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[Kenya] Residential real estate returns dip on interest rate caps

[Kenya] Residential real estate returns dip on interest rate caps

Cytonn Real Estate, the development affiliate of Cytonn Investments, has released its Nairobi Metropolitan Area Residential Report – 2017/2018, ranking Kilimani, Westlands and Thindigua as the best areas for apartment development; and Karen, Runda Mumwe and Ruiru as the best areas for detached units’ development.

The report analyzes the current state of the residential real estate sector in Kenya in terms of supply, demand, drivers, challenges, and performance.

According to the report, the sector recorded total returns of 8.2% p.a compared to last year’s 9.4%, attributable to the protracted electioneering period in 2017, as well as tight access to financing as a result of the interest rate caps.

However, select markets recorded relatively high returns, such as Kilimani with 13.9% total returns.

The report also ranked the most attractive investment opportunities out of the studied 35 sub-markets in Nairobi Metropolitan area, based on total returns, uptake, infrastructure, amenities and distance from key business nodes.

The report is themed “Question of Where, Amidst Sluggish Growth.” According to the report, the residential sector recorded total annual returns of 8.2% in 2017/18, a 1.2% points decline from the 9.4% total returns recorded in 2017; the average price appreciation was 2.8% with an average rental yield of 5.4%.

Notably, price appreciation declined by 1.0% points from 3.8% in 2017 to 2.8% for the period under review, and this was attributed to the effect of last year’s elections and end buyer financing challenges, which has resulted in price stagnation.

“The real estate sector is still attractive for investment, supported by positive fundamentals such as an attractive demographic profile, increasing household incomes, and a stable macroeconomic environment,” said Johnson Denge, Senior Manager, Regional Markets at Cytonn. However, he noted that with surplus supply in selected sub-markets, investors ought to carry out market research and trend analysis in order to identify specific market niches.

Speaking during the release of the report, Cytonn Real Estate’s Senior Research Analyst, Patricia Wachira, noted that “Despite the decline, areas such as Kilimani, with good infrastructure and easy access to main business nodes, recorded double-digit returns of up to 13.9% p.a, as they continue to attract interest from investors and the expanding middle class”

Patricia Wachira also stated that “Apartments recorded relatively high returns with an average of 8.7% p.a, 0.5% points higher compared to the overall residential market average of 8.2%. This is as apartments are more affordable, by 49.1% on average, compared to detached units.” She added that “Selected markets such as Kilimani, Upper Kabete, Thindigua, Ruaka and South B/C recorded double-digit total returns of 13.9%,11.9%, 11.2%, 11.1% and 10.1%, respectively, with the sub-markets being boosted by good infrastructure, and accessible locations in relation to places where most people work, such as the Nairobi CBD, Upperhill, and Westlands.”

Ms. Wachira also noted that “Detached units recorded subdued returns in 2017/2018 with average total returns of 7.6% p.a, 0.6% points lower compared to the market average of 8.2%. There was slower price appreciation at 2.7% in 2017/18 compared to 3.9% in 2017, attributable to increased supply and thus prices have remained relatively flat to attract buyers; rental yields remained fairly stable, dropping by 0.1% points, as developers stabilize their rents in order to retain occupants.” She added that, Ruiru had the highest returns in the detached category, with total returns of 11.7% p.a.

In terms of investment opportunity for developers, the report noted the best places to invest in apartment units are Kilimani, Westlands, Thindigua, Ruaka, Upper Kabete and South B/C, driven by relatively high uptake averaging at 26.6%, and good returns ranging from 10.1% to 13.9%; while for detached units, the best areas to invest in are Karen, Runda Mumwe, Ruiru, South B/C, Kitisuru and Ruiru driven by the relatively high returns ranging from 8.8% to 11.7% p.a, uptake averaging at 23.8%, and availability of development land, which makes it affordable for developers to invest in these areas.


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