The real estate sector is a vibrant sector that has continued to grow evidenced by (i) its increased contribution to GDP at 8.6% in 2017 from 8.2% in 2016 and (ii) sustainable high returns, with real estate outperforming other investment asset classes in the last 5 years, generating returns of 25.0% p.a., compared to an average of 12.4% p.a. in the traditional asset classes,. This is largely due to i) positive demographic trends with an annual population growth rate of 2.6% compared to global growth rates of 1.2%, ii) rapid urbanization at 4.4% p.a., versus a global average of 2.1%, iii) an expanding middle class, v) large housing deficit that currently stands at 2.0mn units and growing at around 150,000 - 200,000 per annum, and iv) improvement in infrastructure opening up new areas for development, with the overall expenditure on roads expected to increase by 38.3% to Kshs 156.5bn in 2016/17 from Kshs 113.2bn from in 2015/16.
We look at several things any new real estate investor should be aware of before engaging in the real estate sector, they include:
The different Real estate typologies – In the Kenyan market, the residential sector is the most common and well-known theme. This is despite the fact that there are more themes which even attract higher returns than the residential sector. The main themes in the real estate sector include: residential, commercial, land and industrial. The residential sector may contain single or multiple housing units, with the main classes in the sector apartments or flats and detached units. The commercial sector mainly focusses on real estate for business, comprising both office space as well as retail. The industrial sector focuses on developments mainly for production and manufacturing purposes. In terms of performance, in 2017 commercial, retail and residential attracted yields of 10.0%, 8.9% & 5.6% respectively while the land sector posting capital appreciation of 19.4% in 2017.
A new real estate investor needs to know the various ways of investing in real estate. For instance, through the real estate investment trust, an investment vehicle ideal for individuals with inadequate capital to invest in the sector. REITs enables collective investment in real estate, where investors pool their money and invest in a trust with the intention of earning profits or income from real estate and the crowd-funded real estate where individuals pool funds and join others to invest in a rental premise, crowd-funded real estate have the benefit of low minimums where one can invest low amounts and one doesn’t have to be a recognised or accredited investor in order to participate.
A real estate investor needs to be aware of the various exit options that exist in real estate. The options are based on the time the investor needs funds committed in the sector back. That is either on a monthly basis or in full once a project is completed. Some of the common exit options are: where a developer develops property lease for a particular period of time and then exit through the sale of the whole development, additionally, a developer could develop the premise and exit immediately through full-sale and lastly a developer could partially exit through the sale of a particular percentage and then lease of the rest of the development.
An investor needs to be aware of business legalities and obligations in real estate for instance Off plan developments that refer to scenarios where the property is purchased before being completed. Off plan, developments have been driven by high prices for real estate developments and the longevity of time taken to deliver units to clients. The process of purchase is in 3 stages, that commences where three documents being signed the i) the letter of offer, ii) the reservation form, and iii) the sale agreement where a decision is made regarding delivery of land parcel and land package to the buyer at an agreed price. Other business legalities are Joint Ventures (JVs) which are business arrangements where two or more parties pool resources together. Ideally, joint ventures involve the combination of the financing capacity and development expertise of the developer with the landowner contribution of land. An outright buy, on the other hand, involves the payment of the full negotiated price of the property at the onset, this precedes the transfer of the title of the property to the buyer.
Investing in the real estate sector can be daunting with seasonal challenges with the sector being highly prone to political instability with investors mainly adopting a wait and see attitude, this reduces the volume of transactions. This can be evidenced by the 2017 election that saw declined activity in the real estate sector where approved buildings declined by 18.4% between January and July 2017 as compared to the same period in 2016 from Kshs 183.2bn worth of approvals to Kshs 149.5bn.
In conclusion, the real estate sector is a dynamic sector and a newbie investor needs to be well informed before engaging in the sector. Information regarding the sector can be accessed through research done by the real estate industry players, for instance, Hass Consult and Cytonn Investments on a periodic basis and Principal government agencies for gathering, analyzing and distributing statistical data, for instance, the Kenya National Bureau of Statistics (KNBS). Getting informed about the sector avails room for more informed investment decision based on expected returns and future prospects of the asset classes.