A sector so bullish the world is trooping in with billions

COURTESY

What you need to know:

  • A burgeoning middle-income population presents the biggest market for real estate investors in East Africa’s biggest economy, with some recording double returns from house sales. As all this happens, real estate developers are bullish about the future. Africa’s population is growing at 2.4 per cent a year and it is estimated that by 2030, half of them will be living in cities. The African workforce will reach 1.1 billion people by 2040, the largest in the world, according to McKinsey, and this is expected to push up the demand for urban housing

At a construction site in Isinya, a sprawling suburb 50 kilometres west of Nairobi, a swam of young men in worn-out, dusty overalls chip away at shapeless stones to carve out blocks using steel chisels and hammers.

Across the site, their colleagues have formed a chain that feeds a monster concrete mixer with cement and gravel. The foundation of a new house is taking shape. Four months from now, the house will be complete and occupied.

These scenes are replicated across Kenya, more so in and around Nairobi, where demand for housing is at an all-time high. As investments go, real estate here is ranked among the top four businesses, alongside stocks, mobile phone services and cars. The joke on the street that shows how fast buildings are coming up is that if you left the city to return after five months, you would need to hire a guide.

Most lucrative

Kenya’s real estate market is the most lucrative in Africa, attracting investors from China, India, London and, lately, South Africa’s Pam Golding Properties.

Over the last six years, the sector has outperformed most other economic pillars like capital markets and tourism, even when the economy slowed at the peak of the global financial crisis and after the 2007-08 post-election violence.

While high interest rates have slowed down construction, the industry is still growing at a surprisingly higher pace. The diaspora community and foreign investors sourcing cheaper financing from outside Kenya are benefiting big, given that house prices will keep rising due to high demand and inadequate supply.

Residential and commercial properties on the outskirts of Nairobi recorded the highest increase of 20 per cent in prices in the last quarter of 2012, according to a survey by Hass Consult, which tracks real estate trends in Kenya. Townhouses, apartments and stand-alone houses on the city’s fringes had higher growth in capital and rental yields compared to similar houses within the city, explaining the trending towards out-of-town life. Prices for houses within the city grew by one to two percentage points.

Some houses are designed with the highest end of the luxury market in mind, where asking prices go beyond Sh80 million. In a country where investors are constantly looking for a home for their millions, these properties often sell out in a short while!

A study in early 2012 by estate agents Knight Frank and Citi Private Wealth ranked Nairobi the best performing prime residential market globally. Property values in the capital grew by 25 per cent in 2011, higher than luxury hotspots such as London, Miami and Hong Kong. At the coast, Mombasa, Malindi and Lamu came second in The Wealth Report 2012, with a 20 per cent price growth in premium residential properties.

Demand continues to grow, by close to two per cent in the last four months of 2012, despite tightening liquidity. Real estate has astounded economists by defying economic fundamentals such as higher interest rates, spiralling inflation (which nearly hit 20 per cent last year, but is now on a retreat), and a weak shilling. For most investment analysts, housing is a hot bet.

There are unlimited opportunities for investors in both rental and sale of houses in Nairobi, especially the high-end market which has been the focus of most developers. Apartments, too, are a big attraction for the middle-income earners who can’t afford the stand-alone units whose prices have virtually gone through the roof.

The cheapest units in the high-end segment on the outskirts of Nairobi are going for upwards of Sh14 million while within Nairobi and organised communities property prices range in the region of Sh20 million and Sh80 million.

A burgeoning middle-income population presents the biggest market for real estate investors in East Africa’s biggest economy, with some recording double returns from house sales.

Moneyed investors are buying off old buildings in the low-income estates and replacing them with posh apartments that are turning in high rents from residents eager to stay close to the city centre and places of work and enjoy some lavish home as well. Rent rates rose 16 per cent last year; and they seem to move in only one direction.

Low income earners are being pushed away from their homes to less glossy and crowded homes where survival supersedes luxury. The underlying reason is simple: posh homes have a ready market in Kenya, which is a hub for multinationals and international organisations like the United Nations. Most UN agencies, including Unep, have a base in Nairobi. Staff working for these organisations often take up executive apartments and stand-alone units, and have helped to push up not just demand, but prices too.

An interesting development is the shift towards the city’s outskirts, in some cases over 50 kilometres away, as the rich and style-conscious look for hustle-free residence that gives a homely feel. Also, serviced properties have become the norm in Nairobi and investors are pouring in billions as uptake of houses increases.

Kenya’s middle class is among the fastest growing in Africa, buoyed by a rebound in earnings from a growing economy. Most people are also making a fortune in businesses, riding on mobile and Internet technologies and the growing demand of various goods and services.

Low-cost housing

One of the developers riding the off-town wave is Wagane Diouf, the Senegalese-born chief executive of Urbanis Africa, a pan-African low-cost housing developer based in Nairobi.

Urbanis has two housing projects underway in which people are investing for either own homes or rental units. One is a mixed-income community targeting 2,000 residential units and 1,164 commercial units, located 55 kilometres in a semi-desert swathe west of Nairobi.

Prices range between Sh1.5 million and Sh5 million. The second project targets 2,400 residential units — apartments and maisonettes.

“We want to enable majority of Africans living in cities to own a house, work and raise a family in a clean and family-friendly environment,” says Diouf. The first project sold out before construction began and the second was 50 per cent bought barely two months after the launch and before the ground-breaking.

If residential estates are growing fast, commercial buildings are just popping. Nairobi’s skyline is being redrawn from every direction in a race for height and stretching architectural imagination. When you talk to many developers, you get the feeling that, in the commercial segment, the higher you go, the cooler it becomes. And with most serious businesses and organisations exiting the city centre, thanks to congestion and insecurity, office owners are guaranteed of tenants.

As all this happens, real estate developers are bullish about the future. Africa’s population is growing at 2.4 per cent a year and it is estimated that, by 2030, half of the continent’s people will be living in cities. The African workforce will reach 1.1 billion people by 2040, the largest in the world, according to McKinsey, and this is expected to push up the demand for urban housing.

The fact that by 2040 Africa is expected to be the second most urbanised continent after China has raised the premium placed on housing and office space.

“At current urbanisation rates, an additional 14 million housing units per annum are needed to accommodate the increasing urban demand,” says Diouf.

For investors looking to serve the low-end housing market in Africa, statistics are on their side. Sixty-two per cent of the population living in Africa’s cities, or 32 million households, live in informal housing where basic services are poor or non-existent. In Kenya, 60 per cent of households are considered ‘inadequately housed’, most of them located in slums. About 150,000 units are required per year, but less than 30,000 are supplied, leaving an annual deficit of 120,000.

It’s easy to understand why everyone wants a piece of Kenya’s real estate market. With elections behind, chiseling of broken rock and the rattle and rev of building machines have resumed in earnest.