Nairobi’s Real Estate development overview

Nairobi City County has identified 50,000 buildings that risk being demolished as a result of lack of construction approvals. They have given the developers a one-month notice to comply or face demolition. Many of the buildings that are constructed in Nairobi are not planned for, or regulated by City Hall as they do not have construction or building permits. Noncompliance is caused by several factors, key among them being: High levies charged by City Hall such as the EIA levy which has a floor of 0.1% of project cost and no ceiling as well as the construction cost permit which is 0.5% of project cost, Time taken to get the approvals also discourages developers from applying for the permits as it can take more than a month to get a building plan approval, Bureaucracy involved in the process discourages developers from applying for the permits, Requirement to own a title deed in order to apply for and receive building permits while most people have certificates of ownership or share certificates from companies, and City Hall and the other bodies in charge of regulation such as NEMA have also not been stringent in the enforcement of these regulations. The condition is replicated in other counties with National Construction Authority (NCA) halting noncompliant construction in Kiambu after a random survey showing that only 10% of buildings under construction were compliant with the health and Service Act 2007. This increased vigilance by NCA and NEMA will result in better-planned buildings and hence safer for occupation reducing incidences of buildings collapsing. The higher costs of construction will however be passed down to buyers who will pay more for the buildings. Role of Transport, Energy dev’t East Africa has been marked as one of the regions that will steer Africa’s growth. According to Deloitte’s Africa Construction Trends Report 2015, the region has seen robust infrastructural development with Kenya recording the highest number of projects, followed by Ethiopia. The report tracks projects valued over USD 50 million, which are underway as of June each year but have not been commissioned. Transport, Energy and Power are the main infrastructural developments taking place in the region contributing to over 80% of the projects under construction. On the back of these, there shall be increased interest in land and property, as investors seek to cash in on areas with good transport network and reliable power connections. Some of these projects in Kenya include development of the East Africa Railway and the Standard Gauge Railway that will run from Mombasa to Malaba. Completion of these projects is likely to open up previously inaccessible areas. Speculative developers are likely to purchase land in these regions with a bid to construct or sell in future. In addition to transport, energy and power, the construction sector has expanded incorporating sectors such as real estate. According to the report, Kenya and Tanzania are experiencing growth in retail, entertainment facilities, modern office parks, and hotel space developments. In Kenya, we have witnessed construction of large-scale malls such as Two Rivers in Ruaka, the Hub as well as modern office parks in Karen, Riverside, Parklands and other areas in the last year. Some of the factors that have contributed to these include a growing middle class; high yields from retail property rentals; technology innovation; and increased Foreign Direct Investment. The Kilimani boom We are collecting data from the various neighborhoods in Nairobi and the Nairobi Metropolitan satellite towns and shall be releasing research notes as we progress towards more comprehensive and thematic research reports. We have started with a research note on Kilimani, being one of Nairobi’s prime residential and commercial areas. The area comprises of a lot of mixed-use developments and has a rich cultural mix given that its population consists of individuals of both local and foreign decent. It has a lot of real estate activity still going on with a host of new developments still under construction such as the FCB Mihrab, despite the high land prices in the area averaging at Sh400 million per acre. For Mixed Use Developments (MUD) in the Kilimani area: The office component has an average of 88.7% occupancy rate and an average rental yield of 9.8%. This is similar to the general office yields in the area. The retail component has an average yield of 7.5%, and the average yield for a MUD is 8.65%. At an average sale price of Sh150, 308 per sq. m, un-serviced apartments generate an average yield of 5.8% compared to 7.2% for serviced apartments. Hotels on the other hand generate an average yield of 7.7% at an average occupancy rate of 59%. Given Kilimani’s relatively high land prices and increasing population density, a vertical mixed-use development would be the most viable development in the region. A well thought out development mix would serve to maximize overall returns and given the current development trends, excellent architectural designs would be the ultimate pull factor in the region. Ample parking space is also necessary to serve the high traffic expected within the development. Another key point of consideration is road frontage and a development would do well with an extended high traffic frontage, most preferably along the Argwings Kodkek road.

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