consequently, we expect this to result in increased demand for property in satellite towns with increased provision of infrastructure.