Nyeri Real Estate Investment Opportunity

21 January, 2018

Over the last few years, we have been investing in the Nairobi metropolitan area. We however continuously do research in the other regions to see in what places we can undertake investments and developments on behalf of our investors. Our Real Estate Research & Deal Origination (RDO) team spends time in the target market, collecting and analyzing data to make the best investment recommendation both for our own proprietary use and to inform the investors of the trends in the markets. As such, and in line with our regional expansion strategy, we have been carrying out research on various markets across the Kenyan Counties. Currently we have covered 13 Counties, among them being Laikipia, Meru, Mombasa, Kisumu and Uasin Gishu. We have chosen Nyeri County to serve as the Mt. Kenya Regional Office due to its centrality in the region. We also target to open offices in other Counties such as Kisumu, Mombasa, Nakuru and Uasin Gishu as they remain attractive from a macroeconomic perspective, are in need of modern real estate developments, and can support good returns for investors.

This week we look at our real estate findings in the commercial, residential, holiday homes, and site and service schemes markets in Nyeri Town. We start by a general overview of the area, and then cover the key drivers and challenges for the real estate market in Nyeri, followed by an analysis of the performance of the various themes, before finally concluding with our outlook on the market.

Overview

Nyeri Town is situated in the Central Highlands of Kenya, about 150 km north of Kenya's capital city Nairobi, lying between the eastern base of the Aberdare (Nyandarua) Range, which forms part of the eastern end of the Great Rift Valley, and the western slopes of Mount Kenya. It is the largest town in Nyeri County and the headquarter of Nyeri County, and former central administrative headquarters of Central Province. This therefore makes the area a strategic location to serve all the counties located in Mt. Kenya region such as Kirinyaga, Meru, Laikipia, Nyandarua, Muranga, Embu and Tharaka Nithi.

Nyeri has witnessed growth in infrastructure and amenities over the last five years attributed to:

devolution due to flow of money from central government to county governments most of which is invested locally,
tourism in the area which continues to grow,
infrastructure development,
relatively higher incomes, with it being the second richest county in terms of GDP per capita in the country at USD 1,503, after Kiambu at USD 1,785. Rounding up the top 5 richest Counties are Kajiado at USD 1,466, Nakuru at USD 1,413 and Laikipia at USD 1,226 on 3^rd, 4^th and 5^th positions respectively
its strategic central location in the Mount Kenya Region.

The water supply and sewerage are from Nyeri water and sewerage Company limited (NYEWASCO). The area is served by a number of main roads including: Nyeri – Nyahururu road, Nyeri-Karatina road and the Nyeri – Nanyuki road

The main factors driving the Real Estate Market in Nyeri are;

Kenya Regional Headquarters – Nyeri is centrally located bordering over five counties in the Mt. Kenya Region, such as Nyandarua, Laikipia, Meru, Embu and Murang’a. This has led to attracting Mt. Kenya Regional offices for both local and international companies such as the Safaricom Mt. Kenya regional hub, National Construction Authority (NCA) Mt. Kenya Regional Office, and Coca Cola Mt. Kenya Bottlers Ltd, hence creating demand for office space, retail and in the housing sector,
Devolution – Devolution has opened up Nyeri town, attracting government institutions, private investors and entrepreneurs to the county headquarters. This has therefore created demand for office space, retail space and residential to host all the investors and government officials,
Growth of middle-income earners –Growth of the middle-income earners has translated to increased disposable income hence creating demand in the housing sector and retail facilities, which translates to towns such as Nyeri,
Tourism – Nyeri County is on a major tourist circuit to Mt. Kenya and the northern region, hosting key tourist attractions such as the Lord and Lady Baden Powell graves, Mount Kenya and the Aberdares National Park. These therefore promotes the hospitality sector, hence creating demand for hotels, holiday homes and conference facilities, and,
Growth of SMEs – The increase in the number of SMEs due to ease in business registration that takes a maximum of 2-weeks. Mt. Kenya Region hosts many of these companies, and requires office space and housing for the employees, hence drive the demand for real estate.

However, despite all the factors supporting the real estate sector in Nyeri, there are still a number of factors, which if not properly addressed present challenges to real estate development in the county:

Availability of Land - Availability of land for development in Nyeri County has been low owing to the dense population at 208/km² in comparison to Kenya’s population density at 85/km², hence resulting in relatively high land prices. The county has also been operating largely like a closed circuit with minimal land sales to non-locals. This is mainly due to ownership of ancestral land; hence, people have sentimental attachment. This operation has therefore led to slow investment growth,
Access to Funds – Just like other counties in Kenya, Nyeri is facing challenges on lack of proper funding for developments due to limited access to finance, characterized by few sources of funds to both developers and homeowners, hence low housing supply and commercial properties that are capital intensive. The Banking Amendment Act 2015 and more prudent lending by banks has also resulted in a decline in credit supply in the market which will hinder Real Estate developments,
Unstructured planning regulations – Unstructured planning regulations, which currently does not clearly outline areas zoned for commercial, residential and special needs. This may lead to urban sprawl in urban centers and reduced land use maximization. The county is however working on setting up zoning regulations to formulate land use standards, zoning schemes and ordinances for all urban settlements in the county.
Inadequate Infrastructure - Inadequate infrastructure such as access roads, with most being earthen roads, water services and drainage systems are poor, hence slowing the growth of real estate due to reluctant investors.

Nyeri Market Performance:

We undertook our research in August 2017, our market research focused on;

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 our products against the market prices,
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 prospective rental yield they can gain from investing in Nyeri,
Annual Uptake - This allows the investor to appreciate the rate at which available homes are sold over a specific period. This helps him/her gauge on whether it is profitable to invest in a given area.

The key themes covered are:

Residential

Generally, the residential sector is picking up, with most of the estates having existed for less than 5-years. This has been driven by the government decentralization, urbanization and growth of middle class in the region. The residential houses are distributed in the outskirts of the Central Business District (CBD), such as Ring Road, Kamakwa and Kingongo areas. The key estates in the area are Garden Estate, Mountain View Estate, Ring Road Estate, which comprise mainly of owner-built and occupied standalone houses.

National Housing corporation (NHC) is the only institutional developer in Nyeri, having constructed residential bungalows available for sale to the public. Other real estate companies, operating in Nyeri real estate sector are Mhasibu Housing Company Limited, Gakuyo Real Estate and Madiba Properties Limited, among others that are selling land with a gated community concept.

We analyzed the performance of NHC bungalows performance, to gauge the market and the research findings are as follows;

All values in Kshs unless otherwise stated
Nyeri NHC Bungalow Units Performance Summary
Room Typology	Unit Plinth Area (SQM)	Initial Price (2014)	Initial price per SQM	Current Price (2017)	current price per SQM	Monthly Rent	Monthly rent per SQM	Sales achieved	Annual Sales achieved	Price App.	Rental Yield	Total Return
1 bed	42	2,800,000	66,667	3,200,000	76,190	10,000	238	100%	33%	4.6%	3.8%	8.3%
2 beds	54	3,500,000	64,815	4,000,000	74,074	20,000	370	71%	24%	4.6%	4.3%	8.8%
3 beds	69	4,000,000	57,971	4,400,000	63,768	28,000	406	67%	22%	3.2%	5.1%	8.3%
Average			63,151		71,344		338	79%	26%	4.1%	4.4%	8.5%
· The NHC development, have registered a total return of 8.5%, due to low appreciation rate, given the market has not accepted the build and sale exit model
· The 1-bedroom units have recorded the highest uptake at 33% annual uptake as compared to other typologies averaging at 23% annual uptake. This can be attributed to the fact that 1-bedroom are cheaper, and investors are targeting renters market, comprising of young working adults

Source: Cytonn Research August 2017

The residential apartments in and around Nyeri town are available for rent and the market is yet to witness a build for sale model. The analysis assumes an exit price of Kshs 71,344 per SQM, similar to the standalone units.

The performance on the sector is as follows;

All values in Kshs unless otherwise stated
Nyeri 1- Bedroom Units Performance Summary
Project	Location	Unit Plinth Area (SQM)	Monthly Rent	Monthly rent per sqm	Occupancy %	Rental Yield
Hill View Place	Kamakwa		10,000	238	100%	4.0%
Pamki House	CBD		10,000	238	100%	4.0%
Kingongo Apartments	Kingongo		7,500	179	100%	3.0%
San Homes	Ringroad	52	10,000	238	60%	2.4%
Urban Premier Properties	Kamakwa	32	6,000	143	90%	2.2%
Average		42	8,700	207	90%	3.1%
· 1-bedroom apartments have on average a rental yield of 3.1% at an occupancy rate of 90%. The low rental yields in comparison to Nairobi average rental yield of 6.0% is due to low rental charges, that the market is willing to pay