How much do you know about your local real estate market? Would you be prepared to take out a mortgage to secure the home of your dreams? And how is the commercial property sector affecting the Kenyan economy? What does the future hold for tenants and developers? Over the next few pages, Kenya Yetu takes a close look at our property market and the way it affects you.
Making sense of the money: an economic overview by Peter Musa
The property boom in Kenya has elicited talk of a ‘bubble burst’ for years, but Ben Woodhams, Managing Director of property management firm Knight Frank Kenya, is not convinced.
“The situation in Kenya does not point to this happening any time soon; at least not with the current demand outstretching supply,” says Woodhams. With not enough properties to go round, the lack of affordable housing continues to be a headache for the market, and declining bank interest rates pose another challenge. However, the exorbitant interest rates that slowed down the construction sector over the last two years do now appear to be loosening their grip. Many projects previously stalled due to investors’ fear of not recouping their money and making a significant profit margin have now started tip-toeing towards construction, and others towards completion.
In a bid to tackle the housing crisis in Kenya the government has been wooing the private sector to bridge the gap between supply and demand. But with a target of creating 300,000 residential homes every year throughout the country and a shortfall of 150,000 unconstructed units per annum, the demand for Kenyans to own their homes is not about to be quenched.
It all seems pretty bleak, but despite these financial challenges Woodhams feels real estate remains the sector to watch. According to him, demand in the residential, office and retail market continues to increase, courtesy of a growing middle class with disposable income and a desire to own property of their own, or conduct trade and consultancy business. Demand for high-end residential town houses and stand-alone properties on large acreages within the preferred suburbs continues to grow, with rents reaching as much as US$5900 for a six-bedroomed house on a three-acre farm in Karen.
Woodhams also believes that the migration of corporate regional headquarters to Nairobi is going to play a key role in the growth of the construction sector, and of real estate as a consequence.
He explains: “ You will find an owner of an international company whose African office is in Joburg saying, ‘instead of having the HQ at the tip of the continent, why not bring it closer to the centre – in this case Nairobi?’”
Commercial property: The development of the Nairobi-Mombasa Highway and Nairobi’s changing skyline, by Dinfin Mulupi and Peter Musa
The Nairobi-Mombasa highway, once a dry and deserted landscape characterised by shrubs and dust, has been transformed into a commercial and industrial property hub with the establishment of go-downs and sleek multi-storey buildings.
Recent developments along Mombasa Road have included housing estates for the middle class and high-end office parks occupied by both local and international companies. The highway also services the Industrial Area, the country’s industrial capital, where dozens of Export Processing Zone facilities are hosted.
The rapid development along the expressway is attributed to the easy access it provides to expansive land on both sides at affordable rates compared to areas within the city or closer to Jomo Kenyatta International Airport. Easy access to Kenya’s coastal region and neighbouring Tanzania has also made Mombasa Road a strategic location for manufacturers and distributors.
It was in 2011 that Toyota Kenya kicked things off with the launch of a state-of-the-art showroom at the automobile firm’s headquarters located opposite the Nyayo National Stadium. Other players in the auto industry, such as General Motors East Africa, tyre distributors Yana Tyres and Kingsway Tyres followed, also setting up shop along the highway.
Sameer Business Park, one of the largest and newest projects along Mombasa Road, has attracted both local and foreign companies such as technology firm Altech Kenya Data Networks (KDN), with its 260,000-square-feet business park office and warehouse space set on eight acres.
Apart from the increased demand for office space, Imran Fazal, Property Development Executive at HassConsult, attributes the changing face of Mombasa Road to the ‘copycat’ culture among Kenyans that has seen developers replicate projects they perceive to be lucrative.
The icing on the cake for Mombasa Road is the planned development of Konza City on 5000 acres approximately 60km from the city. A new technology site, it will host a science park, mega-malls, a convention centre, data hubs, hotels, international schools, hospitals, a championship golf course, a financial district, a high-speed mass transport system and residential properties.The project is expected to redefine the local human settlement pattern and transform the economic activities of the city’s surroundings. The Government has committed to facilitating the construction of services that include roads (such as a two-lane carriageway from Athi River), water and sewerage systems, energy provision and a high-speed railway.
The Konza City project has attracted substantial interest from local and international enterprises, some of which plan to expand their manufacturing businesses here. These include homegrown technology companies such as Craft Silicon and Safaricom, as well as global giants like Google, Samsung and Huawei, who are expected to take up space at the new city.
The entry of such multinational firms to Kenya, and the associated influx of expatriates, has inspired the development of unique commercial and residential projects and is expected to play a major role in the transformation of Nairobi’s skyline into a ‘mini-Dubai’, as developers come up with projects that are attractive to this new market.
With these new shopping malls, hotels and high-rise commercial properties, industry professionals are pushing the barriers in design and technology to meet the expectations of well-travelled and highly exposed consumers.
Just two years ago, Eng. Adnan Saffarini Office (EAS), a leading architectural and engineering design consultancy in the United Arab Emirates (UAE), which has designed some of the world’s tallest buildings, opened its Africa office in Kenya with a clear mission to bring Dubai-style development to Africa.
One of these glamorous larger projects is Mark Properties’ proposed $41.5 million Le’ Mac project, a 22-storey tower featuring a mix of office, recreational and luxury housing spaces that are likely to attract expatriates and diplomats. The project, which will be based in Westlands, will offer a 5-star live-and-work experience, bringing banking, hospitality and recreational services into one building.
EAS are placing emphasis on high-rise commercial and residential properties to counter the shortage of land for development and high land prices, confirms Mahad Karani, Regional Director for Africa.
“As the growing population and urbanisation put pressure on land, we want to add value by designing tall buildings and skyscrapers set on very small pieces of land,” says Karani.
Investors are choosing to develop high-end commercial properties in prime suburbs such as Westlands to counter Nairobi’s notorious traffic. Nairobi was last year listed by the IBM research department as one of the cities with the worst traffic globally, costing the country an estimated US$580,000 in lost revenue and working hours per day. Other than traffic concerns, developers are also establishing projects in locations perceived to have better security and in closer proximity to recreational facilities.
The Knight Frank 2012 Kenya Market Update report for the third and fourth quarters indicated robust market growth with increasing demand for office space in prime areas. According to the study, areas along Waiyaki Way – a prime feeder road for the leafy suburbs of Lavington, Westlands, Parklands and Kileleshwa, among other plush estates – have become the ‘to-go’ places for commercial real estate developers.
Two recently completed developments in Westlands – Sky Park and Delta Corner – have changed the suburban skyline, with each recording a 100% uptake by the end of 2012, clear evidence of the high demand for office space. Parklands is also emerging as a hotspot for commercial as opposed to residential, development. Across town, Upperhill, another vibrant commercial property market, recorded limited supply in 2012. Most projects in the area are set for completion within the next two years.
Knight Frank statistics indicate there is strong demand for office suites, with prices rising to US$1900 per square metre (psm) from an average of US$1700 psm at the beginning of 2012. Prime office rentals averaged between US$12-15 psm and US$9-11 psm. But as the supply of office space increases, HassConsult’s Fazal reckons, the winners will be developers of quality and unique projects that meet international standards.
Architect Karuga Koinange, Director of Urban Savannah Design Studio, who is concerned about the poor infrastructure planning that is making Nairobi home to very expensive buildings, agrees: “As more international money continues to flow in, we should expect to see great things sprout. The skyline will change, but the quality of it will depend on the developers.
“Multi-nationals don’t mind paying a high price to get water and sewerage systems and other services which it should be the council’s duty to provide. They are willing to pay a premium for consistency in these services. The irony, however, is that these projects cater for just 1% of the market,” he says.
Koinange, the driving force behind What If (www.whatif.co.ke), an architecture and design campaign that explores contemporary and visionary ideas for the built environment, also takes issue with industry professionals for failing to push the barriers when it comes to innovation. “They are driven more by money than creativity,” he laments. “Most good architects and engineers want to work on big projects, and neglect what they see to be small projects, but we need to cater for every level of society.”
Prices: what does it cost to buy?
Land and property prices in Nairobi began heading north at an accelerated pace about five years ago, and these escalating land prices have encouraged developers to focus on luxury and high-end projects aimed at the upper-class.
A case in point is Nairobi’s prime suburbs, such as Westlands, Kileleshwa and Kilimani, where an acre of land easily sells for Ksh120 million. Small towns that are now seeing increased development are also recording rapid growth in land prices. In Kiambu for instance, an acre goes for about Ksh 20 million, up from Ksh5 million just five years ago. The middle-and lower-income markets, which account for 83% of the total 150,000 units of housing demand in the country, remain the most underserved.
According to studies, 80% of every 50,000 units developed is targeted at the upper-middle and upper classes, leaving a paltry 10,000 units for the lower end of the market.
“Developers want a project that will cover the land costs and high construction costs, and factor in a good profit. That makes it feasible to go for a luxury or high-end development. There is demand too because we have seen developments sell out quite fast in this area,” says HassConsult’s Imran Fazal.
Prime residential sale prices averaged between US$1500 (Ksh128,250) and US$1900 per square metre in Nairobi, according to the Knight Frank Kenya Market Update for the third quarter of 2012.The same study shows that prime retail rentals averaged between US$3500 and US$4400 per unit for three-and four-bedroom town houses.
There has also been a change in the type of houses in demand. In 2001 apartments took up 23.5% of the market, town houses 24.5% of the market and stand-alone houses 52% of the market. As of December 2012, apartments represented 43.6% of the market, town houses 26.9% and stand-alone houses 29.5%.
Ben Woodhams of Knight Frank Kenya attributes the growth in the supply of apartments to economies of scale: “When land gets too costly, it is business logic that you add value through apartment construction, which has more units per square area than stand-alone units.”
Developers planning to undertake projects in prime suburbs should however be warned. “Prime estates like Kileshwa and Kilimani have attracted a lot of development and now risk oversupply,” Fazal cautions.
Limited housing supply for the low-cost market has seen informal settlements like Kibera thrive, with a population of over 170,000 (according to the 2009 census), with the majority having limited access to basic amenities. Kibera has proved to be a hard nut to crack, as previous upgrading attempts failed to achieve the key goal: housing for the poor. Beneficiaries of the Kibera Slum Upgrading Programme scheme are reported to have rented out their homes for residential and commercial purposes and relocated back to the slums. Kibera residents claim, however, that it is officials who rent out the houses to persons from higher income areas.
Thankfully, innovative developers are now changing tack, pursuing projects at more affordable locations outside Nairobi and coming up with smaller house units within the range of low-income earners. One such development is the Mombasa Road-based Sucasa, a housing project comprising 1000 house units on a 12.5 acre piece of land. The scheme, developed by Suraya Property Group Ltd, will see buyers finding somewhere to live for as little as Ksh 900,000.
“If land is cheap then developers can supply houses within that price range,” says Fazal.
Mortgage brokerage firm TMC recently rolled out ‘Makazi Mema’, a product that enables landowners to become homeowners. TMC handles the mortgage approval process and oversees the construction of houses in just under six months. However, Karuga Koinange, Director of Urban Savannah Design Studio, is concerned by poor infrastructure planning, especially in middle-income suburbs like Buru Buru.
“We are seeing all these nice houses, but when you step outside, things are different. The public realm of Nairobi is uncared for,” he says.
Mortgages: should you borrow to buy?
Major concerns for those considering a home loan are the uncertainty of life, losing one’s job, becoming incapacitated, or the death of the breadwinner and the resulting implications for the loan.
Caroline Kariuki, Managing Director of The Mortgage Company (TMC), argues that taking a home loan is a better option than renting because in the eventuality of such disasters, one would have no home and no bargaining power. “If you stick with renting, you will pay somebody else’s mortgage for the rest of your life. You will never make any capital gains and never have the opportunity to move up the property ownership ladder,” says Kariuki.
Borrowers can protect themselves by taking out life cover that would handle the mortgage repayment in the event of their death. A retrenchment cover would also guarantee that if one were retrenched, the insurance company would pay off the mortgage for at least six months.
Kenya’s mortgages total a paltry 20,000. It has been only three years since the market was opened up to allow banks to offer mortgages. This has seen the number of lenders rise significantly. “The skills base among lenders is limited and you often have to wait two to three months to get approval. The availability of funding to finance mortgages is also limited. Mortgages are long-term, yet banks are heavily dependent on short-term deposits,” she says.
Real Estate Investment Trust: Hope?
However, all is not doom and gloom, following the listing of Real Estate Investment Trusts (REITS) at the Nairobi Securities Exchange (NSE). The security, which sells like stock on the securities exchange and invests in real estate, will make it possible for ordinary Kenyans to invest in projects worth multi-millions of shillings, like shopping malls. Investors will receive over 80% of their REITs income as dividends. These schemes are popular in other markets because they are exempt from corporation tax and cushion investors against risks by investing in a diverse range of projects. Kariuki reckons that REITs will also help mobilise finance from long-term investors such as insurance companies and pension funds.
Interest Rates: key to home ownership?
Even with the development of more housing options for buyers at the lower end of the market, it has been argued that home ownership for all will become a reality only when interest rates, which currently stand at between 14% and 18%, are lowered.
“Interest rates are a big factor in home ownership. A very small portion of the industry can afford to pay cash. A larger, working class, percentage have to take loans to buy homes and therefore interest rates need to come down,” says Fazal.
The returns on rent for residential property currently lie at between 6% and 8%, yet interest rates are almost double that. A Knight Frank study states that the low achievable rents have resulted in a large mismatch between income and mortgage instalments, making homeownership less attractive to investors.
Beyond Nairobi: where to buy?
Outside Nairobi, the demand for property can be just as high. Mombasa has had significant development of new properties, although most are holiday homes, which Kariuki feels is a double-edged sword. In a situation where the economy is not doing well, most owners would opt to sacrifice their holiday home before their family house. The sea also contributes to high maintenance because salt eats into the house.
Kisumu, another major city, is experiencing a shift in culture which is driving the development of more residential property after years of stagnation. “For a long time, most people working in Nairobi did not see the need to buy or build a home in Kisumu. They would visit their families there and spend the night at a hotel. Today we are seeing more development in estates like Milimani,” Kariuki explains.
Nakuru‘s residential market is growing too, but at a slower pace compared with the commercial segment. Eldoret has, however, been booming for years and now records land prices on a par with Nairobi’s, because of investments from athletes.
Increased development is expected across the country as county governments begin to take action. A number of players are also coming up with innovative products that will ease financing in rural areas.
Build or buy?
Beyond the problem of finance, aspiring home-buyers often grapple with the all-important question: to build or buy? Fazal believes that this is a matter of personal preference. Buyers who do not want to be involved in the development process should go for ready-made units, whereas those who want to customise their homes should build.
“If you are building on your own, I would say don’t even begin unless you are partnering with professionals. Building is technical and time consuming, and you risk losing construction materials on site. If materials are stolen, you could run out of funds and still have an unfinished house and a loan to repay,” says Kariuki.
“Never go it alone,” Fazal agrees.
5 Mortgage Essentials:
1 Earn double the monthly repayment fee. If your monthly repayment fee is Ksh50,000, you will need to earn Ksh100,000 after tax.
2 Save, save, save. Before taking out a mortgage, you will be required to make a deposit. Most developers will ask for 10% of the house price. You will also need to pay other fees, which add up to about 8% of the house price.
3 Be credit-worthy. Having a clean credit record will give lenders confidence to finance you. Financiers refer to the Credit Reference Bureau (CRB) for information on a borrower’s past credit history. If you are found to have defaulted, it is unlikely that any institution will agree to finance your mortgage.
4 Identify a home. You will need to find a home or piece of land for development. This should be at an ideal location that is both convenient for you and affordable.
5 Be in it for the long haul. A mortgage is a major long-term commitment that could span up to 20 years.
The struggle for many young Kenyans is making the step onto the property ladder, as this example demonstrates.
Profession: Primary School teacher
KY: What is your monthly income?
MM: I earn Ksh15,000.
What is your current housing situation?
I live in a rented house in Riruta Satellite. It is a one-roomed house with a kitchenette. My monthly rent is Ksh5000.
What is your dream home?
I would like to own a permanent self-contained house at Riruta Satellite estate. I would like a house that has a study room for my research. That house would cost me about Ksh1.5 million.
What are you doing to achieve that goal?
I will start saving in the future when I am in a better financial position.
Have you considered taking a mortgage?
No. I do not have the financial muscle and I also don’t know how mortgages work.
Would you prefer to build or buy?
I will build at my own pace as I get more financial resources.
Are you worried that you might never own your dream home?
Yes. I am afraid of that because my income is very low and it is difficult to save.
What kind of city do you want to live in?
With Africa’s urban population forecast to be larger than that of Europe in just eight years’ time, the pressure on the continent’s urban spaces is intense. Serious work needs to be done to plan and prepare our cities to cope with their rapidly-growing residential demands. The exciting thing is that you can have a say in the development of your city. The UN-backed World Urban Forum is driving a campaign called I’m a City Changer to seek your engagement in the discussions relating to future planning of our cities. Log-on, join in and have your voice heard.
Residential property: The rise of the gated community, and how and where to buy, by Dinfin Mulupi
Kenya’s real estate market bull run is set to continue thanks to a stabilising economy, growing foreign investor interest, the steady lowering of interest rates (which hit a historic 30% during the 2011 economic slump) and the conclusion of a peaceful election after months of uncertainty. For the past ten years the industry has defied many challenges to outperform other sectors, making it one of the most lucrative investment vehicles in the country, earning investors returns of up to 30%.
Riding on a high level of demand, a growing middle class, increasing investments from the diaspora and an influx of expatriates, the residential market in Nairobi and other major urban centres has continued to thrive and is expected to improve still further.
According to the Hass Property Index statistics, average property values have increased by 3.36 times since 2000, rising from Ksh7.1 million in December 2000 to Ksh24.1 million in December 2012.
The statistics for the fourth quarter 2012 reveal that the average value for a 1-3 bedroom property in the country is currently Ksh11.8 million, and a 4-6 bedroom property Ksh33 million. The current average price for a stand-alone house is Ksh34.5 million, up from Ksh8.8 million in December 2000, and, for an apartment, Ksh12.2 million, up from Ksh5.2 million in December 2000. To rent a 4-6 bedroom property today you would need Ksh166,935, while a 1-3 bedroom property can be had for Ksh63,805.
While it is common to hear people complaining about how tough times are, Charles Kibiru, founder and director of Thika Greens, a US$690 million golf estate project set in 1700 acres in Thika, is pleased to report that many Kenyans have already bought plots, with only 20% of the buyers needing to borrow. Phase One of the project, consisting of 960 plots, has already sold out. About 30 homes are currently under construction, and eight people have already moved in. Upon completion, Thika Greens will have 4000 homes.
The project is one of many multi-million dollar golf and gated estates cropping up in previously sleepy agricultural towns on the outskirts of the capital, proving how popular the concept of community living has become.
Not too far away is Tatu City, a planned satellite development that will convert 2400 acres of land on the outskirts of Nairobi into residential and commercial real estate. The urban development situated on the new Eastern Bypass will host companies, major retailers and 70,000 residents.
“Buyers want a quiet, secure environment with access to shared facilities. Most of these projects are coming up in locations far away from the city because buyers want to have their own small piece of land and this is possible only in places where land is cheaper, such as Kiambu, Limuru, Thika and Mombasa,” says Imran Fazal, Property Development Executive at HassConsult.
While they may successfully evade the city’s exorbitant land prices, developers of gated and golf estates like Thika Greens and Tatu City have to install their own services, which comes at great expense.
“About 30% of a developer’s expenditure goes towards building infrastructure such as roads, water and sewage supply systems, which are essentially the government’s responsibility,” says Caroline Kariuki, Managing Director of The Mortgage Company (TMC), who feels the government should either develop infrastructure themselves or allow developers to claim back some of the costs incurred.
Industry stakeholders are also urging Government to construct better roads and commuter railway systems which would enable more buyers to go for cheaper housing options further away from urban centres.
“If there was a connecting railway system, why wouldn’t I live in Naivasha?” Kariuki poses. “It would take me only 30 minutes to come to work in Nairobi.”