To get the best out of real estate, buy off-plan, at right time

Kenya’s real estate sector continues to baffle many analysts, with frequent predictions of a bubble burst always coming a cropper.

In the last seven years, the property index has risen fivefold, attracting many investors into the sector.

And there is money to be made from brick and mortar, especially if you invest in the right places at the right time.

Currently, the return on investment in the sector ranges from 20 to 30 per cent on for-sale developments, and six to eight per cent on rentals, per annum.

“Real estate is now a solid investment sector that promises impressive margins,” says Harun Nyamboke of Moke Gardens. “Because this is a growing market, all one needs to do is understand the value of the property and time the purchase well.”

Previously, the market was dominated by individual developers, but of late institutional investors have started pumping billions into real estate projects. Foreign investors and Kenyans in the diaspora are also investing in real estate, showing how lucrative the industry has become.

“The reason for all this interest in the sector is that, in the traditional investment model, the stocks exchange offered a solid investment opportunity while real estate was seen as a bit flaccid,” says Nyamboki.

HANDSOME RETURNS

“However, with the growing demand and prices, institutions have seen this as a good place to put their money, hence private equity firms, Saccos, and other institutional investors have become key players in the real estate sector.

“With the development of Real Estate Investment Trusts (Reits), the industry is looking forward to a lot more institutional investors. Real estate is capital-intensive and we think Reits will bridge that gap.”

Kenya’s property market has potential for higher rates of return compared to other jurisdictions. It is also relatively easy for foreign investors to enter the market.

Most property transactions in the country are cash-based, which explains why, despite the boom, the country had a paltry 20,000 mortgage accounts at the end of 2012.

Abdi Dahir, the Chief Executive of Hazem Properties, says that, with property, the trick is always to get on board when the project is commencing so that one can reap the benefits of off-plan purchases, which are always far much cheaper than completed projects.

“For example, the four-bedroom, all-ensuite Syokimau Villas that we are putting up are selling for Sh13 million. With an expected construction period of 18 months, the final selling price per unit will be adjusted by close to 40 per cent (calculated at an average annual adjustment rate of 20 per cent) to sell at Sh17 million in 2017,” Dahir explains. “This means that anyone who bought it off-plan can comfortably earn Sh4 million in two years.”

On the rental side, Nasir Ali of Lido Beach Apartments in Mombasa says that, with an eight per cent annual return in rental income, buying off-plan also gives one higher margins.

The Lido Beach Apartments target “business people who are looking to invest in a vacation home” and make an income from vacationers, according to Ali.

With a starting price of Sh17 million for a two-bedroom, all-ensuite house, a rental yield of Sh30,000 per day from vacationers could earn someone a handsome return on investment. Assuming that the property is occupied for 200 days in a year, this means an annual income of Sh6 million.

SPECULATIVE PRUPOSES

Ali says that given that vacation apartments have become popular with local tourists in Kenya, investors can make a tidy sum if they scour the market for the right location and the right price.

Assuming you invest in a three-bedroom all-ensuite house in Kileleshwa — where the Kileleshwa Everest Court is retailing at Sh28 million for the same particulars — add stamp duty, capital gains tax and legal fees, your total buying costs comes to about Sh30 million.

For rental return, you will be looking at Sh150,000 per month, with an annual rental income of Sh1.8 million. If you divide that by the cost of the house, your rental yield comes to 16.66 per cent. This is better than most investments, given that it also carries capital appreciation.

Buying off-plan has been touted as an easy way into reaping on the gain. However, this form of investment needs a buyer who understands what he or she wants and how the plan purchase works.

Chris Gachiengu, the developer of Chania Gardens in Thika, says “we all like to save money”, so when developers first offer their new products to the market, “they usually start with lower prices to encourage a faster sales rate”.

“When construction commences and the developer has met their construction finance requirements, prices usually rise, hence capital gains. Those locked in on the project for speculative purpose are then able to sell off, especially when the developer has sold out his or her units. It’s just like the stock market, where one is able to enjoy the benefit of any capital growth that occurs on the property.”

On the other hand, this form of investment could turn risky if not done with due diligence, or if one is dealing with a rogue developer. Delays in completion of the property, which means that it might not fit into your plans — especially if you wanted to offload it back into the market — could become a major financial headache for investors.

Recent Hass Consult and Stanlib Property indices show that, for investors buying property to let out, the rental yields have held firmly at above six per cent, more than interest rates from government treasury bonds.

RELATIVE STABILITY

Other reports also capture well the continuing resilience of the housing market as a long-term investment plan in Kenya, “with strong demand holding prices firm throughout the economic slowdown of 2008 and rising prices for houses continuing to drive overall property returns”, says Anthony Mwithiga, Chief Investment Officer at Stanbic Investments.

“At the same time, the relative stability in rental incomes has continued to deliver returns that are now very attractive, considering the current low-interest-rate environment. This data supports our long-held belief that property is a strong asset which has been beating inflation, yet remains under-exploited,” Mwithiga says.

If you want to go the mortgage way, look at the benefits from a long-term capital gain perspective. This is because of the interest rates, type of mortgage and capital appreciations of the property.

Nyamboki of Moke Gardens says that, with mortgages, the benefits of off-plan purchases cannot be enjoyed as most financial institutions will only advance loans for finished properties.

“This explains why it’s a long-term investment vehicle. With the average bank interest rate of 15 per cent calculated on a reducing balance and an annual capital gain of 20 per cent, the net gain will grow, albeit slowly. That is why it is a long-term investment,” Nyamboki says.

Land is also another front where the returns are rewarding, especially within Nairobi, where the price is on an upward trend. That appreciation depends on the type of projects that pop up around the area, though.

“For instance,” says Alex Muema of Ndata Enterprises, a land-buying company, “about six years ago an acre on the Northern Bypass was going for Sh300,000, but today the same is going for Sh18 million!

“It’s all about strategy. Look at the immediate planning of the area; institutions coming up, road networks, electricity, water and such. These are what attract people, making the rate of growth high.”

Apart from all this, says Sue Muraya of Suraya Properties, it is also important to survey the market before investing in a particular area.

“Market research involves understanding the real estate mathematics,” she says. “If you buy a property in, say, Runda for Sh50 million, most of the times it will be a four-bedroom villa sitting on an eighth. The rental yield will be Sh250,000 per month, giving an annual rental yield of Sh3 million.  This means the gross returns are at 16.6 per cent.

“You can instead choose to diversify by buying three Sh15 million maisonettes at the same cost, but which will give you a rental income of Sh100,000 each monthly, or Sh3.6 million annually.”

Last month Hass Consult noted that rent rates in the country have been increasing steadily for the last 18 months, and that they are expected to maintain the trajectory into the near future.

The same report also showed that asking prices for properties, especially apartments and detached houses, moved up significantly in the third quarter of 2014.

Apartment prices had risen by 3.6 per cent, detached houses by 3.2 per cent, and semi-detacheds by 2.4 per cent from the previous quarter. 

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KISAJU VIEW PARK

Fourth phase of Sh6bn low-cost housing estate kicks off

The fourth phase of the Sh6 billion Kisaju View Park Estate has kicked off, with 120 low-cost housing units expected to be ready by the end of this year.

This brings the entire construction to 55 per cent completion, according to Ms Cathy Achola-Warega, the CEO of Urbanis Africa, the company that is managing the project.

She said six investors have shown interest in funding the housing estate, which will have 3,000 housing units when complete, sitting on 293 acres of land in the Kisaju area of Kajiado County.

“The investors have visited the project to consider it for future funding,” she said. “This tells you that the project is clearly feasible to a number of investors and on the right track. We expect more investors to come on board.”

Kisaju View Park Estate is one of the big projects providing low-cost housing in Kenya. Ms Achola-Warega said over 800 units have been built so far and more than 2,000 people already reside in the estate. “Phase five will commence next year for another 120 units,” she said.

BUYING IN BULK

The houses are targeted at low- and middle-income earners and cater to different budgets in this segment of the market. The two-bedroom bungalow, for instance, is going for Sh1.5 million, while the three-bedroom bungalow is priced at Sh2 million and the four-bedroom at Sh2.5 million.

The other units include three-bedroom bungalows with one-bedroom detached guest wings at Sh3.95 million, three-bedroom en suite bungalows plus DSQs for Sh3.65 million, and four-bedroom en suite maisonettes plus DSQs Sh5.95 million.

“Our target market really is for that person who feels phased out by the Nairobi market,” Ms Achola-Warega noted.

She said despite the high cost of building materials, Urbanis Africa has kept prices low through bulk buying directly from manufacturers. “Construction costs are normally higher mainly because of the middlemen in the supply chain of materials,” she said.  “(We) manage to construct descent low-cost housing because of the direct purchase from manufactures.”

Also, Urbanis Africa manufactures most of the materials on site, including blocks, tiles, and cabros.

“We also have concentrated on cross-subsidisation, where every development on site compensates the other, thus realising a general margin,” she added.