Executive Summary:

Residential Sector: Our outlook on residential sector performance remains NEUTRAL. We expect that uptake as well as development activity will remain subdued as the negative effects of a sluggish economy persist into the year. Investment opportunity is in low to mid-end markets such as Athi River, Ruaka and Thindigua, for potential buyers, and upper mid-end markets such as Parklands for rental property;

Commercial Office Sector: Our outlook for the commercial sector is NEGATIVE as the sector’s performance continues to be constrained by oversupply of 5.6 mn SQFT as at 2019. The sector however has pockets of value in zones with low supply and high returns such as Gigiri, and in differentiated concepts such as serviced offices, which record relatively high rental yields of up to 13.4% p.a.;

Retail Sector: We have a NEUTRAL outlook for the sector with a bias towards negative due to existing oversupply of space estimated at 2.8 mn SQFT. We remain optimistic that the sector’s performance will be cushioned by the entry of international retailers and the expansion of local retailers such as Naivas and Tuskys. The investment opportunity is in Kenyan County headquarters in some markets such as Kiambu and Mt. Kenya that have an estimated retail space demand of 0.8mn and 0.2mn SQFT, respectively;

Hospitality Sector: Our outlook for serviced apartments is POSITIVE. Given the country’s political stability and the continued marketing of Kenya as an experience destination, we expect the number of international arrivals to grow annually by 6.7% to approximately 2.3 mn in 2020, from the estimated 2.2 mn in 2019. The investment opportunity is in (i) Westlands & Parklands, and (ii) Kilimani submarkets, which recorded relatively high rental yields of 10.8% and 9.5% in 2019, respectively;

Land Sector:  We have a POSITIVE outlook for the land sector. We expect an annual capital appreciation of 3.9% in 2020, fueled by the growing demand for development land especially in the satellite towns, and the improving infrastructure for instance the dualling of the Northern by-pass which on completion is expected to opened up areas such as Ruaka for development, and the dualling of Ngong Road phase 2 which will enhance access to areas such as Lang’ata, Karen and Dagoretti. The investment opportunity within the Nairobi Metropolitan Area land sector lies in satellite towns (unserviced land) such as Utawala and Limuru, and suburbs such as Karen, Kitisuru, Runda and Kilimani supported by the relatively high annual capital appreciation of above 10.0%;

Infrastructure Sector: We have a POSITIVE outlook for the infrastructure sector, given the demonstrated government commitment towards transforming the country to middle-income status by 2030 through infrastructural upgrades. We expect execution of the planned infrastructure development such as sewer connection in Ruiru and Kitengela, water improvement program and the ongoing road and power projects in the pipeline, which will open these areas for real estate development;

Listed Real Estate Sector: We retain a NEGATIVE outlook for the REIT market due to insufficient market structures and poor market sentiment. We expect real estate stakeholders such as the East Africa Forum for Alternative Investments and REITs Association of Kenya to continue working at improving the market sentiment on REITs, coupled with government efforts to improve the regulatory structures surrounding the REIT market.

Real Estate

In 2019, the real estate sector grew by 4.8% on average from Q1’2019 to Q3’2019, 0.3% points higher than the growth rate recorded over the same period in 2018, according to Kenya National Bureau of Statistics (KNBS) Quarterly Gross Domestic Product Report Q3'2019. The growth was supported by:

1. Continued National Government support for the affordable housing initiative,
2. Increased entry of multinational corporations and retailers into the country,
3. Infrastructural improvements, boosting Nairobi’s positioning as a regional hub,
4. Rapid population growth, creating demand for more properties, especially housing, and,
5. Improving the macroeconomic environment, with the country’s GDP growing by 6.3% in 2018, 1.4% points higher than the 4.9% recorded in 2017 and is expected to come in at 5.6% in 2019 according to Cytonn Research.

In terms of performance, commercial office, retail, residential, mixed-use developments and serviced apartments sectors registered average rental yields of 7.5%, 7.8%, 5.0%, 7.3%, and 7.6%, respectively, resulting to an average rental yield for the real estate market of 7.0%, 0.4% points lower compared to 7.4% recorded in 2018. Therefore, with a capital appreciation for existing properties at 2.0%, average total returns came in at 9.0%, 2.2% points decline from 11.2% recorded in 2018. For a detailed review of 2019 performance, see Cytonn Annual Real Estate Markets Review Note 2019.

In 2020, we expect the key drivers of real estate to be as follows:

1. Improving Macroeconomic Environment - The country’s GDP grew by 6.3% in 2018, 1.4% points higher than the 4.9% recorded in 2017 and is expected to come in at 5.6% and 5.7% in 2019 and 2020, respectively, according to Cytonn Research. We expect that the improvement will enhance the growth of business and thus increased real estate activities,
2. Attractive Demographic Profile – Demographic trends such as (i) rapid urbanization, currently at 4.3% p.a. in Kenya, against global and Sub-Saharan averages of 2.0% and 4.1%, respectively, (ii) an expanding middle class evidenced by growth in net disposable income, which increased to Kshs 7.1 tn in 2017 from Kshs 6.6 tn in 2016, and (iii) rapid population growth rates currently at 2.2%, 1.3% points higher than global averages of 0.9%, will continue to support demand in the real estate sector, and,
3. Sustained Infrastructural Development – The government increased the 2019/2020 budget allocation towards infrastructural development to Kshs 435.1 bn, 3.9% higher than 418.8 bn allocated for FY 2018/19, which shows the government’s efforts aimed at transforming the country to middle-income status by 2030 through infrastructural upgrades, which we expect will continue opening up new areas for real estate development and boosting performance in upcoming markets, especially satellite towns in Kenya.

Despite the above drivers, the sector is expected to be constrained by;

1. Delay in Processing of Construction Permits - Continued delays in the processing of construction permits by some Kenyan County Governments, namely, Nairobi, Kisumu, Kiambu, and Mombasa, was a major setback for private developers in 2019 as it resulted in prolonged project implementation timelines. Given that the issue is yet to be resolved, we expect this to continue crippling the sector in 2020,
2. Oversupply in Select Sectors - The real estate sector has witnessed increased space supply over the last 5-years;
   1. Increased supply in the middle and high-end residential sector (houses with prices above Kshs. 119,535 per SQM) with a decreasing effective demand, hence recording 3.4% points decline in annual uptake from 22.8% in 2018 to 19.4% in 2019,
   2. The commercial office sector has an oversupply of 5.2 mn SQFT and this is expected to grow to 5.6 mn SQFT in 2020, with completion of buildings such as Kenya Institute of Supplies Management(KISM) headquarters along Ngong Road and Parliament Tower in the CBD,
   3. The retail sector, which has an existing oversupply of 2.8 mn SQFT.
3. Inaccessibility and Unaffordability of Off-take financing - Access to mortgages in Kenya remains low mainly due to; (i) low-income levels that cannot service a mortgage, (ii) relatively high property prices, (iii) high interest rates and deposit requirements which lock out many borrowers, (iv) exclusion of the informal sector due to insufficient credit risk information, and (v) lack of capital markets funding towards real estate purchases for end buyers. According to Central Bank of Kenya, there were only 26,504 active mortgage accounts in Kenya as at December 2018 against a total adult population of approximately 23 mn persons, leading to low real estate uptake,
4. Ineffectiveness of Public-Private Partnerships (PPPs) for Housing Development - The government has previously enlisted the help of the private sector for financing and development of affordable housing. This has however not achieved the optimal intended objective this far as a result of; (i) regulatory hindrances such as lack of a mechanism to transfer public land to a Special Purpose Vehicle (SPV) to facilitate access to private capital through the use of the land as security, (ii) lack of clarity on returns and revenue-sharing, (iii) the extended time-frame of PPPs while private developers prefer to exit projects within 3-5 years, and (iv) bureaucracy and slow approval processes,
5. Despite being successfully launched in 2019, we expect the KMRC to face challenges such; (i) difficulty in raising funds through issuing of bonds, due to competition from government instruments such as treasury bills and government stocks, (ii) prolonged due diligence processes due to bureaucracy in departments offering critical services such as registration of properties, (iii) lack of access to long term funding, and (iv) a high cost of debt as the investors of the mortgage-backed bonds are likely to demand a relatively high rental yield of approximately 13.5%%, assuming a 1.0%-point margin above the minimum of the risk-free rate for a 15-year bond, which currently stands at 12.5%, yet KMRC’s target is providing mortgages at 9.0% interest. For more details, see our KMRC Topical,
6. The unavailability of proper guidelines on the way forward for the newly approved institutions that can hold Home Ownership Savings Plan (HOSP) deposits. These include; (i) the general framework for business principles and general contract terms with respect to institutions that offer HOSPs, (ii) rules on permissible business activities by the Fund Managers, (iii) approved methods of investing the savings whether in the stock market or government securities, and (iv) guidelines on granting of loans after the ten years have elapsed and the appropriate loan-to-value ratio. For more details, see HOSP Update Topical, and
7. Restrictive Capital Markets Structure: The current capital market structure is restrictive for market players looking to raise capital and deploying it towards real estate. The primary reason for the same is that Kenyan businesses currently face challenges raising capital due to dominance by the banking sector. Some of the challenges include:
   1. Conflicts of interest as only banks are currently licensed to be Trustees of Collective Investment Schemes (CIS’s) in Kenya, and this can lead to frustration of market players,
   2. There are players in the banking sector that are firmly in control of the capital markets. Similar to the way the banking sector has undergone reforms and in recent times been liberalized, there need to be similar reforms in the capital markets,
   3. A lot of capital raised towards real estate comes in the form of private offers. However, there is still not a lot of clarity on private offers and private equity for raising capital towards real estate, which needs to be provided, as not every offer needs to be regulated. This will ultimately lead to more private sector players raising and deploying capital to real estate,
   4. In order to spur deployment of capital towards growing homeownership, the Finance Bill of 2019 had a number of key measures. One of which was Inclusion of Unit Trust Fund Managers as Registered Home Ownership Savings Plan in the Finance Bill 2019. However, unless operationalized and specialized funds approved by CMA, there will be no benefit towards the Affordable Housing Big 4 Agenda. The effective date was January 1, 2020, and there has been no movement at all.

In 2020, some of the key factors expected to shape the real estate sector include;

1. The Affordable Housing Initiative - The Kenyan Government’s affordable housing initiative focused on delivering 500,000 units by end of 2022, is expected to push developers’ effort towards the provision of more housing for the lower middle- and low-income earners segment. In support of the initiative, several tax incentives through the Financial Act of 2019, which include;

For developers:

1. A reduction in the Import Declaration Fee (IDF) on inputs for the construction of houses under the affordable housing scheme approved by the CS Finance from 2% to 1.5%,
2. Exemption of companies implementing projects under the affordable housing scheme from the application of thin capitalization rules, and
3. Exemption of good supplied for the direct and exclusive use houses under the affordable housing scheme approved by the Cabinet Secretary (CS) for Finance from Value Added Tax (VAT),

For home buyers:

• An exemption of stamp duty for the transfer of a house constructed under the affordable housing scheme,
• Exemption from income tax of withdrawals from the NHDF to purchase a house by a first-time homeowner and,
• Exemption of the National Housing Development Fund from income Tax.

With the above tax and policy reforms, we expect more potential homeowners to join the affordable housing program in 2020, given the significantly reduced financial burden in the strive towards homeownership, and developers and other private sector players taking up affordable housing projects as they are bound to maximize on the reduced costs.

In addition, the government allocated Kshs 10.5 bn of the Kenya National Budget 2019/20 in support of the initiative and hence we expect increased development activities in 2020,

2. Improved Mortgage Market – Following the National Treasury launch of the Kenya Mortgage Refinancing Company (KMRC) in 2019 and its successful mobilization of capital, we expect the institution to become fully operational in 2020, stimulating the mortgage market by enabling lenders to offer long-term mortgages. In addition, we expect the recent interest rate cap repealing will result in borrowers being able to access housing finance as banks increase credit advancement to the private sector,
3. Devolution - Devolution has led to the increased population at County Government headquarters and neighboring towns through the relocation of County Government officials and businesses creating demand for commercial office and retail spaces as well as residential units. In addition, counties were allocated Kshs 371.6 bn in the 2019/2020, and we expect this to support infrastructural development,
4. Government Partnerships – In 2020, the government is expected to enter into various partnerships such as Public Private Partnerships (PPPs), County Government & National Government partnerships and government & government partnerships, which we expect will support development and financing for the real estate sector, especially affordable housing and infrastructure.

The table below summarizes our outlook on the various real estate themes and the possible impact on the business environment in 2020:

Thematic Performance Review and Outlook

Our outlook is positive for three themes, neutral for two and negative for two, thus, the general outlook for the sector in 2020 is NEUTRAL. The sector will be supported by; (i) the National Government’s support for the affordable housing initiative, (ii) continued entry and expansion of international retailers into the country, (iii) improving infrastructure, and (iv) the improving macroeconomic environment. The real estate sector has pockets of value in themes such as housing for lower-middle to low-income earners in the residential sector, land in satellite towns and differentiated concepts such as serviced apartments and serviced offices.

1. Residential Sector

The residential sector recorded sluggish growth, largely attributable to slow property demand as homebuyers’ spending power remained below average property prices amid a tough economic environment. This resulted to softened price appreciation, which averaged at 1.1% in comparison to 4.2% in 2018. However, investor returns were cushioned by the rise in occupancy rates driven by an increase in renters coupled by a slowdown in housing inventory leading to an increase in rental yields. Total returns as a result came in at 6.1% (price appreciation-1.1%, rental yield – 5.0%) in 2019, in comparison to 8.9% in 2018 (Price appreciation – 4.2%, rental yield – 4.7%).

In 2020, we expect the sector’s change in performance to remain flat and select markets to continue exhibiting a positive performance supported by their appeal to local homebuyers or foreign clientele, based on location and accessibility, availability of key amenities such as shopping facilities and schools, as well as availability for affordable land for development.

The table below summarizes the various factors that will affect the demand side of residential real estate.

Demand

Of the five factors, we expect to affect residential demand, two are positive, one is negative, and two is neutral with a bias to positive, thus our outlook for residential demand this year is neutral with bias to positive.

Supply

The table below summarizes the various factors that will influence the supply side of residential real estate in 2020. Of the five factors that we expect to shape residential supply, one is negative, two are neutral, whereas two are positive, and thus, our outlook is neutral.

Our outlook for the residential sector remains neutral. On the supply side, our outlook is neutral, as we expect developers to slow down on construction activity in the top-tier residential areas, focusing on providing low mid-end range properties where majority of the housing demand lies, as they also capitalize on government incentives especially in satellite towns with relatively high returns. On the demand side, our outlook is neutral with a bias to positive, as we expect a surge in demand for rental property. However, we expect that the market for buyers will be buoyed by government incentives and property offers from developers on inventory that has been in the market for long. Overall, the sector’s performance is likely to remain stable especially with respect to prices and uptake, while occupancy rates are expected to continue growing albeit at a slow rate.

Investment opportunities are in areas that continue to exhibit growing demand from homebuyers offering investors above-average returns and relatively quick uptake supported by availability for land for development, whereas demand is boosted by presence social amenities and relatively good infrastructure.

2. Commercial Office Sector

In 2020, we expect the commercial office sector to continue attracting investors driven by Kenya’s positioning as a regional hub thus, attracting multinational firms leading to increased demand for office space, especially grade A, coupled by the improving macroeconomic environment, with the country’s GDP projected to grow by 5.6% and 5.7% in 2019 and 2020, respectively, according to Cytonn Research.

However, the sector’s performance remains constrained attributed to a surplus of office space that stood at 5.6 mn SQFT as at 2019, creating a bargaining chip for tenants and forcing developers to reduce or maintain prices and rents in order to remain competitive and attract occupants to their office spaces.

We expect the performance of the commercial office theme to decline slightly in 2020 with average rent, price, occupancy and yields rates coming in at Kshs 96 per SQFT, Kshs 12,600 per SQFT, 78.2% and 7.3%, respectively, from Kshs 96 per SQFT, Kshs 12,638 per SQFT, 80.2% and 7.5%, respectively, in 2019 mainly due to the current office oversupply and incoming supply with the expected opening of Kenya Institute of Supplies Management Headquarters (KISM) Headquarters along Ngong Road and Parliament Tower in the Nairobi CBD in 2020.

The table below summarizes the office performance from 2013 to 2019 and our forecast for 2020:

Source: Cytonn Research

Our outlook for the commercial sector is NEGATIVE as the sector’s performance continues to be constrained by oversupply of 5.6 mn SQFT as at 2019. The sector however has pockets of value for Grade A offices in zones with low supply and high returns such as Gigiri and in differentiated concepts such as serviced offices recording relatively high rental yields of up to 13.4%.

3. Retail Sector

In 2020, we expect the retail sector to continue to exhibit growth driven by;

1. The continued expansion of local retailers such as Naivas and Tuskys and international retailers such as Carrefour and Shoprite taking up vacant spaces left by troubled retailers such as Nakumatt and Choppies,
2. Anticipated private sector credit growth with the recent repeal of the interest rate cap,

Increasing purchasing power with GDP per Capita growing at a rate of 7.9% p.a. over the last 5-years, However we expect the sector’s performance to soften, with asking rents, occupancy rates and yields declining by 2.1%, 2.2% points and 0.4% points, respectively, to average at Kshs. 171.9, 73.4% and 7.4%, respectively. This is attributed to the existing oversupply of space estimated at 2.8 mn SQFT.

The table below summarizes the retail performance from 2016 to 2019 and our forecast for 2020;

Source: Cytonn Research

Based on the above, our retail performance outlook is negative. However, we have a general NEUTRAL outlook for the sector as we remain optimistic that the sector’s performance will be cushioned by increased entry of international retailers into the Kenyan market and the expansion efforts by local retailers such as Naivas and Tuskys as they take advantage of the attractive rental rates. The investment opportunity is in  county headquarters in some markets such as Kiambu and Mt. Kenya that have retail space demand of 0.8mn and 0.2mn SQFT, respectively.

4. Hospitality Sector

In 2019, the hospitality sector registered improvement in performance, evidenced by the 0.2% points increase in the serviced apartments rental yield to 7.6%, from 7.4% recorded in 2018, attributable to increased demand, which triggered an increase in charge rates. The improved performance was on overall been supported by the stable political environment and improved security, thus making Nairobi an ideal destination for both business and holiday travelers. According to the Leading Economic Indicators (LEI) September 2019, the total number of visitors arriving through Jomo Kenyatta (JKIA) and Moi International Airports (MIA) came in at 1.2 mn persons for the period between January and September 2019, 5.4% higher than 1.1 mn persons during the same period in 2018.

In 2020, we expect the sector to record increased activities, driven by;

1. Improved Security - Kenya’s security has continued to improve evidenced mainly by the reduced terrorist attacks. This will continue to boost tourists’ confidence in the country, making it a preferred travel destination for both business and holiday travelers,
2. Improving air travel- In 2019, various airlines operating in Kenya increased their flights frequency driven by increased tourist arrivals into the country, for both holiday and business, we expect this to result in a growing number of tourist arrivals thus increased demand for accommodation and other hospitality services, boosting the performance of the hospitality sector,
3. Growth of Meetings, Incentives, Conferences and Exhibitions (MICE) Tourism - According to KNBS Economic Survey 2019, local conferences grew by 7.9% in 2018 to 4,147, from 3,844 in 2017, while international conferences grew by 6.8% to 204, from 191 in 2017, signaling a growth in the MICE tourism sector, which has continued to drive the hospitality sector. The growth in the sector has been largely enabled by presence of conferencing facilities such as the Kenyatta International Convention Centre (KICC), which was crowned as the leading meetings and conference center in Africa at the World Travel Awards 2019, and we expect this to continue encouraging growth of MICE in 2020, and
4. Travel Tourism - Holiday travelers are the main drivers of Kenya’s hospitality sector, accounting for approximately 71.2% of international arrivals over the last 5-years. In 2018, the number of tourist arrivals came in at 2.0 mn, 42.9% higher than the 1.4 mn recorded in 2017.

The graph below shows the growth of the numbers over the years;

We expect the number of tourist arrivals to come in at approximately 2.2 mn for 2019, and grow even further in 2020, enhancing demand for food and accommodation services, thus boosting the hospitality sector, with the investment opportunity being in Westlands & Parklands and Kilimani submarkets, which recorded relatively high rental yields of above 10.8% and 9.5%, respectively.

Nevertheless, the sector is likely to continue facing challenges, mainly;

1. Issuance of travel advisories with the United States of America travel advisory highlighting some areas in Kenya such as Kilifi, Lamu, Kibera, Eastleigh, and the Somali border as high-risk crime and terrorism prone areas, despite an elongated prevalence of peace in the country, and
2. Delayed infrastructural projects which continue to cripple access to areas, for example with the dragging expansion of Malindi Airport, which continues to result in reduced number of tourist arrivals at the East African coast due to lack of direct flights to airport.

We retain a POSITIVE outlook for the hospitality sector, as we expect continued demand for hospitality services with occupancy rates in the serviced apartments sector coming in at up to 80%, and a resultant average market rental yield of 7.6%. 

5. Land 

In 2019, the land sector recorded increased activities as investors continued to take up development class land despite the tough economic environment. Land priced within the Nairobi Metropolitan Area recorded an 8- year CAGR of 11.9% and a 2.0% y/y asking price change in 2019. The performance was driven mainly by; (i) the growing demand for development land especially in the satellite towns such as Ruiru and Syokimau as developers strive to drive the government’s Big Four government agenda on the provision of affordable housing, and (ii) improving infrastructure which opened up areas for development.

In 2020, we expect the performance to remain positive, with an expected annual capital appreciation of 3.9% driven by:

1. The improving infrastructure such as road networks as the Kenyan Government continues to intensify efforts to improve infrastructure in the country, evidenced by the significant 2019/2020 national budget allocation of Kshs 435.1 bn, 3.9% higher than 418.8 bn allocated for FY 2018/19 to infrastructural development,
2. Investor demand for development land especially in satellite towns where infrastructure has been improving, in addition to land in these areas being relatively affordable and available in bulk, and
3. Positive demographics with Kenya’s population growth rate at 2.2% p.a compared to the 1.2% global average, rapid urbanization at 4.3% p.a compared to the SSA average of 4.1%, and the growing middle class, which has continued to create demand for development land.

However, main challenges likely to face the sector include; (i) delay in processing of construction permits which continues to discourage investors, (ii) relatively high land costs of up to Kshs 500 mn per acre in areas such as Upperhill, hence impacting on financial viability on returns to investors as rental charges remain flat, (iii) relatively high land rates, specifically in Nairobi County following the capping of the new land rates at 1.0% of the current value of the plots as opposed to using the 1980 valuation, where property owners previously paid land rates at 25.0% of the unimproved site value, and (iv) delayed infrastructural projects which continues to cripple access to areas.

The summary of the previous performance of the theme and 2020 outlook is as outlined below:

All values in Kshs unless stated otherwise

Source: Cytonn Research

The investment opportunity in the Nairobi Metropolitan Area land sector lies in satellite towns (unserviced land) such as Utawala and Limuru, and suburbs such as Karen, Kitisuru, Runda and Kilimani supported by the relatively high annual capital appreciation of above 10.0%.

We retain a POSITIVE outlook for the land sector with a bias to satellite towns, with unserviced land prices expected to record a 7.0% annual appreciation in 2020, due to the high demand boosted by their affordability, availability of development land and the improving infrastructure in the areas.

6. Infrastructure Sector

The infrastructural sector remained vibrant in 2019, in line with the country’s economic expansion goals to make Kenya the African hub for transportation, industrial, and service sectors. The government expenditure continued to increase, albeit at a decreasing rate following the realization of majority of the projects such as the completion of Phase 2A of the Standard Gauge Railway (SGR) project and the Outer Ring Interchange.

The budget allocation towards infrastructural development has been growing by a 7-year CAGR of 8.2% to Kshs 435.1 bn in 2019/2020 from Kshs 251.1 bn in 2013/14. The increased allocation shows the government’s efforts aimed at transforming the country to middle-income status by 2030. For the financial year 2019/20, the infrastructure sector was allocated Kshs 435.1 bn, 3.9% higher than 418.8 bn allocated for FY 2018/19.

The budget allocation to infrastructure development over the years has been as shown below:

Source: The National Treasury

Some of the projects in the 2020 pipeline include; (i) the Jomo Kenyatta International Airport (JKIA) -Westlands Expressway, an 18.6-kilometer road project, which will start at JKIA and terminate at James Gichuru, along Waiyaki Way Road, in Westlands, (ii) a 40-km 400kv power line which is set to power Konza City, as well as Kajiado, Makueni, and Machakos Counties, and, (iii) 17.4 km Western Bypass, a Kshs 17 bn project starts from Gitaru- linking the Northern bypass to the Southern Bypass - and terminates at Ruaka, in Kiambu County.

Our outlook for the sector is thus positive, supported by the execution of the planned infrastructure development such as sewer connection in Ruiru and Kitengela, water improvement program and the above mentioned road and power projects in the pipeline. We expect that continued government efforts to improve the infrastructure, will result in the opening up of more areas for real estate for development.

With the Government of Kenya’s economic transformation agenda, we expect to see more infrastructural projects being unveiled, which in turn will boost the real estate sector’s performance and also lead to opening up of more areas for real estate development.

7. Listed Real Estate Outlook

In 2019, the Fahari I-REIT closed the year at Kshs 9.4 per share, 6.9% lower than its opening price of Kshs 10.1 per share. The REIT’s value declined by 16.0% y/y trading at an average of Kshs 8.9 per share in comparison to Kshs 10.6 in 2018. The poor performance is attributable to; (i) opacity of the exact returns from the underlying assets, (ii) the negative sentiments currently engulfing the sector given the poor performance of Fahari and Fusion REIT (FRED), (iii) inadequate investor knowledge, and (iv) lack of institutional support for REITs.

Having opened the year with a trading price of Kshs 9.6 we expect the REIT to continue trading at low prices and in low volumes in 2020, attributed to the above mentioned factors, in addition to unsteadiness in the market following the recent sale to ICEA Lion Asset Management.

Source: Thomson Reuters

We retain a NEGATIVE outlook for the REIT market due to the insufficient market structures and poor market sentiment, however, attempts by key real estate industry players in the region such as East Africa Forum for Structured products and REITs Association of Kenya to improve the market sentiment on REITs and other alternative investments, government efforts to improve the regulatory structures and the need for capital by developers is expected to drive uptake of the REIT. 

THE KEY AREAS OF OPPORTUNITIES BY THEME IN REAL ESTATE SECTOR

Based on returns, factors such as supply, demand, infrastructure, land prices and availability of social amenities the following are the ideal areas for investment;

Source: Cytonn Research