In June 2017, we released the Nairobi Metropolitan Area Land Report - 2017, which focused on the performance of land in 18 suburbs and 11 Satellite Towns in the Nairobi Metropolitan Area (NMA). According to the report, land had increased in value substantially, with the asking prices growing with a 5-year Compounded Annual Growth Rate (CAGR) of 19.4% between 2011 and 2016. The main drivers for the growth were the rapid population growth of 2.6% p.a against a global average of 1.2%, a high urbanization rate of 4.4% against a global average of 2.1% p.a, as well as the robust growth of the real estate sector, which had delivered returns of on average 25.0% p.a over a 5-year period. In summary, the land price performance by zones was as follows;
- Commercial zones had the highest returns with prices growing by a CAGR of 24.3%,
- site and service schemes, grew with a 5-year CAGR of 20.4%,
- low rise residential areas recorded the lowest appreciation rates, with prices growing with a 5-year CAGR of 14.6%
This week, we update that report with our Nairobi Metropolitan Area Land Report - 2018. The report highlights the land sector’s performance in the Nairobi Metropolitan Area in 2017 based on annual capital appreciation and make comparison to the 6-year growth rate to enable us identify trends, and hence give an outlook for the sector, as well as an investment recommendation. In this focus note, we cover:
- brief introduction to the land sector in NMA,
- performance summary in 2017 based on zones and locations,
- Summary and the investment opportunity in the sector, and
- conclusion by highlighting the outlook and investment recommendation.
- Introduction
Land prices in NMA have been on an upward trend, growing by high rates of up to 19.4% p.a., over the last 6 years driven by:
- positive demographic such as a high population growth rates of 2.6% p.a, higher than global averages of 1.2%, and a rising middle class with increasing purchasing power,
- continued investments in infrastructure such as roads, water, sewer and power connection,
- reduced supply of development class land at affordable prices, and
- a robust real estate sector.
In 2017, however, land and real estate sector was affected by the tough economic environment attributed to,
- low private sector credit growth, which averaged 2.4% in the first 10 months to October 2017 compared to a 5-year growth rate of 14.4%,
- the protracted electioneering period, which led to investors adopting a wait and see attitude, and,
- increased supply in some themes such as commercial office, which saw the NMA record a growth of just 3.7% p.a, compared to the 6-year CAGR of 17.0%.
The sector’s performance varied, with some zones experiencing price corrections such as Upperhill and Riverside, and others demonstrating attractive price appreciations of up to 12.0%, such as in Karen. The detailed analysis of performance by the various nodes and zones is as summarized below.
- Performance Summary in 2017
In our analysis of the performance, we classified the various nodes based on the zoning regulations and locations as below;
- Commercial Zones: These areas include Nairobi CBD, Kilimani, Westlands, Riverside and Upperhill, they are characterized by commercial office buildings,
- High Rise Residential Areas: These are areas characterized by high rise residential developments mainly apartments and include: Kileleshwa, Dagoretti, Ridgeways, Githurai, Embakasi, Kahawa and Kasarani,
- Low Rise Residential Areas: These are areas zoned for low rise residential developments, mainly villas, townhouses and maisonettes and include; Kitisuru, Runda, Nyari, Karen and Spring Valley,
- Satellite Towns: Land in the area was categorized into serviced (site and service schemes) and unserviced land.
The land sector recorded positive growth rates in most areas in NMA, recording an annual appreciation of 3.7% y/y from 2016, attributable to the tough operating environment in 2017. High rise residential areas recorded the highest capital appreciation rates, growing by 4.8% y/y. The growth was supported by high returns per unit of land value as the areas allow for densification, and increased demand for housing from the growing middle-income population. Areas zoned for commercial development such as Westlands and Kilimani recorded annual appreciation rates of 3.4% y/y, down from a 6-year CAGR of 20.0%. The slowdown in growth is attributed to the increased supply of commercial developments, with offices having an oversupply of 4.7 mn SQFT in 2017 and therefore a decline in demand for land for commercial developments. Site and service schemes had the lowest appreciation rates with the asking prices growing by 2.7% y/y, lower than the 3.0% recorded for unserviced land in the same localities. This implies that buyers are not willing to pay a premium for the services provided, rather opting for unserviced land in areas such as Ngong, which is 36.0% cheaper, and provide the services for themselves.
The performance of the various zones and localities is as summarized below:
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All Values in Kshs Unless Stated Otherwise |
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Land Price Performance by Zones – Nairobi Metropolitan Area |
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|
Location |
*Price in 2011 |
*Price in 2015 |
*Price in 2016 |
*Price in 2017 |
6-Year CAGR |
2017 Capital Appreciation |
|
Nairobi Suburbs - High Rise Residential Areas |
49mn |
85mn |
102mn |
108mn |
14.7% |
4.8% |
|
Nairobi Suburbs - Low Rise Residential Areas |
39mn |
72mn |
84mn |
87mn |
14.4% |
4.5% |
|
Nairobi Suburbs - Commercial Areas |
156mn |
377mn |
458mn |
473mn |
20.5% |
3.4% |
|
Satellite Towns - Unserviced Land |
9mn |
16mn |
20mn |
20mn |
17.4% |
3.0% |
|
Satellite Towns - Site and service Schemes |
6mn |
13mn |
14mn |
14mn |
18.2% |
2.7% |
|
Average |
|
|
|
|
17.0% |
3.7% |
|
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Source: Cytonn Research
High Rise Residential Areas
For high rise residential areas, the asking prices had an annual capital appreciation of 4.8% and this we attribute to the high returns in the areas, given that the areas allow densification. Kahawa had the highest appreciation rates of 8.3% attributed to increased demand for land in the area from developers looking to cater for the middle-income and student population. Embakasi recorded the lowest appreciation rates of 1.7%, attributable to i) traffic congestion into and out of the area making it unattractive for settlement, and thus development, and ii) reduced development activity and therefore demand for land as the area is already well developed. The performance of high rise residential zones is as summarized below:
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All Values in Kshs Unless Stated Otherwise |
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Land Price Performance-High Rise Residential Zones in Nairobi Metropolitan Area |
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|
Location |
*Price in 2011 |
*Price in 2015 |
*Price in 2016 |
*Price in 2017 |
6-Year CAGR |
% Price Change from 2011 |
2017 Capital Appreciation |
|
Kahawa |
33mn |
51mn |
60mn |
65mn |
12.0% |
2.0 |
8.3% |
|
Kileleshwa |
149mn |
227mn |
286mn |
306mn |
12.7% |
2.1 |
6.8% |
|
Kasarani |
32mn |
51mn |
60mn |
64mn |
12.0% |
2.0 |
6.1% |
|
Dagoretti |
28mn |
81mn |
95mn |
99mn |
23.6% |
3.6 |
4.0% |
|
Githurai |
21mn |
37mn |
45mn |
46mn |
14.2% |
2.2 |
2.2% |
|
Embakasi |
33mn |
61mn |
69mn |
70mn |
13.6% |
2.2 |
1.7% |
|
Average |
49mn |
85mn |
102mn |
108mn |
14.7% |
2.3 |
4.8% |
|
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Source: Cytonn Research
Low Rise Residential Areas
Low rise residential areas recorded an average price appreciation of 4.5%, which is 0.3% points lower than that of high rise residential areas, but higher than the 3.4% recorded in commercial zones. Karen recorded the highest appreciation rates of 12.2% against a submarket average of 4.5% attributed to its affordability as compared to other low rise residential nodes, with an average price per acre of land in Karen being Kshs 52 mn against a market average of Kshs 87mn for the low rise residential nodes. In Nyari, the prices reduced by 0.1% attributed to the high land and house prices, with an acre of land in Nyari being Kshs 109 mn against a market average of Kshs 87 mn hence less affordable as compared to the other low rise residential nodes. Given the high land prices in these nodes with the exception of Karen, for these regions to experience significant increase in prices, the zoning regulations need to be relaxed to allow for densification and thus more value can be derived per unit of land. The performance of the low rise residential node is as summarized below:
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All Values in Kshs Unless Stated Otherwise |
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Land Price Performance- Low Rise Residential Zones in Nairobi Metropolitan Area |
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|
Location |
*Price in 2011 |
*Price in 2015 |
*Price in 2016 |
*Price in 2017 |
6-year CAGR |
% Price change from 2011 |
2017 Capital Appreciation |
|
Karen |
25mn |
40mn |
46mn |
52mn |
12.9% |
2.1 |
12.2% |
|
Ridgeways |
24mn |
51mn |
62mn |
68mn |
19.0% |
2.8 |
9.2% |
|
Spring Valley |
64mn |
131mn |
147mn |
154mn |
15.7% |
2.4 |
4.7% |
|
Kitisuru |
32mn |
59mn |
70mn |
70mn |
13.9% |
2.2 |
0.2% |
|
Runda |
33mn |
58mn |
67mn |
68mn |
12.6% |
2.0 |
1.2% |
|
Nyari |
54mn |
93mn |
109mn |
109mn |
12.2% |
2.0 |
(0.1%) |
|
Average |
39mn |
72mn |
84mn |
87mn |
14.4% |
2.3 |
4.5% |
|
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Source: Cytonn Research
Commercial Areas
Commercial areas recorded a 3.4% annual increase in price, lower than both the high rise and low rise residential zones which recorded annual increments of 4.8% and 4.5%, respectively. We attribute this to decreased demand for commercial property given the existing oversupply of 4.7mn SQFT of office space. Kilimani had the highest annual appreciation rate among the commercial nodes of 7.5%, attributable to its relatively low price compared to the other office nodes, with average prices of Kshs 387 mn per acre against a market average of Kshs 473 mn for the nodes. Riverside recorded a slight decline in prices of 0.5%. Prices in Upperhill also corrected with the market recording a 0.5% decline in prices as a result of i) increased land prices over the last 6-years, recording a 16.9% CAGR%, ii) an oversupply of approximately 700,000 SQFT of office space in the node, and iii) traffic congestion into and out of the area that had led to many developers focusing on Kilimani, an upcoming office node with lower supply. The performance of the commercial zones is as summarized below;
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All Values in Kshs Unless Stated Otherwise |
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Land Price Performance- Commercial Zones in Nairobi Metropolitan Area |
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|
Location |
*Price in 2011 |
*Price in 2015 |
*Price in 2016 |
*Price in 2017 |
6-year CAGR |
% Price change from 2011 |
2017 Capital Appreciation |
|
Kilimani |
114mn |
294mn |
360mn |
387mn |
22.5% |
3.4 |
7.5% |
|
CBD |
200mn |
450mn |
600mn |
634mn |
21.2% |
3.2 |
5.7% |
|
Westlands |
150mn |
350mn |
453mn |
474mn |
21.1% |
3.2 |
4.6% |
|
Upper Hill |
200mn |
450mn |
512mn |
510mn |
16.9% |
2.6 |
(0.5%) |
|
Riverside |
116mn |
343mn |
362mn |
361mn |
20.8% |
3.1 |
(0.5%) |
|
Average |
156mn |
377mn |
458mn |
473mn |
20.5% |
3.1 |
3.4% |
|
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Source: Cytonn Research
Satellite Towns
Land in satellite towns recorded an annual price appreciation of 3.0% in 2017, lower than land in the suburbs which had an average annual price appreciation of 4.3%. This is attributable to a decline in speculation activity in 2017, as a result of growth of some towns such as Ruiru and Ruaka, and as a result of the wait and see attitude adopted by investors over the extended electioneering period. The best performing Satellite Town was Juja which recorded an annual appreciation of 8.7%, attributable to speculation in the area as investors moved from Ruiru, whose prices have matured. The worst performing as Utawala, where prices stagnated as the price growth had in previous years been driven by speculation, speculators have since moved to the new towns along Limuru and Thika Road which are undergoing infrastructural and real estate development. The performance of land in Satellite Towns is as summarized below:
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All Values in Kshs Unless Stated Otherwise |
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Land Price Performance- Unserviced Satellite Towns in Nairobi Metropolitan Area |
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|
Location |
*Price in 2011 |
*Price in 2015 |
*Price in 2016 |
*Price in 2017 |
6-year CAGR |
% Price change from 2011 |
Annual Appreciation 2017 |
|
Juja |
3mn |
7mn |
8.8mn |
9.6mn |
20.0% |
3.0 |
8.7% |
|
Athi River |
2mn |
3mn |
3.8mn |
4.1mn |
12.5% |
2.0 |
5.6% |
|
Ruaka |
40mn |
58mn |
74mn |
77mn |
11.6% |
1.9 |
4.3% |
|
Ruiru |
7mn |
15mn |
19.3mn |
19.7mn |
20.0% |
3.0 |
2.2% |
|
Ngong |
7mn |
12mn |
14.1mn |
14.4mn |
13.5% |
2.1 |
2.1% |
|
Limuru |
5mn |
13mn |
16.6mn |
16.7mn |
20.6% |
3.1 |
1.0% |
|
Ongata Rongai |
2mn |
10mn |
9.8mn |
9.9mn |
29.2% |
4.7 |
0.1% |
|
Utawala |
6mn |
9mn |
10.9mn |
11.0mn |
11.3% |
1.9 |
0.0% |
|
Average |
9mn |
16mn |
19.7mn |
20.3mn |
17.4% |
2.7 |
3.0% |
|
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Source: Cytonn Research
Site and Service Schemes
Site and service schemes recorded an annual appreciation rate of 2.7% over the last year, lower than the 3.0% recorded in unserviced land in the same localities indicating that the buyers are not willing to pay a premium for servicing. Thika recorded the highest appreciation rates of on average 9.7% attributable to speculative tendencies brought about by the growth potential of the area. Athi River recorded a decline in prices of 0.3%, attributable to decreased demand in the area as a result of poor infrastructure and availability of relatively cheaper unserviced land. The provision of trunk infrastructure in the individual plots without commensurate infrastructure in the surrounding area is therefore not attractive to buyers. Therefore, to boost site and service schemes, the government should provide this infrastructure in the areas. The performance of site and service schemes in Satellite Towns is as summarized below:
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All Values in Kshs Unless Stated Otherwise |
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Land Price Performance- Site and Service Satellite Towns in Nairobi Metropolitan Area |
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|
Location |
*Price in 2011 |
*Price in 2015 |
*Price in 2016 |
*Price in 2017 |
6-Year CAGR |
% Price Change from 2011 |
Annual Appreciation 2017 |
|
Thika |
5mn |
7mn |
8.4mn |
9.2mn |
10.4% |
1.8 |
9.7% |
|
Ruai |
8mn |
12mn |
12.8mn |
13.1mn |
8.8% |
1.7 |
2.2% |
|
Syokimau-Mlolongo |
3mn |
12mn |
11.9mn |
12.1mn |
24.8% |
3.8 |
1.7% |
|
Ongata Rongai |
7mn |
16mn |
18.8mn |
19.1mn |
18.2% |
2.7 |
1.5% |
|
Ngong |
11mn |
18mn |
19.1mn |
19.4mn |
10.7% |
1.8 |
1.4% |
|
Athi River |
2mn |
11mn |
13.0mn |
12.9mn |
36.5% |
6.5 |
(0.3%) |
|
Average |
6mn |
13mn |
14mn |
14mn |
18.2% |
3.0 |
2.7% |
|
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Source: Cytonn Research
- Summary and Investment Opportunity
Karen, Kilimani, Ridgeways, Juja and Kasarani are among the best performing sub markets in terms of capital appreciation, recording annual rates of more than 5.0% in 2017, while Thika offers site and service investors the highest expected returns of on average 9.7% against a market average of 3.7% in 2017. The table below summarizes the performance of the various areas:
|
Summary and Conclusions- Capital Appreciation Nairobi Metropolitan Area |
|
|
Land Capital Appreciation |
|
|
2016 - 2017 |
Areas |
|
>5% |
Karen, Kilimani, Ridgeways, Athi River, Juja, CBD, Kahawa, Kileleshwa, and Kasarani |
|
1% -5% |
Ruaka, Ruiru, Ngong, Limuru, Westlands, Githurai, Dagoretti, Embakasi, Runda and Spring Valley |
|
< 1% |
Utawala, Ongata Rongai, Upperhill, Riverside, Kitisuru and Nyari |
|
Site and Service Schemes Capital Appreciation |
|
|
2016 - 2017 |
Location |
|
> 5% |
Thika |
|
1%-5% |
Ongata Rongai, Syokimau- Mlolongo, Ngong and Ruai |
|
<1% |
Athi River |
Source: Cytonn Research
Investment Opportunity
Given the above performance of the various areas, the investment opportunity in the sector is in markets with high returns such as Karen, Kilimani, Ridgeways, Juja and Kasarani which recorded annual capital appreciation rates of more than 5.0% in 2017, and Thika which offers site and service schemes investors the highest expected returns of on average 9.7% against a market average of 3.7% in 2017, thus making these areas the most attractive areas both for land and real estate development.
- Outlook for the Sector
The table below summarizes metrics that we expect to have possible impact on land prices in Nairobi, in 2018. All the four indicators are positive, and therefore, the general outlook for the sector in 2018 is positive:
|
Indicator |
2017 Projections |
2018 Projections |
2017 Outlook |
2018 Outlook |
|
Infrastructure Development |
It was expected that the government expenditure on infrastructure would increase by 35.6% in 2017 to Kshs. 342.2bn from Kshs. 252.6bn in 2016. This was exceeded by 1.5% to Kshs. 347.4bn in 2017 |
The government expenditure on infrastructure expected to increase by 14.2% in 2018 to Kshs. 396.8bn from Kshs. 347.4bn in 2017, therefore opening up areas along these corridors, translating to an increase in land value |
Positive |
Positive |
|
Legal Reforms |
Relaxation of the zoning regulations in some submarkets. Zoning regulations relaxed in Kyuna, Loresho and Spring Valley translating to higher returns, with Spring Valley recording an annual appreciation of 4.7% 1.0% points the market average Scrapping of land search fees which was done |
The digitization of the land ministry expected to enhance transparency and efficiency of land transactions hence reduced transaction cost |
Positive |
Positive |
|
Credit Supply |
We expected if the Banking Amendment Act 2015 is not reversed, to continue constraining credit supply to the sector thus reducing both development and off take of real estate. This was witnessed where we saw private sector credit growth decline to 2.4% as at October 2017 from a 5-year average of 14.4% with the number of active mortgage accounts dropping by 1.5% to 24,085 from 24,458 in 2015 |
In the case the Banking Amendment Act 2015 review is not successful, we expect low credit supply to continue hindering access to funds reducing both development and off take of real estate. However, we expect developers to embrace alternative funding such as Real Estate Investment Trusts (REITs), |
Negative |
Neutral |
|
Real Estate Activities |
Decreased activities due to elections uncertainty. This was evidenced with the value of building plans approved by the NCC, decreasing by 28.1% to Kshs 240.8 mn in 2017 from Kshs 308.4 mn in 2016 |
Increased real estate activities on the back of the calm conclusion of the prolonged electioneering period in 2017 and the government affordable housing initiative |
Negative |
Positive |
|
Performance |
We expected Land in Nairobi Metropolitan Area to grow with a 5-year CAGR of 19.4% between 2011 and 2016. Land prices, however recorded an annual capital appreciation of 3.7% in 2017 due to the prolonged electioneering period |
We expect land prices in Nairobi to record an annual capital appreciation of 10.2% in 2018 following the return to normalcy after the conclusion of the electioneering period |
Positive |
Positive |
Source: Cytonn Research
For the 2017 Land sector outlook, we had three out of the five metrics as positive, and two negative and thus a positive outlook for the land sector in Nairobi. For 2018, we have four of the metrics under consideration are positive and one neutral, thus we retain our positive outlook for the land sector in Nairobi and we expect the land and real estate market to record better performance in 2018.
We expect increased investments in the sector driven by i) infrastructural development with the government expenditure on infrastructure expected to increase by 14.2% in 2018 from 2017, ii) the conclusion of the electioneering period and iii) relaxation of zoning regulations in some markets thus making them more attractive for real estate development.
Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.
