Have money? Put it in urban land, cows, gold, or oil... in that order

The value of land in nine of the fastest growing suburbs of Nairobi has grown fivefold since December 2007, a new report shows.

The average value per acre in these crowd-pulling zones rose from Sh32.5 million in December 2007 to Sh173.7 million in December 2014, according to the Hass Composite Land Index, which tracks land prices in and around Nairobi.

This impressive performance of the sector has attracted the attention of many investors and analysts, the investors seeking a piece of the pie and the analysts out to understand what drives the sector.

On Thursday, January 29 this year, for instance, property firm Real Estate Consultancy, in association with investment managers Stanlib, unveiled the country’s first land price index for urban land.

HIGH-END, LOW-DENSITY

Their findings also show a more-than-fivefold increase in prices of advertised land in the city’s nine fastest developing suburbs of Karen, Kileleshwa, Kilimani, Lang’ata, Lavington, Runda, Spring Valley, Upper Hill and Westlands over the last seven years.

It was based on all records of land offered for sale in these nine suburbs, researchers said.

On the Hass index, Ms Sakina Hassanali, head of research and marketing at HassConsult, said they chose the suburbs “based on the scale of building and construction in each, choosing the nine that have seen, and are seeing, the most construction, (hence) making land a key issue in supply and pricing”.

Urban land has delivered the highest return compared to all other asset classes in the last seven years, followed by property, which has gone up by about 98 per cent from 2007.

The city’s most expensive land is in Upper Hill, at around Sh470 million per acre, followed by Kilimani at around Sh370 million an acre; while the cheapest land in the nine suburbs is in Karen and Lang’ata, at around Sh45 million an acre, followed by Runda at around Sh67 million, the report indicates.

The most expensive high-end, low-density residential land is in Spring Valley, at around Sh150 million an acre. Interestingly, the average price per acre here was a little over Sh30 million in 2007.

Between 2007 and 2014, land in Karen took up 22.7 per cent of the high-end market, Kileleshwa took up 6.3 per cent, Kilimani 12.2 per cent, Lang’ata 10.3 per cent, Lavington 15.6 per cent, Runda 16.0 per cent, Spring Valley 4.9 per cent, Upperhill 3.9 per cent, and Westlands 8.2 per cent.

The galloping land prices in the city are being driven predominantly by the commercial and high-density residential developments, the report states.

In comparison with other investment options that are on international indices, such as gold, oil and cattle (and, for purposes of this article, we base the cattle data on international prices), land prices in the last four years in Kenya have risen at twice the rate of cattle, and four times the rate of property, while oil and gold prices have either fallen or stagnated over the same period.

HIGH PRICES

Overall, Nairobi’s prime development land has seen a 535 per cent increase in prices, compared with cattle as the next best investment, which achieved a 72.3 per cent rise over the same period.

“This means that, across all these investment options, prime land in Nairobi has outperformed the rest,” says Mr Kenneth Kaniu, chief investment officer at Stanlib.

An investment of Sh32 million in urban land at the end of 2007 would have been worth Sh173 million by the end of 2014, Sh64.2 million if invested in property, Sh57.8 million if in Bonds, and Sh29.2 million if put in equities, Stanlib reports.

Investors in urban land, however, need to buy strategically, advise the experts at Stanlib, who are quick to warn against the notion that all land is a strong speculative investment.

“The pressure on land prices is caused by the inherently limited supply close to key city centre clusters,” says Mr Kaniu. “But such land cannot appreciate indefinitely.”

Traditionally, once acreage reaches very high pricing levels, cities begin to evolve around multiple nodes as is happening now in Nairobi. This makes the city’s evolving shape key to the choice of location for land buying, as a central location does not always guarantee high returns.

In most of the suburbs for which data was collected, land zoning had a major impact on the price of specific acreage, with land suitable for high-density developments fetching far higher prices than land that could only be used for low-density housing.

Across most of the suburbs, the cheapest land was often selling for around half the price of the most expensive.

“The single most important factor for this was zoning,” says Mr Kaniu.

Where an area is zoned for commercial use, or for high-density residentials — which typically means apartment blocks — the land itself becomes worth considerably more than land for low-density and residential-only developments, in that the buildings that will be sold at the end will fetch far more for a commercial highrise than a single detached house, he says.

Accessibility, infrastructure, and desirability, including even the surrounding properties and the view, all additionally influence pricing, and as such, a large suburb such as Karen can be quite different in character from one side to the other.

“Nonetheless, in residential areas, particularly where land purchasing tends to be less well researched by commercial developers, there is a spread in prices that we believe is the result of a lack of market information, with some sellers selling for less than they could get, and some buyers paying more than they should,” says Mr Kaniu.

GREATER GROWTH

Indicative of this might be the price spread in Karen, from a bottom quartile average of Sh20 million an acre to a top quartile average of Sh94 million, although it is true that Karen does have areas of commercial land use included in this spread.

The hugely greater growth in land prices than in property prices highlights a major challenge developers face today: that of having to spend far more on land now while being largely unable to recover the increase in their end-sale prices.

This also explains the current preference by developers to apply for planning licences for high-density apartments and commercial buildings, where the far higher sales proceeds can cover the big jump in land costs, adds Mr Kaniu.

This shift and the retreat from low-density building is a very important trend in understanding the meaning of this land price growth for the future, because it warns that, at such prices, Nairobi’s land has reached the point where only the highest value buildings can still be built.

The quantum rise of the last seven years, therefore, is not a pointer to the same rise again in the next seven years, cautions Mr Kaniu. It just shows that land prices are moving towards a maximum of what the construction and development market can bear, until property prices rise further.