Last year, we released a report that covered the mortgage and rental affordability of the residential sector, called Nairobi Mortgage and Rental Affordability Report. According to the report, most sub-markets were unaffordable to prospective home-owners with an average mortgage affordability index of 66, whereas most markets were affordable to the renters with an average rental affordability index of 132, where index scores of 100 and above indicate affordability. This year, we conducted research on 35 sub-markets in the Nairobi Metropolitan to determine the investment opportunity for residential developments in 2017. This report shows the performance of both apartments and detached units in the 35 sub-markets. We start with an introduction, then cover the performance summary by sub-markets and conclude by establishing where the investment opportunity lies by ranking the sub-markets using various metrics.
Introduction
The residential real estate sector in Kenya has witnessed increased interest in the last 5-years supported by (i) the accumulated housing deficit of approximately 2 mn units and growing at 206,000 units p.a according to the Africa Development Bank, (ii) the high urbanization rate at 4.4% p.a. compared to a global average of 2.0%, which has created increased demand for residential real estate in urban centers, (iii) population growth at 2.7% p.a. compared to a global average of 1.2%, (iv) improvement in infrastructure, leading to opening up of new areas for development, and (v) the growing middle class demanding attractive real estate. In 2017, however, various reports have been released highlighting a decline in sales of residential units. This can be attributed to investors adopting a wait and see approach ahead of the elections held on August 8th and the trend is likely to continue in the short-term given the cancellation of the presidential results and postponement of the elections to a later date. In addition, the implementation of the Banking Amendment Act 2015 resulted in a decline in credit growth from 25.8% in June 2014 to 2.1% as at May 2017. This is because banks are unable to factor in ‘high risk borrowers’ within the stipulated margins. According to the Central Bank of Kenya, the number of active mortgage accounts in the year 2016 declined by 1.5% to 24,085 from 24,458 in 2015, showing the impact of the Banking Amendment.
On the supply side, according to the World Bank Kenya Economic Update of 2017, 48.0% of housing supplied is in the upper middle Income segment, 35.0% in the high income segment and only 17.0% in the lower income segments. The main factors affecting supply include
- increasing cost of land, with prices rising at a 5-year CAGR of 19.4%,
- access to funding, which is difficult to get unless you have structuring capabilities and is also expensive,
- high construction costs, which constitute approximately 70% of development costs, and,
- availability of infrastructural support.
Due to these limitations, private developers have continued to focus on the upper middle and high-end unit types to sustain profit margins. We have however seen various efforts by the government to boost provision of affordable housing including the reduction of corporate tax to 15% from 30% for firms that develop at least 100 affordable housing units annually, and scrapping of title search fees, NCA and NEMA fees. This is likely to enable more developers including Saccos and housing cooperatives provide more affordable housing.
In terms of performance, on average prices increased by 3.8% in 2017 compared to a 7.4% increase in 2016 while rental yields remained fairly stable averaging at 5.6% in 2017 compared to the 2016 average of 5.2%. This indicates sustained demand for rental housing whereas demand for sale houses declined.
The performance of the residential sector is as summarized below:
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(all values in Kshs unless stated otherwise) |
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Year on Year Change in Price Appreciation and Rental Yield |
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|
Unit Typologies |
Average Price Appreciation (2017) |
Average Rental Yield (2017) |
Total Returns (2017) |
Average Price Appreciation (2016) |
Average Rental Yield (2016) |
Total Returns (2016) |
Y/Y Change in Total Return (% Points) |
|
|
Detached |
4.2% |
5.2% |
9.4% |
6.5% |
5.2% |
11.7% |
(2.3%) |
|
|
Apartments |
3.5% |
6.0% |
9.5% |
8.3% |
5.2% |
13.5% |
(4.0%) |
|
|
Average |
3.8% |
5.6% |
9.4% |
7.4% |
5.2% |
12.6% |
(3.2%) |
|
|
Prices in 2017 appreciated albeit at a lower rate of 3.8%, which is 3.7% lower than the same in 2016 due to a slow-down in demand attributed to investor anxiety over the 2017 elections. Rental yields remained stable at 5.5% compared to 5.2% yield in 2016 indicating sustained demand for rental housing. |
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Source: Cytonn Research
Sub Market Analysis
In our submarket analysis, we classified the various suburbs in the Nairobi Metropolitan Area into three segments
- High End Segment – Consists of prime suburbs in Nairobi, such as Karen, Runda and Kitisuru. Most of these zones have been zones for low rise residential developments only and are characterized by palatial villas and bungalows on half acre parcels
- Upper Middle Income Segment – Consists of suburbs such as Kilimani, Lavington, Kileleshwa, Loresho and Ridgeways among others. The population in these zones are middle class but with higher incomes than the average characterization of middle class. They are zones for both high rise and low density houses.
- Lower Middle Income Segment – Consists of suburbs in Nairobi habited by middle class such as Donholm, Komarock and Imara Daima as well as Satellite Towns such as Ngong, Rongai and Juja
The submarket analysis is as presented below, in the zones above, we analysed detached units and apartments separately:
- Detached Units - High End Segment
This consists of zones such as Karen, Runda and Kitisuru. Houses are mainly on half acre land parcels. The zone has the highest average price per square meter at Kshs 194,000 and recorded average rental yields of 4.9%. On average prices increased by 2.6% in this zone in 2017 with Lower Kabete recording the highest increase in price of 5.1%.
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(all values in Kshs unless stated otherwise) |
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Detached Units- High End Segment |
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Location |
Average Price per SQM (2017) |
Average Rent per SQM (2017) |
Annual Uptake |
Rental Yield |
Price Appreciation |
Total Return |
|
Lower Kabete |
165,113.9 |
562.5 |
18.0% |
4.1% |
5.1% |
9.2% |
|
Runda |
208,621.3 |
892.0 |
9.9% |
5.2% |
3.6% |
8.7% |
|
Roselyn |
173,513.4 |
853.5 |
24.3% |
5.8% |
2.0% |
7.7% |
|
Kitisuru |
234,497.6 |
1,015.3 |
28.5% |
5.4% |
0.6% |
6.0% |
|
Karen |
186,515.4 |
727.3 |
35.4% |
4.0% |
1.7% |
5.7% |
|
Average |
193,652.3 |
810.1 |
23.2% |
4.9% |
2.6% |
7.5% |
|
Lower Kabete and Runda have the highest returns attributed to their prime locations and low supply due to scarcity and high cost of development land. |
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Source: Cytonn Research
- Detached Units - Upper Middle Segment
These zones consist of areas such as Langata, Runda Mumwe, Redhill and Loresho. Zoning regulations in these areas allow for development of both apartments and single dwelling units. The areas recorded on average a rental yield of 5.0% in 2017 and an average increase in prices of 6.1%, Langata had the highest price increment in the zone of 13.4% attributable to ease of access to the area due to its proximity to the CBD and other business nodes such as Upperhill.
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(all values in Kshs unless stated otherwise) |
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Detached Units- Upper Middle Segment |
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Location |
Average Price per SQM (2017) |
Average Rent per SQM (2017) |
Annual Uptake |
Rental Yield |
Price Appreciation |
Total Return |
|
|
Langata |
131,637.0 |
424.3 |
21.6% |
3.9% |
13.4% |
17.4% |
|
|
Runda Mumwe |
146,861.5 |
684.9 |
21.3% |
5.9% |
6.1% |
12.0% |
|
|
Redhill |
96,640.0 |
344.1 |
10.4% |
5.0% |
6.0% |
10.9% |
|
|
Loresho |
147,610.6 |
613.6 |
16.8% |
5.2% |
2.9% |
8.0% |
|
|
Ridgeways |
187,083.7 |
843.0 |
19.9% |
5.1% |
1.9% |
7.0% |
|
|
Average |
141,966.6 |
582.0 |
18.0% |
5.0% |
6.1% |
11.1% |
|
|
Lang’ata has the highest returns due to its proximity to the Nairobi CBD and other business districts such as Upperhill, thus has high demand |
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Source: Cytonn Research
- Detached - Lower Middle Segment
This zone consists mainly of Satellite Towns and Nairobi suburbs such as Donholm and Komarock. The area has an average price per square meter of 77,000 and the highest annualized sales rate in Nairobi Metropolitan Area of 28.4%. On average prices increased in these zones by 3.9%, with Juja having the highest increment of 11.0% attributable to high demand from middle classes as a result of lower prices, the area has a price per square meter of 71,000 against a market average of 77,000.
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(all values in Kshs unless stated otherwise) |
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Detached- Lower Middle Segment |
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Location |
Average Price per SQM (2017) |
Average Rent per SQM (2017) |
Annual Uptake |
Rental Yield |
Price Appreciation |
Total Return |
|
|
Juja |
70,526.1 |
308.6 |
44.4% |
6.3% |
11.0% |
17.3% |
|
|
Thika |
66,253.7 |
340.5 |
17.4% |
6.9% |
7.8% |
14.7% |
|
|
Kitengela |
76,716.3 |
307.6 |
26.4% |
5.1% |
9.0% |
14.0% |
|
|
Athi River |
87,788.8 |
301.4 |
26.1% |
4.3% |
4.8% |
9.0% |
|
|
Ngong |
64,285.8 |
251.0 |
24.2% |
4.5% |
4.4% |
8.9% |
|
|
Komarock |
78,876.6 |
525.3 |
32.3% |
8.0% |
0.0% |
8.0% |
|
|
Ruiru |
84,821.4 |
384.6 |
25.0% |
5.7% |
0.5% |
6.2% |
|
|
Rongai |
72,351.6 |
289.0 |
21.2% |
4.8% |
0.9% |
5.7% |
|
|
Donholm |
91,797.6 |
397.1 |
38.6% |
5.2% |
(3.2%) |
2.0% |
|
|
Average |
77,046.4 |
345.0 |
28.4% |
5.6% |
3.9% |
9.5% |
|
|
Juja and Thika have the highest returns with relatively high price appreciation driven by demand from the lower middle income population. These markets also have relatively larger unit sizes compared to areas such as Donholm for the same price, thus buyers pay less per square metre |
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Source: Cytonn Research
- Apartments - Upper Middle Segment
This zone consists of areas such as Ridgeways, Kilimani, Westlands and Parklands. They have an average price per square metre of Kshs 128,000 and in 2017, the zone recorded the highest yield in Nairobi Metropolitan Area of 6.2% against a market average of 5.5%. In the Zone, Ridgeways had the highest price increment of 12.2% attributed to high demand in the zone evidenced by the high average uptake of 32.9% recorded.
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(all values in Kshs unless stated otherwise) |
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Apartments- Upper Middle Segment |
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Location |
Average Price per SQM (2017) |
Average Rent per SQM (2017) |
Annual Uptake |
Rental Yield |
Price Appreciation |
Total Return |
|
|
Ridgeways |
118,482.7 |
585.0 |
32.9% |
6.1% |
12.2% |
18.4% |
|
|
Kilimani |
159,201.5 |
846.0 |
28.3% |
6.6% |
8.7% |
15.4% |
|
|
Loresho |
106,882.1 |
531.2 |
29.8% |
6.0% |
3.9% |
9.9% |
|
|
Westlands |
128,151.3 |
585.2 |
22.0% |
6.1% |
3.5% |
9.6% |
|
|
Parklands |
128,650.3 |
606.3 |
28.9% |
5.6% |
3.7% |
9.3% |
|
|
Riverside |
159,359.7 |
734.3 |
8.8% |
7.0% |
2.2% |
9.2% |
|
|
Kileleshwa |
128,442.6 |
602.7 |
26.6% |
7.9% |
1.1% |
8.9% |
|
|
Mountain View |
85,069.1 |
380.8 |
28.9% |
5.1% |
2.8% |
7.9% |
|
|
Upper Hill |
141,041.6 |
668.8 |
16.0% |
5.8% |
0.2% |
6.0% |
|
|
Average |
128,364.5 |
615.6 |
24.7% |
6.2% |
4.3% |
10.5% |
|
|
Ridgeways has the highest returns at 18.4% driven by high demand as seen through the 32.9% annual uptake compared to other markets with an average annual uptake of 24.7%. The area borders Runda and Muthaiga, attracts ex-patriates working at the United Nations and Government Embassies in Gigiri and Runda. Ridgeways still has low supply compared to Kilimani and Westlands hence less competition between developers. |
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Source: Cytonn Research
- Apartments Lower Middle Income Satellite Towns
Apartments in the lower middle segment recorded an average rental yield of 5.7% with an average price increment of 3.5%. Like in the detached houses for the same Zone, Langata had the highest increase in price of 13.9% attributed to proximity to the CBD and other business nodes such as Upperhill.
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(all values in Kshs unless stated otherwise) |
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Apartments- Lower Middle Income Suburbs |
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Location |
Average Price per SQM (2017) |
Average Rent per SQM (2017) |
Annual Uptake |
Rental Yield |
Price Appreciation |
Total Return |
|
|
Langata |
108,948.8 |
434.6 |
23.9% |
4.8% |
13.9% |
18.7% |
|
|
Komarock |
71,071.2 |
210.5 |
14.4% |
3.6% |
9.1% |
12.7% |
|
|
Imara Daima |
78,010.8 |
354.0 |
22.7% |
5.6% |
5.2% |
10.7% |
|
|
Dagoretti |
98,185.3 |
516.9 |
31.9% |
6.4% |
3.9% |
10.3% |
|
|
Kahawa West |
75,956.9 |
511.9 |
38.1% |
8.6% |
(3.8%) |
4.8% |
|
|
Kasarani |
115,628.3 |
413.5 |
23.0% |
4.2% |
0.0% |
4.2% |
|
|
Donholm |
73,807.0 |
393.2 |
18.7% |
6.4% |
(3.7%) |
2.7% |
|
|
Average |
88,801.2 |
404.9 |
24.7% |
5.7% |
3.5% |
9.2% |
|
|
Lang’ata has the highest returns among the lower middle income suburbs at 18.7% attributed to high price appreciation. The area is attractive to both investors and home-buyers due to its proximity to major business districts. |
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Source: Cytonn Research
Nairobi’s Satellite Towns recorded an average rental yield of 6.3% with an average price increment of 3.2%. Thindigua had the highest price increment of 13.0% as a result of high by demand for houses in the area. This is as it neighbours prime areas such as Runda and Ridgeways and is easily accessible from the Central Business District compared to other satellite towns.
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(all values in Kshs unless stated otherwise) |
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Apartments- Lower Middle Income Satellite Towns |
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Loction |
Average Price per SQM (2017) |
Average Rent per SQM (2017) |
Annual Uptake |
Rental Yield |
Price Appreciation |
Total Return |
|
|
Thindigua |
78,875.0 |
415.8 |
32.2% |
6.4% |
13.0% |
19.3% |
|
|
Uthiru |
71,564.8 |
386.3 |
37.9% |
6.8% |
5.5% |
12.3% |
|
|
Kitengela |
47,369.2 |
225.9 |
22.6% |
5.4% |
6.4% |
11.8% |
|
|
Ruaka |
99,240.3 |
448.7 |
25.0% |
5.3% |
6.4% |
11.8% |
|
|
Kikuyu |
77,060.2 |
353.8 |
13.0% |
5.5% |
5.2% |
10.7% |
|
|
Thika |
50,974.5 |
296.9 |
12.9% |
7.6% |
1.5% |
9.1% |
|
|
Ruiru |
79,435.6 |
453.5 |
15.6% |
6.5% |
1.9% |
8.4% |
|
|
Lower Kabete |
81,388.4 |
469.2 |
19.4% |
6.6% |
1.2% |
7.8% |
|
|
Athi River |
59,982.1 |
356.5 |
23.1% |
7.5% |
(0.1%) |
7.4% |
|
|
Rongai |
57,951.9 |
322.6 |
27.3% |
6.8% |
(1.4%) |
5.4% |
|
|
Ngong |
60,760.2 |
263.5 |
11.8% |
5.1% |
(1.1%) |
4.1% |
|
|
Juja |
50,728.3 |
239.1 |
15.3% |
5.6% |
0.0% |
5.6% |
|
|
Average |
67,944.2 |
352.7 |
21.3% |
6.3% |
3.2% |
9.5% |
|
|
Thindigua is the best performing market with a 19.3% return driven by demand. It neighbours prime areas such as Runda and Ridgeways and is easily accessible from the Central Business District compared to other satellite towns. Apartments in Juja, Ngong’ and Rongai have recorded stagnation in prices indicating low demand compared to other satellite towns. As they are far from the Central Business District, they mostly attract people seeking detached units with an own compound. |
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Source: Cytonn Research
Investment Opportunity
Whereas the overall market performance has declined, there exists an opportunity in some sub-markets. Thus to identify the investment opportunity in the sector and single out the specific suburbs with the highest returns, we ranked the submarkets based on
- Weighted annual uptake – Refers to how fast developments sell on average per annum, the higher/ faster the sales rate, the higher the points allotted
- Average returns – This is the sum of the rental yield and price appreciation for each suburb. The higher the return the more points allotted
- Price to land multiple – This the number of times the price of a residential unit in a suburb sells above the price of land on which the unit sits, the higher the multiple the more points allotted
- Availability of development land – Areas with higher supply of development land have higher ranking and hence more points
- State of infrastructure – Ranked as poor, average or good, with poor referring to areas that are accessed by earth roads and are not sewered, average referring to areas that are accessed by tarmac but are not sewered and good referring to areas that are both tarmacked and sewered
- Distance from main business nodes- Areas closer to main business nodes such as the Nairobi Central Business District (CBD) have higher ranking due to the ease in commuting for majority of the working adult population
Based on the above metrics, we allotted points to the areas on a scale of 1 to 3 as shown below with 1 being low and 3 being high;
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Residential Market Opportunity |
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Weighted Annual Uptake |
<1% |
1-2% |
>2% |
|
Points |
1 |
2 |
3 |
|
Average Returns |
<10% |
10-15% |
>15% |
|
Points |
1 |
2 |
3 |
|
Price to Land Multiplier |
<10X |
10-20X |
>20X |
|
Points |
1 |
2 |
3 |
|
Availability of Development Land |
Low |
Average |
High |
|
Points |
1 |
2 |
3 |
|
Infrastructure |
Poor |
Average |
Good |
|
Points |
1 |
2 |
3 |
|
Distance from Main Business Nodes |
>25 km from Nbi CBD |
16km-25km from Nbi CBD |
Within 15km radius of Nbi CBD |
|
Points |
1 |
2 |
3 |
Based on the criteria above, for detached units, Juja and Runda Mumwe were the highest ranking due to high uptake, returns and the availability of development land.
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Top 5 Areas to Invest in Detached Units |
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Location |
Weighted Annual Uptake |
Returns Points |
Distance from Main Business Nodes |
Price to Land Multiple |
Availability of Development Land |
Infra-structure |
Total Points |
Rank |
|
Juja |
3.0 |
3.0 |
1.0 |
2.0 |
3.0 |
1.0 |
2.3 |
1 |
|
Runda Mumwe |
3.0 |
2.0 |
3.0 |
1.0 |
2.5 |
1.5 |
2.2 |
2 |
|
Athi River |
3.0 |
1.0 |
1.0 |
2.0 |
3.0 |
1.0 |
2.0 |
3 |
|
Kitengela |
2.0 |
2.0 |
1.0 |
2.0 |
3.0 |
1.0 |
1.9 |
4 |
|
Langata |
1.5 |
3.0 |
3.0 |
1.0 |
1.0 |
2.0 |
1.8 |
5 |
|
Juja and Runda Mumwe are best areas to invest in detached units mainly due to high uptake, returns and the availability of development land. The main challenge with Juja, however, is infrastructure which may result in high costs for the developer. |
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For apartments, Ridgeways and Kilimani were the highest ranked areas due to high uptake, returns and proximity to main business nodes.
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Top 5 Areas to invest in Apartments |
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Metrics |
Weighted Annual Uptake |
Returns Points |
Distance from Main Business Nodes |
Price to Land Multiple |
Availability of Development Land |
Infra-structure |
Total Points |
Rank |
|
Ridgeways |
3.0 |
3.0 |
3.0 |
2.0 |
2.5 |
2.5 |
2.7 |
1 |
|
Kilimani |
2.0 |
3.0 |
3.0 |
2.0 |
2.0 |
3.0 |
2.6 |
2 |
|
Langata |
2.0 |
3.0 |
3.0 |
2.0 |
1.0 |
2.5 |
2.4 |
3 |
|
Dagoretti |
3.0 |
1.0 |
3.0 |
2.0 |
2.5 |
2.5 |
2.3 |
4 |
|
Westlands |
1.5 |
2.0 |
3.0 |
1.0 |
2.0 |
3.5 |
2.2 |
5 |
|
Ridgeways and Kilimani are the best areas to invest in apartments mainly due to high uptake, returns, and proximity to main business nodes in Nairobi |
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Residential Sector Conclusion |
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|
Measure |
Sentiment |
|
Factors influencing residential development |
· The key drivers for the residential sector are mainly population growth, urbanisation, improved infrastructure and increased incomes as seen through economic growth with an average GDP growth rate of more than 5.0% over the last five years. New government incentives such as reduced taxes and scrapping of various fees is likely to spur development · The key challenges remain to be high land costs, high construction and infrastructural costs and access to financing hindering provision of affordable housing |
|
Residential Sector Performance |
· The average return in the residential sector is 9.4%. However, the best performing markets have returns of up to 19% which is high compared to returns from other asset classes such as the 10-Year treasury bond with a 12.3% yield |
|
Residential Demand |
· There is a housing deficit of approximately 1.9 mn units according to Cytonn Research · Residential demand is highest in the lower middle income segment of the market at 70.7% |
|
Outlook |
· We expect the market to stabilise from early 2018. However, there will be price stagnation in selected markets with surplus supply. Investors therefore need to invest in proper market research and trend analysis to identify specific market niches. |
|
Opportunity |
· For apartments, the best opportunity is investment in areas such as Ridgeways, Kilimani and Lang’ata driven by returns, uptake and state of infrastructure · For detached units, the best opportunity is in areas such as Juja and Runda Mumwe driven by uptake and the market returns to an investor |
Conclusion
In conclusion, the residential sector performance in 2017 has been constrained by negative political sentiments as investors’ preferred short term investments compared to long term investments such as real estate. In our view, however, the market is likely to recover given the opportunity in the residential segment with returns of up to 20% in the last 5-years. There still exists a huge opportunity in housing given the largest deficit in the market. The returns have remained attractive in some sub-markets and thus investors ought to carry out research to identify specific market niches.
For more on the residential sector market performance, see the full report here.
