Nairobi Metropolitan residential outlook: price, rental yields and market uptake

Measures imposed by the Government to curb the Covid-19 pandemic’s spread as well as the global lockdowns have suppressed construction activities while housing demand has remained sluggish as investors and homebuyers adopt a wait and see stance as incomes are severely dented 


In 2019, the residential sector was marked by increasing affordability concerns amongst homebuyers amidst rising costs of living coupled by massive job losses and general economic uncertainty. However, according to KNBS Economic Survey 2020, despite the slow economic growth in 2019 which came in at 5.4%, the real estate sector, and by extension the residential market, was one of the sectors that continued to boost the country’s growth. 

The sector was also poised for further improvement with the anticipated increase in liquidity following the government’s repeal of the interest rate cap regime in November 2019, and as a result, the sector had started to stabilize at the end of 2019 and into the first quarter of 2020 recording a slight uptick in prices and rents. 

However, with the advent of the COVID-19 pandemic and its quick spread, and the subsequent adverse impact on the global economy, we expect the sector’s performance to see some negative performance. Generally, the measures imposed by the government to curb the pandemic’s spread as well as the global lockdowns suppressed construction activities in the second quarter while housing demand remained sluggish as investors and homebuyers adopted a wait and see stance and incomes severely dented by the pandemic.

Factors likely to shape demand 

The need for affordable housing is currently at an all-time high considering the current economic downturn, which has seen increased unemployment and the subsequent drop in disposable incomes. Additionally, the Government’s affordable housing initiative continues to lag behind expectations and therefore, the current housing deficit in Kenya which is estimated at 2m units is expected to continue increasing

Secondly, demographics will also play a huge role.According to the 2019 census data, Kenya currently has a population of 47.6m, growing at 2.2% per annum, which is 1% points higher than the global average. Additionally, Kenya’s urban population continues to grow rapidly accounting for 31.1% of the total population and estimated to grow by 4.3% p.a. according to the World Bank. This demographic trend is expected to continue supporting housing demand especially in urban areas, exacerbating the need for decent and low-cost housing.

The other factor will be access to credit.The repeal of the interest cap regime in November 2019 was expected to enhance market liquidity and thereby stimulate growth of sectors such as real estate, which are capital intensive. Additionally, according to Kenya Mortgage Refinancing Company’s Chief Executive Officer Johnstone Oltetia, the institution will begin refinancing mortgage portfolios in Q3’2020 and as such, it is expected that homebuyers will begin accessing affordable credit for home buying in the near term.

However, with the ongoing crisis, demand is expected to remain relatively low due to weak macroeconomic environment leading to increased credit risk; decline in demand from expatriates due to the ongoing global lockdown, and; decline in purchasing power with the increase in unemployment rates.

In terms of supply, the residential sector was largely constrained by insufficient access to affordable funding by developers, the challenging local land tenure systems, and approval delays between the months of June and August 2019. In 2020, new supply is also expected to slow down owing to, one; slow economic growth.According to the World Bank, Kenya’s economic growth is expected to decelerate to 1.5% in 2020 from 5.4% in 2019, whereas growth in Sub-Saharan Africa is projected to slip into its first recession in 25 years with the average growth expected to decline from 2.4% in 2019 to a range of between (2.1%) and (5.1%) i
n 2020. 

Insufficient access to credit is yet another factor that is likely to slow down new supply.With the increase in non-performing loans in the sector and increased economic uncertainty, developers are likely to continue experiencing barriers to adequate financial access. Currently, lending institutions have also tightened their lending standards. It is expected developers will seek alternative sources of financing such as Real Estate Investment Trusts and bonds,

The other factors that will affect new supply include reduced revenues,supply chains disruption, and high development costs especially as, according to Centre for Affordable Housing Finance in Africa, Kenya remains as one the countries with the highest constructions costs in Africa at Kshs 51,064 per SQM on average, compared to countries like Nigeria and South Africa with Kshs 43,264 and Kshs 30,245, respectively.

Developers will, definitely, seek alternative ways of improving their margins. As such, the supply side is likely to see an increase in joint venture deals and public-private partnerships (PPP) with entities like foreign investment institutions seeking to enter the market, and local pension funds seeking to diversify their investments.

Recent Developments

In terms of regulation, the Government announced a couple of policies and measures affecting the residential sector, including the Finance Act 2020 which, one, increased the amount of rental income that qualifies for Residential Rental Income (RRI) Tax to income to between Sh288, 000 and Sh15m per annum from the initial income of between Sh144, 000 and Sh10m, and two, repealed section 22C of the Income Tax Act thereby abolishing Registered Home Ownership Savings (HOSP) schemes effective January 2021,

Tax (Amendment) Act 2020,which saw the amendment of Section 38 of the Retirement Benefits Act (1997) to allow access of retirement benefits for purposes of purchasing of a residential house. In the draft RBA regulations, the amount used shall be the lower of either 40% of the savings, Sh7m or the purchase price of the house. This is expected to unlock a significant amount of pension funds towards the housing sector.

Finance Act 2019, which was assented into law in November 2019, introduced a couple of reforms: inclusion of Fund Managers or Investment Banks registered under the Capital Markets Act as approved institutions for Home Ownership and Savings Plan (HOSP); stamp duty exemption on the transfer of a house constructed under the affordable housing scheme from the developer to the National Housing Corporation, and; exemption of goods supplied for the direct and exclusive use in the construction of houses under the affordable housing scheme from Value Added Tax (VAT). 

Lastly, there were some institutional regulations. Following the President’s directive in November 2019 to make NHDF contributions voluntary rather than mandatory, the Cabinet Secretary for housing this year drafted the new NHDF regulations, which are aimed at guiding the institutions full operationalization. Secondly, the Central Bank of Kenya finally gazetted the Mortgage Refinancing Companies regulations in August 2019. The facility is slated to begin refinancing mortgage portfolios by Q3’2020,

In terms of construction activities, key players have continued launching projects with low-cost housing being the main focus, and a few upper market projects. Notable projects launched during the period are as shown below.

Residential market performance

Average total returns improved marginally in FY’20 averaging at 5%, 0.3% points higher than 4.7% recorded in FY’19, and can be attributed to annual rent increases. Price appreciation, however, declined averaging at 0.1%, 0.4% points lower compared to 0.5% recorded in FY’19. Market uptake remained subdued coming in at 18.3% on average, 2.6% points lower than 20.9% recorded last year, indicating weak demand amidst a tough economic environment. As such, the average price per SQM came in at Sh113, 972, 4.5% lower than FY’19 average of Sh119, 330, due to developers offering price discounts in a bid to attract buyers as well as prices remaining flat in majority of the markets.

In the submarket analysis, Cytonn Investment classifies the various suburbs in the Nairobi Metropolitan Area into three segments; High end – consisting of prime suburbs in Nairobi, such as Karen, Runda and Kitisuru. Most of these zones have been zones for low-rise residential developments only and are characterized by palatial villas and bungalows on half acre parcels; Upper middle income– consisting of suburbs such as Kilimani, Lavington, Kileleshwa, Loresho and Ridgeways among others. Here, the population is middle class but with higher incomes than the average characterization of middle class. They are zones for both high-rise and low-density houses, and; Lower middle income– consisting of suburbs in Nairobi habited by middle class such as Kikuyu, Ruaka, Dagoretti, Upper Kabete (Uthiru and parts of Mountain View), and Ngong Road (Race Course, Lenana, Corner), among others

Detached Units

The detached market registered average rental yields of 4.5%, 0.6% points higher than 3.9% recorded in FY’19 on account of a vibrant rental market evidenced by the relatively high occupancy rates averaging at 85% from 81.4% in FY’19. The high-end market, however, recorded subdued performance with returns averaging 4.2%. This is largely due to subdued price growth as Rosslyn and Lower Kabete recorded negative averages of (0.1%) and (1.2%), respectively, attributable to decline in asking prices as developers attempt to sell off old stock as well as competition from other high-end markets such as Kitisuru and Runda.

The upper mid-end market recorded an annual price appreciation of 0.9% compared to other detached markets, testament to the relatively high demand from the expanding middle class.

The lower mid-end market recorded subdued performance with price appreciation averaging (0.5%). This is due to decline in asking prices especially in areas such as Ngong, Athi River and Syokimau owing to increased supply amidst minimal uptake especially as lower middle income earners continued to reel from a tough economic environment.

Ridgeways recorded the highest price appreciation and annual returns at 3% and 8.5%, respectively, compared to the detached markets averages of 0.1% and 4.6%. The area’s performance is boosted by the relatively low supply coupled by presence of good infrastructure and amenities as well as proximity to Runda and Muthaiga, which are high-end areas.


With increased supply and, therefore, competition among developers, apartment prices remained subdued recording an average price appreciation of (0.2%), 0.7% points lower than FY’19. However, the rental yields remained relatively strong averaging at 5.5% compared to 4.8% last year, attributable to an increase in occupancy rates which averaged at 86.3% compared to 82.8% during the same period in 2019.

The upper mid-end segment recorded a mixed performance with an average price appreciation of (0.7%) as markets like Kileleshwa and Kilimani continued to experience a price correction. This is attributable to increased supply in the markets thus leading to downward pressure on prices amidst heightened competition among developers.

Apartments in lower mid-end suburbs recorded the highest total annual returns at 5.9% driven by demand from the growing middle class in Nairobi. Dagoretti recorded the highest price appreciation at 3.1%. This was due to increase in asking prices especially in projects previously selling as off-plan. The area also appeals to investors due to attractive rental yields, which averaged at 6.2% boosted by demand from Nairobi’s working population in surrounding commercial nodes such as Kilimani, Upperhill, and Westlands.

In Satellite Towns, apartments recorded a slight decline in price appreciation which came in at (0.1%) owing to decline in asking prices in areas such as kikuyu and Syokimau amidst reduced uptake. Thindigua recorded the highest annual total returns at 7.9% supported by a relatively high price appreciation which came in at 2%. This is due to continued demand in the area driven by its proximity to the CBD, increased availability of amenities along Kiambu Road as well as proximity to upper markets such as Runda.

Areas such as Kahawa West and Kikuyu recorded high declines in asking prices with price appreciation averaging (1.4%) and (1.7%), respectively, indicating a drop in demand. Kahawa West continues to lose in appeal due to increased densification and lack of sufficient infrastructure while Kikuyu faces competition from other satellite towns such as Thindigua and Ruaka, thus suppressing price growth.    

Cytonn Investment

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