- Land Investment in the Nairobi Metropolitan Area is the only sector projected for growth in 2023 according to the latest data from Cytonn Investments.
- Land has continued to establish itself as a reliable investment opportunity, displaying great resilience even during times of economic hardship in the COVID-19 period, and a depreciating Kenyan currency.
- The investment opportunity lies in satellite towns; Juja, Utawala and Limuru for unserviced land, for serviced land, investment opportunity lies in Syokimau and Ruiru-Juja which recorded the highest annualized capital appreciations
Land Investment in the Nairobi Metropolitan Area is the only sector projected for growth in 2023 according to the latest data from Cytonn Investments.
The report states that land has continued to establish itself as a reliable investment opportunity, displaying great resilience even during times of economic hardship in the COVID-19 period, and a depreciating Kenyan currency.
Some of the factors that will contribute to the sector’s positive performance in 2023, include a greater emphasis on Affordable Housing projects and private projects, tax policies such as increased property rates in some counties which might provoke landowners and landlords to demand higher land prices and rents, in efforts to recover additional costs incurred from higher rates set to be charged, positive population demographics, and, rapid growth of satellite towns amid increased delivery of infrastructural developments which are improving accessibility, property prices and demand in the regions.
“The investment opportunity lies in satellite towns; Juja, Utawala and Limuru for unserviced land, which recorded annualized capital appreciation of 16.6 percent, 14.8 percent and 13.4 percent respectively, in FY ‘2022 compared to the market average of 11.1 percent. For serviced land, investment opportunity lies in Syokimau and Ruiru-Juja which recorded the highest annualized capital appreciations at 19.2 percent and 13 percent, respectively against the serviced average of 8 percent
Other real estate sectors that include Commercial office, residential, retail and hospitality sectors , are projected to stagnate in 2023 attributed to high construction costs, low penetration of mortgages, prevailing inflationary pressures and a weakening shilling.
“Factors such as increased construction costs on the back of inflation, constrained financing to developers with increased underdeveloped capital markets, oversupply in select sectors and low investor appetite in Real Estate Investments Trusts (REITs) are expected to continue impeding performance of the sector,” the report states.
According to the report, the rising construction costs are as a result of prolonged inflationary pressure and supply chain shortages evidenced by the the consumption of cement that declined by 14.7 percent to 2.2 mn metric tonnes in Q3’2022, from 2.6 mn metric tonnes realized in Q3’2021.
Moreover, lenders continue to tighten their lending requirements and demand more collateral from developers as a result of the high credit risk in the real estate sector. This has seen a 9.2 percent increase in gross non-performing loans in the sector to Sh 75.6 billion in Q3’2022 from S69.2 billion recorded during the same period in 2021.
“Banks in Kenya are the primary source of funding for real estate developers, providing nearly 99 percent of funding as opposed to 40 percent in developed countries. This means that capital markets contribute only 0.1 percent of Real Estate development funding, compared to 60 percent in developed countries,” the report says.
Other factors impeding the performance of the sector include lack of urban planning that has resulted in uncoordinated land use, with the proliferation of large, sprawling developments that are not connected to public transportation, water supply, and other services, as well as oversupply in select sectors that include commercial office market, and retail market.
According to the report, the demand for housing is expected to continue growing on the back of Kenya’s attractive demographic profile. In addition, continued infrastructural development, the ongoing focus by the government and private sector to provide housing.
The drive by the KMRC to avail affordable mortgage facilities to potential home buyers is also expected to cushion the performance of the residential sector.
Nairobi Metropolitan Area Performance
Commercial Office Sector performance is expected to slightly improve attributable to gaining traction in co-working spaces, as well as slow but rising expansion in the sector, and reduced developments in the pipeline which will help curb the oversupply challenge by allowing room for the absorption of available and fewer incoming spaces. This will boost occupancy rates and asking rents thereby improving average rental yields.
“However, the existing oversupply of office spaces at 6.7 mn SQFT in the NMA is expected to weigh down optimum performance of the sector by crippling the overall demand for physical space. Investment opportunity lies in Gigiri, Westlands and Karen supported by relatively high returns with yields of 8.7 percent, 8.3 percent and 8.3 percent respectively, compared to the market average of 7.3 percent, as at FY’2022 as a result of high concentration of topnotch office spaces fetching premium rental rates and attractive yields for investors, availability of adequate infrastructure and amenities in the areas enhancing investments, and, presence of international organizations, multinational companies and embassies within the areas which drive up demand for quality offices, “ the report indicates.
Despite the the continuous aggressive expansion by both local and foreign retailers taking up new and existing spaces as well as continuous developments of public infrastructure of roads and railway projects boosting accessibility in new areas for investments the oversupply of retail space and the growing adoption of e-commerce by most retailers will continues to undermine occupier demand in the retail space sector.