High building costs holding back Kenyan Real Estate

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Kenyan Reits struggling to gain momemtnum as development costs are extremely high. FILE PHOTO: Nairobi Capital City Kenyan Reits struggling to gain momemtnum as development costs are extremely high. FILE PHOTO: Nairobi Capital City

East African listed property is dominated by Kenya but the market in this country is under pressure. Development costs are extremely high in Kenya.

The first real estate investment trust or Reit listed in East Africa is the Stanlib Fahari-REIT. This was listed more than a year ago and has not lead to the listing of more Reits.

The Stanlib Fahari I-REIT’s share price has come under significant pressure over the past year.

This is for various reasons. There is a lack of understanding among local investors and property companies’ forecasts are not being reached in East Africa.

Some investors may have overpaid for assets in Kenya and the Fahari-REIT may have overpaid for assets too. There is also a lack of liquidity in Kenyan real estate which is counter intuitive to what Reits are supposed to achieve.

Craig Smith, head of research at Anchor Stockbrokers says pricing of real estate in Kenya is extremely expensive.

“Pricing of real estate in Kenya extremely expensive, local currency prime property yields often sub 8% whereas local funding costs in excess of 14%. Therefore, most transactions will be 100% or largely equity funded as cost of debt prohibitive. The property market is also largely a domestically focused market “ he says.

Kenya offers opportunities in the real estate sector but pricing is an inhibitor, at least for foreign capital, for the most part. Also still believe that Reit regime can benefit the Kenyan real estate capital markets and in turn the direct property market over time but this will not be a quick process – key is for institutions and pension funds to commit to the Reit regime and thereafter allocate capital to this sector.

Kenyan real estate could be helped by the growing information technology industries in the country. More and more capital is being placed into Kenyan IT companies. These companies will need office space and industrial space which Kenya’s real estate sector can provide.

Real estate actually contributed 9% of Kenya’s Gross Domestic Product in 2016. This is the greatest growth compared to seasoned contributors like the financial and agricultural sectors.

According to the Kenya National Bureau of Statistics, over the last five years, the real estate sector has consistently outperformed other asset classes, giving a return of around 25% and 30%. Residential properties actually generated an average rental yield of 5% while commercial ones had an average yield of over 9%.
Nevertheless, some investors are preferring to buy land, given a slow down in commercial office space.

If you are planning to invest in real estate this year, buy land. According to the Hass Property Index, most landowners around Nairobi have been reaping big. Land prices in satellite towns rose by 7% in the third quarter of 2016 and 21.4% over the year, the highest growth rate since 2014. The rates are expected to surge in coming years.

Commercial office space, on the other hand, has experienced the least absorption, mainly because some multi-nationals have been downsizing. African growth had been slowing which affects Kenya.

In 2016, land selling entities benefitted, thanks to land prices in the 18 Nairobi suburbs increasing by 1.4% in the third quarter of last year.

Real estate developers have often complained of stringent and lengthy approval processes. However, failure by some developers to follow them wasn’t taken lightly by the authorities. Companies can be fined.

Kenyan real estate has to come right but more investment grade stock must come to market and building costs must fall.

When Kenya’s real estate becomes more competitive, other countries’ markets can follow suit in east Africa.

Rwanda and Tanzania should adopt the Reit structure soon. Rwanda’s economy is beginning to thrive, largely because the country is so open to investment. It is making it quite easy for foreigners to invest in  the country. Hopefully all East Africa can get onto the Reit map.

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