RESIDENTIAL UNITS IN RUAKA, WAIYAKI WAY, RUIRU, JUJA AND NGONG RECORDED THE HIGHEST Y/Y AVERAGE RETURNS TO INVESTORS

3 January, 2023

Press Release

RESIDENTIAL UNITS IN RUAKA, WAIYAKI WAY, RUIRU, JUJA AND NGONG RECORDED THE HIGHEST Y/Y AVERAGE RETURNS TO INVESTORS.

Nairobi, Kenya. Tuesday, 3^rd January 2022

Cytonn Real Estate, the development affiliate of Cytonn Investments, has released their Annual Markets Review 2022. The report highlights the current state of the Real Estate sector in terms of uptake, rental yields, capital appreciation, and hence, total investor returns. In 2022, the general Real Estate sector witnessed considerable growth in terms of property transactions and development activities as seen by the 0.3% growth in rental yields to 6.8%, from 6.5% recorded in 2021. Consequently, the sector’s activity contribution to GDP grew by 5.6% to Kshs 749.7 bn for the 9 months to September 2022, from Kshs 710.3 bn recorded during the same period in 2021. Additionally, selling and rental prices also continued to soar, driven by continued inflationary pressures and a weakened shilling against the United States dollar that has seen a rise in costs of construction materials.

The Nairobi Metropolitan Area (NMA) residential sector recorded improvement in performance with the average total return to investors coming at 6.2%, a 0.1%-point increase from the 6.1% recorded in FY’2021. This was majorly driven by improved selling prices and rents which came in at Kshs 119,609 and Kshs 540, respectively, from Kshs 119,494 and Kshs 508, respectively, recorded in FY’2021. In the commercial office sector, the average rental yield slightly increased by 0.3% points to 7.6% in FY’2022, from 7.3% that was recorded in FY’2021, mainly driven by a 2.1% increase in the average rental rates per SQFT to Kshs 96 from Kshs 94 recorded in FY’2021, and, a 1.8% increase in occupancy rates to 79.4% from 77.6% in FY’2021. In the retail sector, the average rental yield slightly improved by 0.1% points to 7.9% in FY’2022, from 7.8% in FY’2021, as a result of improvement in average asking rents per SQFT by 2.4% to Kshs 174 in FY’2022, from Kshs 170 recorded in FY’2021. In the hospitality sector, the average rental yield for serviced apartments increased by 0.7% to 6.2% in 2022, from the 5.5% recorded in 2021, attributed to improvement in monthly charges per SQM to Kshs 2,716 in 2022, from Kshs 2,549 recorded in 2021. In Mixed-Use Developments (MUDs), the average rental yield of increased by 0.2% to 7.4% in 2022, from the 7.2% yield recorded in 2021, as a result of increased demand for MUDs owing to their convenience. For land, the average selling prices recorded an overall improvement in performance with the land asking prices per acre rising by 1.6% Year-on-Year (y/y) to Kshs 131.0 mn in FY’2022, from Kshs 130.8 mn recorded in FY’2021.

“Some of the key factors that continued to shape the performance of the sector include; i) continued launch and implementation of various infrastructure projects, ii) aggressive expansion efforts by retailers, iii) focus by the government and private sector to provide affordable housing, iv) provision of long-term, low-interest home loans to potential buyers by the Kenya Mortgage Refinance Company (KMRC), v) increased mergers and acquisitions in the hospitality sector, and, vi) positive demographics promoting demand for Real Estate developments.” Stated Kennedy Waweru, a Research Analyst at Cytonn Investments.

Conversely, there existed a couple of challenges facing the sector such as; i) prevailing inflationary pressure from local and external shocks, ii) limited credit access partly due to the rising non-performing loans in the property sector, iii) low absorption of physical space due to the continued oversupply in the commercial office and retail sectors, iv) uncoordinated land use due to lack of proper urban planning, and, v) subdued growth of the Real Estate Investment Trusts (REITs) market.

In the residential sector, detached units registered an average total return of 5.8% y/y while apartments recorded an average total return of 6.5% y/y. Detached units in Ruiru, Juja, and, Ngong, recorded the highest average y/y returns at 7.8%, 6.9%, and 6.5%, respectively, while apartments in Ruaka, Waiyaki Way, and, Ruiru, recorded the highest average y/y total returns of 7.5%, 7.4%, and, 7.3% respectively.

*All Values in Kshs unless stated otherwise*
Cytonn Report: Detached Units Performance, Top 3 markets
Area	Price per SQM FY'2022	Rent per SQM FY'2022	Occupancy FY'2022	Uptake FY'2022	Annual Uptake FY'2022	Rental Yield FY'2022	Price Appreciation FY'2022	Total Returns
Ruiru	68,474	345	87.3%	83.6%	18.2%	6.2%	1.6%	7.8%
Juja	66,081	290	81.4%	83.9%	18.2%	5.7%	1.2%	6.9%
Ngong	65,329	319	93.6%	96.3%	12.4%	6.2%	0.4%	6.5%

*All Values in Kshs unless stated otherwise*
Cytonn Report: Apartments Market performance, Top 3 Markets
Area	Price per SQM FY'2022	Rent per SQM FY'2022	Occupancy FY'2022	Uptake FY'2022	Annual Uptake FY'2022	Rental Yield FY'2022	Price Appreciation FY'2022	Total Returns
Ruaka	109,462	567	78.6%	83.8%	22.3%	5.2%	2.3%	7.5%
Waiyaki Way	87,429	539	83.8%	87.3%	21.2%	6.3%	1.1%	7.4%
Ruiru	89,592	492	87.0%	83.6%	17.1%	5.8%	1.6%	7.3%

Source: Cytonn Research

In the commercial office sector, Gigiri, Westlands and Karen recorded the highest rental yields of 8.7% and 8.3% for both Westlands and Karen, respectively, in FY’2022 compared to the market average of 7.6%. Their remarkable performance continues to be driven by; i) high concentration of top notch office spaces fetching premium rental rates and attractive yields for investors, ii) availability of adequate infrastructure and amenities in the areas enhancing investments, and, iii) presence of international organizations, multinational companies and embassies within the areas which drive up demand for quality offices.

In the retail sector, Kilimani, Karen, and, Westlands were the best performing nodes with average rental yields of 9.8%, 9.4% and 8.7%, respectively, compared to the overall market average of 7.9%. The remarkable performance in the three nodes was mainly driven by presence of high quality retail spaces fetching the high rents, coupled with the availability of quality infrastructure services.

For the land sector, Un-serviced land in Nairobi's satellite towns recorded the highest YoY capital growth by 11.1%, with demand being fuelled by: i) high land prices within Nairobi, which has caused investors to source for cheaper land in satellite towns, ii) enhanced accessibility to the areas owing to infrastructure boost through projects such as the Nairobi Expressway and expanded Eastern Bypass, that unlocked value for investors, iii) their affordability which entices both buyers and investors, and, iv) a high number of affordable housing development projects in the areas compared to other NMA regions, further increasing demand for land.

The outlook of the Real Estate sector is positive for one sector -Land, and, neutral for seven sectors - Residential, Commercial Office, Retail, Hospitality, Mixed Use Developments, and, Real Estate Investment Trusts (REITs). Therefore, our overall outlook for the Real Estate sector is NEUTRAL, supported by; i) initiation and implementation of various housing projects, ii) reduced developments in the pipeline, coupled with the slow but rising expansion which will help curb the oversupply challenge by allowing room for the absorption of available and fewer incoming spaces in the commercial office market, iii) aggressive expansion in the retail sector, iv) increasing popularity of Mixed Use Developments (MUDs) owing to their convenience, v) continuous recovery of the hospitality sector, vi) growing foreign investor confidence in Kenya’s property market thus driving investments and expansion following the peaceful conclusion of the August polls and sustained political stability, vii) continued implementation of various relevant laws and regulations in the Real Estate sector in order to level up transactions and build on the overall efficiency, compliance, and, transparency in the industry, and, vii) improved infrastructural developments. However, the existence of excess supply of space in the commercial office and retail sectors, slow delivery of affordable housing projects, the government’s directive to indefinitely suspend hotel meetings, conferences and trainings, and, the low investor appetite for REITs is expected to hinder the optimum performance of the sector. Below is a summary of the FY’2022 sectorial performance:

Key: Green – POSITIVE, Grey – NEUTRAL, Red – NEGATIVE highlights sectorial outlook

Theme	Cytonn Report; Thematic Performance and Outlook FY’2022	Outlook
Residential	The residential sector’s average total return increased by 0.1% points y/y to 6.2%, from 6.1% recorded in FY’2022 mainly driven by improved selling prices and rents which came in at Kshs 119,609 and Kshs 540, respectively in FY’2022, from Kshs 119,494 and Kshs 508, respectively, recorded in FY’2021. We expect the sector’s performance to be driven by continued development of infrastructure serving to open up areas for development and easy access for residency. This is as demand for housing is expected to continue growing on the back of Kenya’s attractive demographic profile. Additionally, the ongoing focus by the government and private sector to provide housing will serve to improve the sector's performance and in turn curb the existing housing deficit in the country. However, we expect the prevailing inflationary pressure coupled with a weakened shilling, high construction costs, and the low penetration of mortgages in the country to continue impeding the performance of the sector. For detached units, investment opportunity lies in areas such as Ruiru, Juja, and Ngong, while for apartments, investment opportunity lies in Ruaka, Waiyaki Way, and Ruiru.	Neutral
Commercial Office Sector	The NMA commercial office sector realized a slight increase in the average rental yield of 0.3% points to 7.6% in FY’2022, from 7.3% that was recorded in FY’2021. This was mainly driven by a 2.5% increase in the average rent per SQFT to Kshs 96, owing to increased supply of Grade A offices fetching higher rents such as Karen Green and GTC Office Tower, among others. Sector’s optimum performance continues to be weighed down by the existing oversupply of 6.7 mn SQFT in the market. Conversely, given the reduced developments in the pipeline, coupled with the slow but rising expansion in the sector, we expect that this will help curb the oversupply challenge by allowing room for the absorption of available and fewer incoming spaces. Investment opportunity lies in Gigiri, Westlands, and Karen which offer relatively high returns compared to the market averages.	Neutral
Retail Sector	The average rental yield for the NMA retail sector improved by 0.1% points to 7.9% in FY’2022, from 7.8% in FY’2021. This was mainly on the back of a 0.7% points increase in the average occupancy which came in at 77.6%, from 76.8% recorded in FY’2021. We expect the performance of retail sector to be driven by; i) the continuous aggressive growth and expansion by both local and international retailers, ii) increased infrastructural developments boosting accessibility, and, iii) positive demographics facilitating demand of space, goods and services. However, its optimum performance is expected to be impeded by; i) oversupply of retail space at approximately 3.0 mn SQFT in the NMA retail sector and 1.7 mn SQFT in the Kenyan retail sector excluding NMA, and, ii) fast-evolving e-commerce hampering the optimum uptake of physical retail spaces. Investment opportunity lies in Kilimani, Karen, and, Westlands which were the best performing nodes in FY’2022.	Neutral
Mixed-Use Developments (MUDs)	Mixed-use developments are expected to continue gaining traction as they offer the live, work and play concept thus convenient for the rising sophisticated middle-income earners with huge demand for exceptional lifestyles. This is further backed by the attractive returns in comparison to single use projects and the rising demand for high quality, efficient and environmentally sustainable developments. However, despite offering impressive returns for investors, performance of MUDs is expected to be weighed down by existing oversupply in select Real Estate sectors. Investment opportunity lies in Karen, Kilimani and Westlands which were the most promising nods with average rental yields higher than the market average of 7.4%.	Neutral
Hospitality	Performance is expected to be driven by; intensive marketing of Kenya’s tourism market through platforms such as the Magical Kenya and Kenya Tourism Board, ii) increased promotion of local tourism, iii) improved security, iv) reopening of the global economy owing to mass vaccinations as well as lifting of all travel restrictions and lockdowns, v) continuous improvement of the economy after the peaceful August general elections, vi) increased conferences and meetings from private sector businesses and companies, vii) increased leisure activities during the festive season and sporting activities with the hosting of Annual Safari Rally competition until 2026, and, vii) continued recognition of Kenya’s hospitality industry through positive accolades awarded to several local and foreign hotel brands based in Kenya in different categories which has boosted investors’ confidence in the sector. However, we anticipate factors such as the newly issued travel advisory by the United Kingdom government through its Foreign and Commonwealth Office (FCO) to slightly have a negative impact on international arrivals in 2023 considering the UK is among top five tourist markets for Kenya, and, the government’s directive to indefinitely suspend hotel meetings, conferences and trainings to weigh down the optimum performance of the conferencing, food and accommodation sub-sectors.	Neutral
Land Sector	The NMA land sector continued to perform well in FY’2022, with land asking prices per acre rising by 1.6% Year-on-Year (YoY) to Kshs 131.0 mn from Kshs 130.8 mn in 2021. The NMA land sector has proven to be a reliable investment opportunity, having continued to show great resilience even during times of economic hardship in the COVID-19 period, and a falling Kenyan currency. We anticipate that the sector’s performance will continue being driven by; i) a greater emphasis on Affordable Housing projects and private projects, ii) positive population demographics, iii) the government's attempts to streamline land transactions, and iv) rapid growth of satellite towns amid increased delivery of infrastructural developments which are improving accessibility, property prices and demand in the regions.	Positive
Listed Real Estate	In the Unquoted Securities Platform, Acorn D-REIT and I-REIT traded at Kshs 23.8 and Kshs 20.9 per unit, respectively, as at 16th December 2022. The performance represented a 19.2% and 4.4% gain for the D-REIT and I-REIT, respectively, from the Kshs 20.0 inception price. The volumes traded for the D-REIT and I-REIT came in at 5.5 mn and 15.5 mn shares, respectively, with a turnover of Kshs 117.0 mn and Kshs 320.7 mn, respectively, since inception in February 2021. In the Nairobi Securities Exchange, ILAM Fahari I-REIT closed the week trading at an average price of Kshs 6.5 per share. The performance represented a 1.8% decline from Kshs 6.6 per share recorded the previous week, taking it to a 1.6% Year-to-Date (YTD) gain from Kshs 6.4 per share. However, the performance represented a 67.4% Inception-to-Date (ITD) loss from the Kshs 20.0 price. The dividend yield currently stands at 7.7%. REITs offer various benefits which include stable and long-term returns, tax exemption, and portfolio diversification, among many others. However, the performance of the REITs market continues to be constrained by factors such as; i) inadequate investor knowledge of the investment vehicle, ii) lengthy approval process, iii) high minimum capital requirements for Trustees, iv) only few entities capable of incorporating REITs, and, v) High minimum investment amounts.	Neutral

Source: Cytonn Research

For more details, read the report here.

Notes to the Editor:

Cytonn Investments is an independent investment management firm, with offices in Nairobi - Kenya and D.C. Metro - U.S. We are primarily focused on offering alternative investment solutions to individual high net-worth investors, global and institutional investors and Kenyans in the diaspora interested in the high-growth East-African region. We currently have over Kshs 82.0 billion of investments and projects under mandate, primarily in real estate.

Cytonn Real Estate is Cytonn’s development affiliate, which is focused on developing institutional grade real estate targeted at specific institutional, high net-worth and Diaspora investors. Collective, Cytonn Investments and Cytonn Real Estate manage over Kshs 82.0 billion of real estate projects.

For more information, kindly contact:

Teresiah W. King’ara

PR and Communications

+254 704 597 107

Email: tkingara@cytonn.com