The last 20 years of real the estate boom in East Africa have changed our building landscape and inventory, as it quite rightly should have. Our starting point was a region that was short of every kind of building, from housing, to shops, offices, warehouses, hotels, and even student hostels. In all, we faced a real estate landscape that was cripplingly under-invested. And we invested.
Choosing which type of investment barely mattered. Every type of property sold fast. Developments got snatched up even before the bricks were laid, simply because the market had little to offer. We are no longer in that situation. But confusing the sector’s move to maturity with the end of real estate investment opportunities is a mistake.
In our first years of heavy real estate investment, we concentrated primarily in high-end assets because we all believed they delivered higher margins and returns. That is no longer the case, and may never have been.
We built estates of detached houses and town houses, high-end rental apartments, shopping malls, often huge ones, and towering office blocks. In some areas, and for the high-end market, we have begun to reach market saturation. As a result, an investor now putting up Sh100 millon worth of penthouses, unless they are building for a specific unmet need, would be lucky to fill them in four years.
Yet, only a tiny proportion of Kenyans live in high-end neighbourhoods. Looking at the needs of the working classes, market researchers report demand for two million units. Of this, over two thirds are for earners who can afford Sh18,000 to Sh50,000 a month.
Today, I cannot easily pinpoint any stock that is coming to the market for this segment, certainly not in the scale that responds to this opportunity. Instead, investment in this type of property has been left to unsophisticated investors, in what is largely a landlord market delivering developments found in the more densely populated Nairobi estates.
The buildings are unplanned and non-compliant with construction standards, as developers seek to lower construction costs and complete projects more quickly to increase returns.
A huge opportunity exists for better-quality real estate in this segment. Moreover, while the perception that rental yields in high-end areas are higher has driven investors and developers to areas such as Kilimani and Lavington, research has shown that yields are actually higher in the mid-market areas.
For instance, the average rental yields in 2016 in the mid-market were 6.5 per cent, compared with 6.3 per cent for high-end apartments. That premium in the mid-market has continued. In 2018, mid-market rental yields ran at 5.4 per cent, compared to high-end yields at 5.3 per cent.
Moreover, demand is high.
Thus, if the NSSF were to put up an estate such as the organised Nyayo Estate in Embakasi, it would not struggle with tenancy, as tenants look for quality stock that is currently close to nonexistent.
Such estates offer almost the same amenities as homes in Kilimani, across modern, 24-hour security systems with professional security personnel, ample parking space, borehole water to cover water shortages, and maintenance services, but at far lower rents.
Similarly, for developers building commercial properties such as stalls or retail centres, as opposed to large malls, occupancy will never be their biggest challenge as they attract SMEs and private businesses dealing with the routine needs of Kenyan consumers.
In sum, the investment opportunities in real estate remain enormous. But now it is the turn of the working classes. And the returns are just as high for investors.
It’s a challenge we welcome, with the region’s annual investor conference, the East Africa Property Investment Summit, set to be the largest yet and a key platform for developing real estate policy and white papers for government.
In this, our own compass is clearly set. We do not face a depressed real estate industry. We face the next opportunity, and it is far larger than the last one.