Karen Investment Opportunity - 2019

27 January, 2019

Following the successful completion and handover of “Amara Ridge”, Cytonn’s flagship project located in Karen near the Bomas of Kenya, Cytonn Real Estate has now launched “Applewood”, a signature gated community development comprising of 18 luxury homes in Miotoni, Karen, seated on 10.4-acres. In this week’s topical, we update our research findings on the Karen real estate market by looking at the factors that have contributed to its attractiveness to investors and analyzing the potential returns to investors in the area. We have expanded our coverage of Karen’s real estate performance by also looking at the commercial office and retail sectors. From Cytonn Research conducted in December 2018, the average total returns in the Karen residential market came in at 8.8% (rental yield of 4.1% and price appreciation of 4.7%), while the office and retail sectors registered average rental yields at 9.2% and 11.0%, respectively.

In our analysis of the investment opportunity in Karen, we shall cover the following:

Overview of Karen
Real Estate Performance in Karen (Residential, Office and Retail)
Karen Investment Opportunity

Overview of Karen

Karen is a high-end neighborhood in Nairobi located approximately 16 km South West of the Nairobi CBD. Previously, it was predominantly a residential area but relaxation of zoning regulations has seen an increase in commercial developments, the most notable ones being The Hub Mall along Dagoretti Road, Galleria Mall at the junction of Magadi and Lang’ata Road and the recently opened, Karen Waterfront along Lang’ata Road. We have seen land values in the area growing at a 7-year Compounded Annual Growth Rate (CAGR) of 12.2% since 2011, from an average of Kshs 25.0 mn per acre in 2011 to Kshs 55.8 mn per acre in 2018, fueled by increased demand for property in the area.

The main factors that have made Karen an attractive area for real estate development include:

Good Transport Network – Karen is accessible by main roads such as Ngong Road, Lang’ata Road and is served by the Southern Bypass, which was completed during the second half of 2016. The ongoing dualling of Ngong Road, currently in its second phase of development, that will see some feeder roads in Karen, such as Karen Road, expanded, is likely to further improve accessibility of the area,
Relaxation of Zoning Regulations – Zoning regulations have been relaxed in Karen to allow for commercial in some nodes and single dwelling up to a half an acre in some areas thus increasing real estate activity and increasing property values. From our research, land prices in Karen have grown by a 7-year CAGR of 12.2% between 2011 and 2018, from Kshs 25.0 mn per acre in 2011 to Kshs 55.8 mn per acre in 2018,
High-end Schools – Karen’s appeal to wealthy individuals is also driven by the presence of some of the most elite international schools in the country such as Banda School, Gems Cambridge, Brookhouse, and Hillcrest. In 2018, Knight Frank’s Wealth Report listed Karen as one of the top investment hotspots globally,
Serene Environment - With the continued relaxation of zoning regulations and increased development activity, many high-end areas are losing their appeal to high net worth individuals. Karen, located at the foothills of Ngong Hills and in close proximity to forests such as Ngong Sanctuary Forest and Oloolua Forest has maintained its appealing environmental serenity, and,
Recreational Facilities – Karen has a unique historical heritage preserved in museums such as the Karen Blixen Museum. It also hosts the Bomas of Kenya, the Giraffe Manor, Karen Country Club and malls including The Hub and Galleria, making the place an ideal home for individuals seeking exclusivity, luxury and convenience.

Real Estate Performance in Karen

In evaluating Karen Market performance, we will look at the following key metrics:

Plinth Area: Research on the size of the units found in the market allows us to gauge the current offering, and put into consideration the home buyer’s preferences for sizes of houses
Prices: Research on prices will be used in comparison of the products in the market over a given time period and allow us to demonstrate capital appreciation
Rental Rates: Research on rental income allows us to inform potential investors on the current rental rates in other developments and also inform the investors on the rental yield they can gain from buying houses in Karen
Annual Uptake: This allows the investor to appreciate the rate at which available homes are sold over a specific period. This helps them gauge on whether it is profitable to invest in a given area
Occupancy: Refers to the units rented out in a development and therefore, indicates the product uptake of an area
Rental Yield: Informs on the returns investors get from a property based on the monthly rental income and hence, the time it will take for an investor to get back the money invested
Price Appreciation: Shows the return on real estate investments though the annual increase in the value of a property/land
Total Returns: This shows the returns investors get back from a real estate investment (Rental yield+ Price Appreciation)

Residential Market

The Karen residential scene has notably changed over the years with more gated communities being delivered to the market. In terms of land for development, Karen remains relatively affordable for developers in the high-end market, with the price per acre averaging at Kshs 55.8 mn as at 2018 in comparison to Runda, Kitisuru, and Rosslyn with Kshs 68.8 mn, Kshs 77.3 mn, and Kshs 100.0 mn per acre, respectively. In terms of performance, five bedroom units recorded the highest annual uptake and annual returns in Karen with an average of 27.6% and 10.9%, respectively, in comparison to four bedroom units with 20.8% and 5.5%, respectively, as high-income investors and homeowners prefer large units.