FOR IMMEDIATE RELEASE
“UNSERVICED LAND IN THE SATELLITE TOWNS OF NAIROBI METROPOLITAN AREA (NMA) REGISTERED THE HIGHEST ANNUAL MARKET CAPITAL APPRECIATION OF 9.1% AGAINST THE MARKET AVERAGE OF 4.5% IN FY’2022/23, HENCE PRESENTING THE BEST INVESTMENT OPPORTUNITY”
Nairobi, Kenya. Monday, 17th July 2023 Cytonn Real Estate, the development affiliate of Cytonn Investments, has released their Nairobi Metropolitan Area (NMA) Land Report 2023, a report that discusses the overall performance of land over time, as well as the factors affecting its performance and then giving a conclusion and outlook for the sector.
“The NMA land sector recorded an improvement in performance with the average Year-on-Year (YoY) price appreciation coming in at 4.5% in FY’2022/23, 1.3% points higher than the 3.2% appreciation recorded in FY’2021/22. This is as the average asking prices came in at Kshs 128.5 mn in FY’2022/23, from Kshs 128.4 mn in FY’2021/22. The performance also represented an 11-year average price appreciation CAGR of 9.1%, with the average selling price for land coming in at Kshs 128.5 mn in FY’2022/23, from Kshs 47.9 mn in 2011. This signifies the continued rise in the demand for development land mainly driven by; i) increased need for land for development facilitated by positive population demographics, ii) ongoing efforts by the government to streamline land transactions creating a more efficient and accessible market, iii) notable increase in the initiation and completion of affordable housing projects owing to both government and private sector involvement, and, iv) rapid expansion of satellite towns, accompanied by substantial infrastructural developments resulting in elevated property prices,” stated Kennedy Waweru, a Research Analyst at Cytonn Investments.
Despite the aforementioned supporting factors, the sector’s optimum performance was still weighed down by; i) inadequate infrastructure developments in some areas, ii) high construction costs, iii) reduced investor confidence in some areas, and iv) oversupply in select Real Estate sectors hindering optimum development of land, as some developers have had to halt their development plans as they await absorption of their existing spaces. However, some of the factors that are likely to shape the sector’s performance going forward include; i) digitization of land records aimed at curbing fraudulent land cases and easing land transaction processes and, ii) land reform policies such as the increase in Capital Gains Tax rate becoming effective on 1st January 2023 with the Finance Act 2022, which is expected to elicit mixed performance in the sector.
The summary of the performance is as shown below;
The table below shows the performance summary of the NMA land sector based on the average asking prices, CAGR and capital appreciation;
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All Values in Kshs mn per Acre Unless Stated Otherwise
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Cytonn Report: Summary of the Land Performance Across All Regions in the Nairobi Metropolitan Area
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Location
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*Price in 2011
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*Price in 2015
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*Price in 2016
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*Price in 2017
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*Price 2018/19
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*Price 2019/20
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*Price 2020/21
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*Price 2021/22
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*Price 2022/23
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11-Year CAGR
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2021/22 Capital Appreciation
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2022/23 Capital Appreciation
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∆ in Capital appreciation
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Unserviced land - Satellite Towns
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3.6
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8.4
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11.6
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12.6
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12.8
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13.2
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13.5
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14.7
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15.4
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14.2%
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9.7%
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9.1%
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(0.6%)
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Serviced Land - Satellite Towns
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5.6
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13.8
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15.2
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16.0
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16.0
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16.0
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16.7
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17.0
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18.3
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12.5%
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3.5%
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8.5%
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5.0%
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Nairobi High End Suburbs (Low and High Rise Areas)
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54.5
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94.3
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113.0
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119.7
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119.3
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120.7
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123.8
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130.5
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135.5
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9.1%
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5.2%
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5.3%
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0.1%
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NMA High Rise Residential Areas
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31.0
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64.3
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71.7
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77.7
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75.7
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77.0
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76.7
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76.3
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76.1
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8.5%
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(2.0%)
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1.1%
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3.2%
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Nairobi Suburbs- Commercial Areas
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145.0
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359.3
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421.8
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433.0
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421.0
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419.0
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404.6
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403.4
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397.3
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9.8%
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(0.3%)
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(1.4%)
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(1.1%)
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Average
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47.9
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108.0
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126.6
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131.8
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129.0
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129.2
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127.1
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128.4
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128.5
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9.1%
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3.2%
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4.5%
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1.3%
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Source: Cytonn Research
We have three positive outlooks; for infrastructure development, legal reforms and land sector performance, one neutral outlook for Real Estate activities and one negative outlook for credit supply, thereby bringing our overall outlook for the sector to POSITIVE. We expect the performance to be further boosted by factors driving demand for development land such as; i) Increased infrastructure developments which have improved and opened up areas for investment, ii) Roll out of numerous affordable housing projects by both the public and private sectors, iii) Affordability of land in the satellite towns, iv) Limited supply of land especially in urban areas which has contributed to exorbitant prices, and, v) Positive demographics driving demand for land upwards, facilitated by high population and urbanization growth rates of 1.9% and 3.7%, 1.0% points and 2.1% points higher than the global averages of 0.9% and 1.6% respectively.
Summary and Outlook:
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Indicator
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2022 Projections
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2023 Projections
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2022 Outlook
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2023 Outlook
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Infrastructure Development
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- Given that infrastructure is a key element in the performance of the Real Estate sector, we expect the rapid infrastructure developments rolled out and implemented by the government to continue opening and driving investments in the property market
- Moreover, the infrastructure sector was allocated Kshs 245.1 bn in the FY’2022/23 Budget Statement, which is a 7.4% representation of the Kshs 3.3 tn total budget, with the aim of supporting the construction of various projects. Some of the ongoing projects include; the Nairobi Bulk Water Supply project, the Western Bypass project, and, the Nairobi Commuter Rail project, among many others
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- We expect the infrastructure sector in Kenya to continue to play a crucial role in promoting economic activities, which in turn will drive the growth and performance of the Real Estate sector, with better and improved road, railway and air transport networks and other support facilities that make it easier for delivery of people, goods, and services efficiently, thereby increasing demand for Real Estate properties. Additionally, the government has increased budget allocation to the infrastructure sector by 16.9%, to Kshs 286.6 bn in FY’2023/2024 from Kshs 245.1 bn in FY’2022/2023, with a key focus on development and expansion, rehabilitation, and maintenance of major roads and bridges across the country, extension of the Standard Gauge Railway (SGR) Phase 2B from Naivasha to Kisumu and Phase 2c to Malaba, development of Dongo Kundu Special Economic Zone, development of Nairobi Railway City, and construction of airports, airstrips and a Kshs 1.3 bn modern cruise ship terminal in Mombasa.
- Additionally, the government is actively pursuing the completion of major infrastructure projects that were previously halted by the current regime and the execution of newer plans in existing projects, signalling a renewed commitment to infrastructural developments. Such projects include the dualling of the Rironi- Mau Summit Highway at a cost of Kshs 180.0 bn, Kenol-Sagana-Marua Highway Phase 3 and 4 at a cost of Kshs 8.0 bn, and the Eastern Bypass Highway Phase 2, Limuru and UN Avenue roads Phase 1, extension of the SGR from Mariakani to Lamu to Isiolo and further connect to the border town of Moyale. From Isiolo, the government will extend the SGR to Nairobi, connecting the country’s capital city and commercial hub to northern Kenya and, finally, to Ethiopia. The updated SGR plan is part of the Kshs 3.4 tn Lamu Port South Sudan-Ethiopia Transport (Lapsset) aimed at opening up northern Kenya and revamping the northern corridor by spurring movement within Kenya, South Sudan and Ethiopia. However, the bulk of financing for these additional major projects will be from external financiers such as the African Development Bank (AfDB), EXIM Bank of China and many more.
- As a result, we expect a boost in the development of more habitable areas for settlements, increased developments of Real Estate in the new upcoming regions, and rising up property prices across the country.
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Positive
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Positive
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Legal Reforms
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- The government continues to initiate reforms and policies aimed at governing land transactions in the country, with others initiated in the FY’2021/22 being the Draft National Land Surveying and Mapping Policy, 2021, and the ‘Ardhi Sasa’ platform. We expect these reforms to ease land transaction processes in the country and, in turn boost the overall performance of the land sector
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- We anticipate that both the national and county governments will continue to make adjustments to their legal policies and introduce new regulations to enhance transparency, efficiency, compliance, and increased land transactions in the Real Estate sector. Furthermore, the recently assented Finance Act 2023 to law in 26 June 2023, with the introduction of the Housing Levy and reduced Monthly Rental Income Tax, and the Finance Act 2022, which became effective as of 1 January 2023, with the Capital Gains Tax (CGT) chargeable on net gains upon transfer of property tripling to 15.0% from the 5.0% previously chargeable are expected to stimulate activities in the Real Estate sector such as; i) the government having the much-needed capital to finance affordable housing projects across the country, ii) incentives outlined in the legislations supporting the private sector's efforts to construct affordable housing units and price them within reach of Kenyan homeowners, and, iii) encouraging collaborations and partnerships between the government and private developers, further boosting the supply of affordable housing in the country.
- Consequently, there will be an increase in land transactions as the government's direct involvement and partnerships with the private sector in the residential sector will encourage streamlining of more reforms that benefit its projects’ execution. These efforts also aim to enhance Kenya's competitive advantage in the region for Real Estate investments.
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Positive
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Positive
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Credit Supply
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- We expect the supply of credit to potential property buyers and developers to continue being a challenge in the property market as banks tighten their lending terms, given the increasing non-performing loans in the Real Estate sector, which currently stand at Kshs 78.5 bn as of Q1’2022, an 11.3% increase from the Kshs 70.5 bn that was recorded in Q1’2021
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- Lenders continue to tighten their lending requirements as they demand more collateral from developers due to the high credit risk in the Real Estate sector on the back of the tough economic environment. This is evidenced by a 12.2% increase in Gross Non-Performing Loans (NPLs) in the Real Estate sector to Kshs 88.1 bn in Q1’2023, from Kshs 78.5 bn in Q1’2022. In addition, on a q/q basis, the increase in NPLs represented a 9.7% increase from Kshs 80.3 bn realized in Q4’2022,
- Additionally, the economic recovery from the pandemic and the rising global interest rates caused by inflation which has forced widespread adoption of credit risk-based pricing models on loans by local lenders and the recent hike of the Central Bank Rate (CBR) by 100 basis points from 9.5% to 10.5% by the Monetary Policy Committee (MPC) will push more lenders to increase their interest rates on loans borrowed by Real Estate investors,
- As a result, we expect these factors will continue raising the cost of credit for most developers seeking to invest in land purchases and property developments through debt. This is even when the government, through the Kenya Mortgage Refinance Company (KMRC), which is the only refinancing company in the country and just formed in 2018, strains to support the credit supply among the local banks and SACCOs by providing affordable mortgages to the ever-rising demand of Kenyans seeking to cheaper loans to finance their homeownership projects on land. It is important to note that the capital markets in Kenya, which could serve as an alternative means to source funds, are already undermined.
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Negative
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Negative
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Real Estate Activities
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- We expect the Real Estate sector to record an improvement in performance driven by factors such as; rapid expansion in the retail sector, increased infrastructure and housing developments by the government, increased investor confidence in the housing and hospitality market, and KMRC efforts to provide affordable home loans to potential buyers
- However, setbacks such as oversupply in the retail and office sectors, increasing construction costs, and limited investor knowledge of Real Estate Investment Trusts are expected to weigh down the overall performance of the sector
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- We expect the Real Estate sector to garner increased activities and continuous positive performance, which will be supported by; i) infrastructural development, ii) focus on affordable housing, iii) continuous focus on mortgage financing through the KMRC, iv) improved investor confidence amid recovery of the hospitality sector, v) aggressive expansion by both local and international retailers, and, vi) Kenya's positive demographics driving housing demand
- However, factors such as increased construction costs on the back of inflation, constrained financing to developers with increased underdeveloped capital markets, oversupply in select sectors and low investor appetite in Real Estate Investments Trusts (REITs) are expected to continue impeding the performance of the sector
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Neutral
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Neutral
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Land Sector Performance
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- Land sector in the NMA has proven to be resilient and a viable investment; hence we expect it to continue recording impressive performance mainly attributed to rapid infrastructure developments opening areas for investments and positive demographics driving demand for development land
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- Land sector in the NMA which continued to remain resilient affirming its position as a reliable investment opportunity. We expect that the sector's performance will be propelled by several key factors including; i) heightened demand for land for development facilitated by positive population demographics, ii) ongoing efforts by the government to streamline land transactions creating a more efficient and accessible market, iii) notable increase in the initiation and completion of affordable housing projects owing to both government and private sector involvement, and, iv) rapid expansion of satellite towns, accompanied by substantial infrastructural developments resulting in elevated property prices.
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Positive
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Positive
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For more details, see the Nairobi Metropolitan Area (NMA) Land Report 2023.
Notes to the Editor:
Cytonn Investments is an independent investment management firm with offices in Nairobi - Kenya, and D.C. Metro - U.S. Cytonn is primarily focused on offering alternative investment solutions to individual high net-worth investors, global and institutional investors and Kenyans in the diaspora interested in the high-growth East-African region.
Cytonn Real Estate is Cytonn’s development affiliate, which is focused on developing institutional-grade real estate targeted at specific institutional, high net-worth and Diaspora investors. Collective, Cytonn Investments and Cytonn Real Estate manage over Kshs. 82.0 billion in real estate projects.
For more information, kindly contact:
Clifford M. Mulama
Brand and Communications
254 (713) 840 107
cmulama@cytonn.com
Cytonn Investments Management Limited, Cytonn Square, Kilimani, Off Argwings Kodhek Rd,
P.O. Box 20695 – 00200, Nairobi, Kenya.
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