May 7, 2023

Last year, we published our Nairobi Metropolitan Area (NMA) Residential Report 2022, titled ‘Improved Property Prices to Shape Market Recovery,’ in which we examined the performance of 35 residential nodes. This week, we update our analysis with the Nairobi Metropolitan Area (NMA) Residential Report 2023 titled ‘Resilient Market with Steady Growth Potential’ by highlighting the residential sector's performance in the region in terms of price appreciation, rental yields, and market uptake, based on the coverage of 35 regions within the Nairobi Metropolis. We also shall also discuss factors influencing residential supply and demand, current developments affecting the industry, and conclude with a look at investment options as well as the sector's general outlook for the coming fiscal year. As such, we shall discuss the following;

1. Overview of the Residential Sector,
2. Recent Developments in the Sector,
3. Residential Market Performance, and,
4. Conclusion, Residential Market Outlook and Investment Opportunity.

Section I: Overview of the Residential Sector

In FY’2022/23, the residential sector recorded increased activities mainly supported by the continued launch and implementation of various residential projects by the government, under the Affordable Housing Programme (AHP) which encouraged construction activities and property transactions. According to the Kenya National Bureau of Statistics (KNBS), Kenya’s Real Estate sector contribution to Gross Domestic Product (GDP) in 2022 came in at 10.5%, a 0.4% increase from the 10.1% recorded in 2021. The improvement in performance was attributed to improved investor confidence as a result of improvement in the country’s business environment post COVID-19 period, and, peaceful conclusion of the August 2022 General elections. The residential sector recorded improved performance evidenced by total returns to investors registering an uptick to come in at 6.2% in FY2022/23, a 0.4%-points increase from the 5.8% recorded in FY’2021/22. We expect the sector’s contribution to continue improving in 2023 supported by;

1. Government and private sector aggressiveness in implementing housing initiative programs, with focus on affordable housing. As at 2022, the AHP had active pipeline of 376 projects looking to deliver 599,000 units across the country, with the construction of 13,529 units having already been completed and an additional 9,935 affordable housing units underway. Additionally, President William Ruto is set to further launch 35,980 units in Nairobi, Kiambu and Homa Bay counties,
2. Increased partnerships between the Kenya Mortgage Refinance Company (KMRC) and commercial banks such as NCBA and Co-op Bank aimed at availing affordable mortgages and home loans to Kenyans,
3. Concerted efforts by the government to provide affordable mortgages through the Kenya Mortgage Refinance Company (KMRC), in a bid to make home ownership more accessible to Kenyans by providing long-term, low-interest home loans to potential home buyers. In 2022, KMRC refinanced 1,948 mortgage loans valued at Kshs 6.8 bn, representing a 278.0% increase from 574 home loans valued at Kshs 1.3 bn disbursed in 2021, and,
4. The growing trend towards use of alternative financing for Real Estate development particularly Public-Private Partnerships (PPPs) in delivering development projects.

Going forward, we anticipate that the following factors will influence the performance of the residential sector:

1. Housing Deficit: According to KNBS, the Kenyan housing market still faces an acute housing shortage of more than 2.0 mn units. Additionally, the Center for Affordable Housing Finance Africa (CAHF) estimates the housing deficit in Kenya stood at 80.0%, as at the end of 2022, given that only about 50,000 new houses are delivered each year against a demand for 250,000. The government through the AHP has purposed to narrow this gap, and as such, affordable housing continues to attract more demand propelled by the increasing entry of private sector players through Public Private Partnerships (PPPs),
2. Demographics: Kenya continues to witness positive demographics as evidenced by Kenya’s relatively high urbanization and population growth rates of 3.7% p.a and 1.9% p.a, respectively, against the global averages of 1.6% p.a and 0.9% p.a, respectively, as at 2021. As such, the demand for Real Estate development in the country continue to increase, and,
3. Access to Credit: High mortgage interest rates currently at 11.3% and high transaction costs, have made it difficult for low- and middle-income earners to afford mortgages. However, we anticipate the increased collaborations between sector players and the KMRC, will aid remedy the situation. Notably, government’s efforts to make affordable home loans to Kenyans more accessible at lower interest rates of from 9.5%, will improve performance of mortgage lending by making home loans more accessible and consequently increase uptake rates in the country.

In terms of supply, the residential sector has been largely constrained by insufficient access to affordable funding by developers, and bureaucracies and delays in approval processes. In 2023, new supply is also expected to slow down owing to:

1. Constrained Access to Financing: Lenders continue to tighten their lending requirements and demand more collateral from developers as a result of elevated credit risk in the Real Estate sector as evidenced by the 7.5% increase in gross Non-Performing Loans (NPLs) to Kshs 80.3 bn in Q4’2022, from Kshs 74.7 bn recorded during Q4’2021,
2. Rising construction costs: Construction costs have remained high averaging at Kshs 5,210 per SQFT in 2022, a 5.0% increase from Kshs 4,960 per SQFT recorded in 2021, attributable to price increase of key construction materials such as cement, steel, paint, aluminium and PVC. The increase is mainly attributed to persisted inflationary pressures on the back of supply chain disruptions worsened by the ongoing Russia-Ukraine war. As such, we expect this will continue to impede development activities in the sector, and,
3. Inadequate infrastructure: Inadequate and substandard infrastructure in many regions of the country will continue to impede development operations due to lack of accessibility, consequently limiting supply. Additionally, inadequate drainage and sewerage infrastructure in some places will continue to hinder developers, due to the anticipated additional development costs of projects. Moreover, the government’s decision to cut back on infrastructure expenditure until stalled projects are completed will slow down development of infrastructure across the country, thus further limiting supply.

Section II: Recent Developments in the Sector

In FY’2022/23, the government announced the following regulations, policies, measures, and proposals affecting the residential sector namely:

1. Mortgage Plan: President William Ruto floated a mortgage plan that will allow tenants to own homes under the social housing tenant purchase scheme, and, affordable housing initiative, through monthly rental payments. The mortgage scheme plans to entail tenants paying their monthly rents as the mortgage repayments for a period of up to 20 years upon which, ownership of a unit is given to the tenant. For more information, see Cytonn Weekly #40/2022,
2. Retirement and Benefits Act review: The Retirement Benefits Authority (RBA) announced plans to have pension managers publish data on the number of Kenyans who use their retirement savings to purchase homes by January 2023, after having reviewed the Retirement and Benefits Act. For more information, see Cytonn Weekly #41/2022,
3. Stamp duty Act amendment: President William Ruto announced plans to exempt all first-time home buyers from paying stamp duty. This comes two years after the Stamp Duty Act was amended in 2020 to allow exemptions for first time home buyers of only approved affordable housing units by the government. For more information, see Cytonn Weekly #43/2022,
4. Draft Valuation Roll 2019: Nairobi City Hall issued a notice on the increment of land rates to 0.115% of the current value of undeveloped land in Nairobi County based on the 2019 Draft Valuation roll, from 1^st January 2023, in line with the Nairobi City Finance Act 2022. For more information, see Cytonn Weekly #47/2022,
5. The Finance Act 2022: The Finance Act 2022 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. The bill was assented to law by President Uhuru Kenyatta in June 2022, stemming from the amendment of Section 34 (1) of the Income Tax Act. CGT is a final tax levied on the net gains which accrue to a company or an individual on or after 1 January 2015, whether or not the property was acquired before the aforementioned date, upon the transfer of property situated in Kenya. CGT was in existent until 1985 when it was suspended, and later re- introduced in 2015 through an amendment introduced to the Income Tax Act by the Finance Act 2014. For more information, see Cytonn Weekly #01/2023,
6. The Finance Bill 2023: The Kenya National Treasury presented the Finance Bill 2023 to Parliament with an introduction of a new amendment in Section 31 of the Employment Act, The amendment recommends a 3.0% deduction on the basic salaries of both public and private sector employees who qualify for the low-cost housing scheme. This deduction will be matched with another 3.0% from their respective employers, and the total deduction will not exceed Kshs 5,000. The contribution will be directed to the National Housing Development Fund, President Ruto’s ambitious housing kitty which aims to finance the construction of 200,000 affordable houses annually across the country. However, high-income earners who are ineligible for the low-cost housing scheme will need to wait for seven years or until retirement to transfer the funds to a retirement benefits scheme or a pension scheme fund. Alternatively, they can opt to receiving their savings in cash as part of their income, which will be taxed at the prevailing rates. Previously, the government attempted to introduce a similar amendment in the Finance Act 2018, proposing a 1.5% deduction from employees' basic salaries, which was rejected by labor unions and employers in 2019. As a result, the National Treasury and the State Department of Housing were directed to revise the legal requirement by making the contribution voluntary to the Housing Fund Levy instead of being a compulsory deduction, and,
7. FY’2022/23 Budget Statement: the  2023 Draft Budget Policy Statementindicated that the government's allocation for Infrastructure, Energy, and Information and Technology (ICT) for the fiscal year 2023/2024 is expected to be Kshs 398.2 bn, a 4.4% decline from the previous fiscal year's allocation of Kshs 416.4 bn. In addition, the FY'2022/2023 Supplementary Budget to the State Department of Infrastructure was slashed by Kshs 47.3 bn, representing a 21.4% reduction in expected spending to Kshs 174.0 bn, from the previous Kshs 221.3 bn allocated towards infrastructure projects for the year ending June 2023. This comes as the government is prioritizing the completion of previously stalled projects and avoiding initiation of new expensive projects amid the current regime’s promised cut on expenditure. As such, we expect the sourcing of funding for infrastructure projects in the country to further shift to alternative financing strategies such as; Public-Private Partnerships (PPPs), issuing of infrastructure bonds, joint ventures, and, grants and concessional loans from more foreign organizations, in order for the government to fast-track the infrastructural development that is critical in growing the Kenyan economy.

Notably, in November 2022, pension-backed mortgages received a setback after the court declared Retirement Benefits (Mortgage Loans) (Amendment) Regulations, 2020 unconstitutional as the process, through the parliament, did not involve public participation. The amendment, which was signed in 2020 by former Treasury Cabinet Secretary Ukur Yatani, was meant to support Kenya’s homeownership especially for the employed people in the formal sector who are unable to afford the monthly mortgage payments. The amendment was to allow workers access up to Kshs 7.0 mn or a maximum of 40.0% of their retirement savings from the pension schemes to buy their first residential house.

However, we continue to see increased focus on the Affordable Housing Programme (AHP) by the National and County governments and the private sector. These housing projects are undertaken through various strategies such as Public-Private Partnerships (PPPs) for the government involving private companies and Joint Ventures (JVs) for private companies executing their own projects. Currently, the AHP pipeline boasts about 25 affordable housing projects, with an estimated 47,787 housing units by the government and 50,225 housing units by the private sector under construction. This is as 200,000 housing units are targeted to be delivered per year. Some of the notable projects launched or ongoing during FY’2022/23 include:

1. Centum Real Estate, a fully-owned subsidiary of Centum Investment Company kicked-off the phase one construction of its ‘Mzizi court’ housing project that will comprise 270 affordable residential units at the 102-acre Two Rivers Development. It is estimated that the construction of Mzizi Court apartments will take approximately 2.0 years and is anticipated to be complete by Q1’2024. For more information, see Cytonn Q1’2022 Markets Review,
2. Heri Homes, a property developer in Kenya, in partnership with Finsco Africa, a Real Estate consultancy firm, announced plans to construct 384 affordable apartments in Ruiru Town, as part of its 200- acre mixed-use development project dubbed ‘Legacy Ridges’. For more information, see Cytonn Weekly #21/2022,
3. The Nairobi Metropolitan Services (NMS) began the second phase of revamping housing estates in select parts of Nairobi County. This followed the completion of the first phase of the rehabilitation process in May 2022, which included 760 housing units in; Kariobangi South, Buruburu, Kariokor and Jamhuri estates. For more information, see Cytonn Weekly #23/2022,
4. Property developer Mi Vida Homes announced plans to break ground 800 affordable housing units project by end of 2022. The more than Kshs 2.0 bn project dubbed, ‘Keza by Mi Vida’ will be located in Nairobi’s Riruta area. The project which will sit on a 4.5-acre piece of land 100m away from Kikuyu/Naivasha road junction. The project will consist of studios, one-bedroom, two-bedroom, and three-bedroom units, with prices ranging between Kshs 2.0 mn and Kshs 6.0 mn. Moreover, the project will be undertaken through a Joint Venture (JV) partnership strategy between Actis Limited, a private equity firm, Indian construction firm Shapoorji Pallonji Real Estate through Mi Vida Homes, and an undisclosed land owner. For more information, see Cytonn Weekly #27/2022,
5. Pension funds administrator CPF announced plans to construct affordable housing units in Laikipia, Nakuru, Nairobi and Mombasa Counties. CPF which currently own assets worth Kshs 5.2 bn in its Individual Pension Plan (IPP)portfolio and Kshs 33.9 bn in its Local Authorities Pensions Trust (LAPTRUST) portfolio as at FY’2021, is looking to increase its investment portfolio into the Real Estate market, and is still in talks with the respective four county governments, in order to construct the housing units. For more information, see Cytonn Monthly, July 2022,
6. National Housing Cooperation (NHC) announced that it is seeking to raise Kshs 7.0 bn through the International Finance Corporation (IFC) under the Public Private Partnership (PPP) model, to fund the construction of 3,500 housing units in Athi River, Machakos County. The housing units are part of the Kshs 20.0 bn ‘Stoni Athi Waterfront City’ project, consisting of 10,500 units to be developed on a 150 acres’ piece of land. For more information, see Cytonn Weekly #34/2022,
7. Harambee Investment Cooperative Society (HICS), the investment subsidiary vehicle of Harambee Sacco Society Ltd, announced plans to develop housing projects in five counties namely; Nairobi, Nakuru, Kisumu, Laikipia, and Mombasa. The housing projects by HICs are aimed at providing investment opportunities for its 650 members which is expected to reach 1,000 by the end of the year. In addition to this, HICs also unveiled a mortgage facility dubbed ‘Harambee Home Loan’ by Harambee Sacco which is in partnership with the Kenya Mortgage Refinancing Company (KMRC), in order to provide a financing option to potential home buyers. Additionally, Safaricom Investment Cooperative (SIC) began the construction of an affordable housing project dubbed Miran Residence in Ruaka, Kiambu County. The Kshs 750.0 mn project has a completion date of June 2024 and will comprise of 200 units in its phase I, distributed into studio apartments, studio lofts, one bedrooms, and two bedrooms, with prices ranging between Kshs 3.2 mn and Kshs 6.5 mn. For more information, see Cytonn Q3’2022 Markets Review,
8. President William Ruto announced plans to commission an affordable housing project consisting of 5,000 units in Homa Bay County with a start date on November 2022. The project was scheduled to be constructed in phases, with the first phase targeting 400 units; while the second phase comprising of 2,000 units and delivered by the end of 2023. For more information, see Cytonn Weekly #40/2022,
9. Property developer Unity homes completed 10.0% of its Kshs 5.4 bn housing project dubbed ‘Unity East’, which sits on a 10.4-acre piece of land at Tatu City in Ruiru Sub - County. This constitutes 64 units of the total 640 houses whose construction began in November 2021 as the second phase of the project. For more information, see Cytonn Weekly #42/2022,
10. The County Government of Nakuru announced plans to complete the construction of 605 affordable housing units by December 2023. Construction of the affordable housing scheme located at Bondeni was launched in May 2021, under Public-Private Partnership (PPP) agreement between the State Department of Housing and King Sapphire Developers. For more information, see Cytonn Weekly #45/2022,
11. Property developer Mi Vida Homes announced plans to begin the construction of two projects at Garden City in April 2022; the 2nd phase of their mid-market apartments dubbed ‘Amaiya’, and affordable housing units dubbed ‘237 Garden City’. Sitting on a 47-acre piece of land at Garden City, Amaiya will comprise of one and two-bedroom duplexes, and three-bedroom flats, all totaling 200 units, with the prices starting at Kshs 9.5 mn, while 237 Garden City project worth Kshs 1.6 bn will comprise of a total of 600 units consisting of studio, one and two-bedroom apartments, with the prices starting from Kshs 2.8 mn. For more information, see Cytonn Weekly #45/2022,
12. The National government, through the Permanent Secretary for State Department for Housing and Urban Development, Charles Hinga, commmenced the construction of 42,000 affordable housing units within November and December 2022. The projects were earmarked to be developed in; Makongeni, Starehe, and Shauri Moyo in Nairobi County, Ruiru in Kiambu County, and, Mavoko in Machakos County. For more information, see Cytonn Weekly #47/2022,
13. The Kenyan National government in partnership with the United Nations Habitat, and, Epco Builders, a local private developer, broke ground for the construction of Mavoko Affordable Housing Project in Syokimau, Machakos County. For more information, see Cytonn Weekly #49/2022,
14. Property developer Erdemann Limited, in conjunction with the County Government of Machakos, broke ground for the construction of the fifth phase of Great Wall Gardens project located in Mavoko municipality. This came three months after the developer completed and launched the fourth phase of the project in August 2022. For more information, see Cytonn Weekly #50/2022,
15. President Ruto oversaw the ground breaking of the Kings Boma Estate affordable housing project consisting of 1,050 residential units, worth Kshs 2.8 bn, located along the Ruiru-Kiambu road in Kiambu County, nearing Kenya Prisons Staff Training College. Construction of the project will be spearheaded by Kings Developers Limited (KDL), a local Real Estate development company, on a 6.1-acre piece of land provided through a partnership with the government under a Public-Private Partnership (PPP). For more information, see Cytonn Weekly #03/2023,
16. President William Ruto presided over the ground breaking ceremony of the Kshs 10.0 bn Shauri Moyo-A Affordable Housing Project which sits on an 8.0-acre piece of land in Shauri Moyo, Nairobi County. For more information, see Cytonn 2023 Markets Outlook,
17. Centum Real Estate, the development affiliate of Centum Investment Company PLC, completed the construction of phase one of its 32 luxurious four-bedroom duplexes dubbed ‘Loft Residences’, which sits on 3.9 acres situated in Two Rivers. For more information, see our Cytonn Weekly #07/2023,
18. The County Government of Nairobi began the second phase of its plan of redeveloping old County estates through construction of 33,000 new low-cost units. For more information, see our Cytonn Weekly #08/2023, 
19. Stima Investments Co-operative Society broke ground for the construction of Stima Heights, a Kshs 1.2 bn ultra-modern affordable housing project located in Ngara West, Nairobi County. The project is situated on a quarter acre piece of land along Kolobot road. For more information, see Cytonn Q1’2023 Markets Review, and,
20. President William Ruto presidedover the ground breaking of 6,704 Affordable Housing units situated on 22.4 acre parcels of land in Ziwani, Starehe. For more information, see Cytonn Weekly #10/2023.
21. NCBA Bank Kenya, a local commercial bank, announced a partnership with state-backed financier, Kenya Mortgage Refinancing Company (KMRC) for an initiative to provide low-cost mortgages starting from an interest rate of 9.5%, which is 1.8% points lower than the market average of 11.3% in 2021. For more information, see Cytonn Weekly #12/2023,

Key to note, some multilateral institutions, private entities, and the government have initiated several alternatives ways in raising finances for funding residential projects such as the capital markets and provision of grants and loans. This is amid efforts to support the supply side of the affordable housing initiative and deliver a target of 200,000 units annually. Some of the notable initiatives include;

1. Shelter Afrique, a Pan African housing finance institution based in Nairobi’s Upperhill district, announced plans to develop a sovereign lending product. The sovereign lending product will be facilitated by the Africa Development Bank (AfDB) through the African Development Institute (ADI) to support affordable housing and commercial Real Estate in its 44-member states by offering trade finance, equity investments, joint ventures, social housing, institutional lending, and project finance. For more information, see Cytonn Weekly #43/2022,
2. Student housing developer Acorn Holdings received Kshs 1.8 bn from the sale of Qwetu Aberdare Heights I hostel located in Ruaraka. In our Cytonn Weekly 43/2022, the developer had in October 2022 announced plans to repay part of its outstanding Kshs 5.7 bn green bond through the sale of the aforementioned property with a 697 bed capacity, through an early redemption option. For more information, see Cytonn Weekly #45/2022,
3. Absa Bank Kenya PLC announcedthat it had availed funding worth Kshs 6.7 bn to property developer Acorn Holdings Limited (AHL), for the construction of 10 Purpose-Built Student Accommodation (PBSA) projects worth Kshs 11.0 bn. For more information, see our Cytonn Weekly #06/2023, and,
4. The Capital Markets Authority (CMA) in collaboration with the Sanduku Investment Initiative, the Association of Pension Trustees and Administrators of Kenya (APTAK) and the Nairobi Securities Exchange (NSE) announced ongoing plans to create a Kenya National REIT (KNR) as an accreditation body for REITs and their stakeholders within the Kenyan REITs market. The initiative is aimed at financially support the government’s priority projects such as; the Railway City Development, Nairobi International Financial Centre, the Affordable Housing Programme (AHP) and many more. For more information, see our Cytonn Weekly #06/2023.

Regarding provision of finances for the demand side of residential units, the government continues to increase its effort to provide affordable mortgages through the Kenya Mortgage Refinance Company (KMRC). This is aimed at making home ownership more accessible to Kenyans by providing long-term, low-interest home loans to potential home buyers. In 2022, KMRC refinanced 1,948 mortgage loans valued at Kshs 6.8 bn, representing a 278.0% increase from 574 home loans valued at Kshs 1.3 bn disbursed in 2021. Some of the notable highlights regarding disbursement of the affordable mortgages include;

1. Co-operative Bank of Kenya revealed in their FY’2021 annual report that it had received Kshs 549.8 mn loan from KMRC in June 2021, aimed at financing affordable housing mortgage loans. For more information, see Cytonn Weekly #15/2022,
2. Housing Finance Group (HFG), a Kenyan financial institution, disclosed in their FY’2021 Annual Reportthat it had received Kshs 474.9 mn from KMRC for onward lending to potential house buyers in the country. HFG disclosed that it had borrowed the aforementioned amount at an interest rate of 5.2% per annum until December 2028, representing 11.0% of HFG’s total borrowed funds worth Kshs 4.2 bn, as of December 2021. For more information, see Cytonn Weekly #24/2022,
3. Gulf African Bank entered into a mortgage financing agreement with property developer Mi Vida Homes, with an aim of funding mortgages to potential home buyers of their recently completed Mi Vida Phase I project situated along Thika Road. The Shari’ah-compliant mortgage facility will be capped at an 11.8% interest rate, with a faster approval period of 48 hours and a favorable repayment period of up to 20 years, which is longer than CBK’sbenchmark period of 12 years. Additionally, Stanbic Bank Kenya partnered with three Real Estate developers namely; Superior Homes Kenya, Avic International Real Estate Ltd, and, Safaricom Staff Pension Scheme, to provide mortgages to their potential home buyers. Stanbic currently has a 1.1% stake at KMRC and plans to cap the home loans at a 9.5% interest rate, with a repayment period of up to 25 years. For more information, see Cytonn Weekly #38/2022,
4. Mwalimu National Sacco signed a partnership deal with KMRC to provide low-cost mortgages capped at an interest rate of 9.0%, 2.3% points lower than the market average of 11.3%in 2021. The 120,000 Sacco members will have access to a minimum mortgage of Kshs 0.5 mn and a maximum limit of Kshs 8.0 mn to finance construction of their houses. The loan facility will be repayable within 26 years, 14 years more than the average loan duration of 12 years in 2021. For more information, see Cytonn Weekly #02/2023,
5. KMRC increased the limit of maximum mortgage to be issued to its clients from Kshs 4.0 mn to Kshs 8.0 mn in NMA and from Kshs 3.0 mn to 6.0 mn in Non-NMA counties. For more information, see Cytonn Monthly, January 2023, and,
6. Co-operative Bank of Kenya in collaboration with KMRC, introducedan affordable mortgage product with a repayment period of 15 years at an interest rate of 9.9%, 1.4% lower than the market average of 11.3% in 2021. Co-operative bank has already secured Kshs 549.0 mn from KMRC which it will top up with counterpart funding to avail for onward lending to its customers. For more information, see Cytonn Q1’2023 Markets Review.

Additionally, we continue to notice increased diversified residential projects such as Master-planned Communities, Lifestyle living, Conservancy Living Developments and many more.  Such projects are expected to be more vibrant and attractive not only locally but to also international markets. Investors and buyers will benefit from the increased diversification in the sector thus discerning appetite for luxurious amenities, conservation-minded and eco-friendly developments cropping up in satellite towns. The availability of affordable development land in these areas, coupled with limited supply within Nairobi City and in other major urban centers countrywide, will draw more high-end buyers and investors in the regions and promote further development. Some of the notable projects that are ongoing include:

1. Superior Homes, a Nairobi based housing developer launched a luxurious Conservancy Living Development project dubbed ‘Lukenya Wildlife Estate’. The project will comprise of 0.5-acre, 1-acre and 1.5-acre serviced plots on a 100-acre piece of land within Swara Plains Conservancy located along Mombasa-Nairobi Highway, Machakos County. For more information, see Cytonn Weekly #51/2022,
2. Tatu City, a mixed-use satellite city development, launched a luxurious lakeside-living project dubbed ‘Kofinaf Tatu Residences’, sitting on a 200-acre piece of land within Kofinaf Estate located in Tatu City, Kiambu County. The project will comprise of serviced plots starting from 1-acre and above, with a selling price of Ksh 135.0 mn per acre. Owners of the residences will also have exclusive access to an ever-present water reservoir dubbed, ‘Comte de Beaumont Dam,’ nourished by Mukuyu and Gaia Rivers. The shores of the 32-acre lake will provide private nature reserve with diverse flora and fauna. For more information, see Cytonn Weekly #02/2023, and,
3. Madison Insurance entered into a Joint-Venture (JV) agreement with Housing Finance Company (HFC), a subsidiary of HF Group, to develop a Master Planned Community project dubbed ‘Villakazi Homes’ in Athi River, Machakos County. For more information, see our Cytonn Weekly #07/2023.

Section III: Residential Market Performance

In terms of performance, average total returns improved in FY’2022/23 to 6.2%, a 0.4%-points increase from 5.8% recorded in FY’2021/22. This is attributable to residential average y/y price appreciation, which came in at 1.1%, 0.2%-points higher compared to a price appreciation of 0.9% recorded in FY’2021/22. The y/y improvement in performance was majorly driven by improved selling price per SQM which came in at Kshs 119,609 in FY’2022/23, from Kshs 118,652 recorded in FY’2021/22. The average occupancy rates increased slightly by 0.1% points to 86.7%, from 86.6% recorded in FY’2021/22. This is as a result of  increase  demand for properties, with the average annual uptake registering a 0.4%-points increase to 14.7% in FY’2022/23, from 14.3% in FY’2022/21. The table below shows the NMA residential sector’s performance in FY’2022/23;

All values in Kshs unless stated otherwise

Cytonn Report: Residential Sector Summary FY’2022/23
Segment	Average Price per SQM	Average Rent per SQM	Average Occupancy	Average Uptake	Average Annual Uptake	Average Rental Yield	Average Price Appreciation	Average Total Returns
Detached Units
High End	193,036	728	92.3%	94.7%	12.5%	4.4%	1.3%	5.7%
Upper Middle	147,178	594	85.2%	89.8%	13.0%	4.5%	1.1%	5.6%
Lower Middle	73,696	325	87.0%	90.6%	15.3%	5.0%	1.0%	6.0%
Detached Units Average	137,970	549	88.2%	91.7%	13.6%	4.7%	1.1%	5.8%
Apartments
Upper Mid-End	126,751	670	84.3%	89.9%	15.8%	5.4%	0.5%	5.9%
Lower Mid-End Suburbs	94,406	514	85.8%	88.0%	14.9%	5.4%	1.0%	6.4%
Lower Mid-End Satellite Towns	82,586	409	85.4%	86.3%	16.4%	5.5%	1.4%	6.8%
Apartments Average	101,248	531	85.2%	88.1%	15.7%	5.5%	1.0%	6.5%
Residential Market Average	119,609	540	86.7%	89.9%	14.7%	5.1%	1.1%	6.2%

Source: Cytonn Research

Investors saw improved returns, with the average rental yield registering a 0.2%-points increase to 5.1% in FY’2022’23, from 4.9% recorded in FY’2021/22. This is attributable to increased rent per SQM which came in at Kshs 540 in FY’2022/23, from Kshs 535 recorded in FY’2022/21. The table below shows the comparison between the performance in FY’2022’23 and FY’2021/22;

Cytonn Report: Residential Market Performance Summary: FY’2022/23 - FY’2021/22 Comparison
Segment	Average of Rental Yield FY'2022/23	Average of Price Appreciation FY'2022/23	Average of Total Returns FY'2022/23	Average of Rental Yield FY'2021/22	Average of  Price Appreciation FY'2021/22	Average of Total Returns FY'2021/22	y/y change in Rental Yield (% Points)	y/y change in Price Appreciation (% Points)	y/y change in Total Returns (% Points)
High End	4.4%	1.3%	5.7%	4.1%	1.5%	5.6%	0.4%	(0.2%)	0.2%
Upper Middle	4.5%	1.1%	5.6%	4.5%	0.9%	5.4%	0.0%	0.2%	0.2%
Lower Middle	5.0%	1.0%	6.0%	5.0%	0.8%	5.8%	0.0%	0.2%	0.2%
Detached Average	4.7%	1.1%	5.8%	4.5%	1.1%	5.6%	0.2%	0.0%	0.2%
Upper Mid-End	5.4%	0.5%	5.9%	5.3%	0.3%	5.6%	0.1%	0.2%	0.3%
Lower Mid-End Suburbs	5.4%	1.0%	6.4%	5.4%	0.4%	5.8%	0.0%	0.6%	0.6%
Lower Mid-End Satellite Towns	5.5%	1.4%	6.8%	5.4%	1.3%	6.7%	0.1%	0.1%	0.1%
Apartments Average	5.5%	1.0%	6.5%	5.3%	0.7%	6.0%	0.2%	0.3%	0.5%
Residential Market Average	5.1%	1.1%	6.2%	4.9%	0.9%	5.8%	0.2%	0.2%	0.4%

Source: Cytonn Research

Sub-Market Analysis

In our submarket analysis, we classified the various suburbs in the Nairobi Metropolitan Area into three segments

• High End Segment – Consists of prime suburbs in Nairobi, such as Karen, Runda and Kitisuru. The majority of these areas have been designated for low-rise residential construction and are distinguished by their large, luxurious villas and bungalows,
• Upper Middle Income Segment – Consists of suburbs zoned for both high rise and low density houses such as Kilimani, Lavington, Kileleshwa, Loresho and Ridgeways among others. The population in these zones are middle class but with higher incomes than the average characterization of middle class,
• Lower Middle Income Segment – Consists of suburbs in Nairobi habited by middle class such as Ruiru, Kikuyu, Ruaka, Dagoretti, Upper Kabete (Uthiru and parts of Mountain View), and Ngong Road (Race Course, Lenana, Corner), among others.

1. Detached Units

The detached market registered improved performance with total returns coming in at 5.8% in FY’2022/23, representing a 0.2% points y/y increase, from 5.6% recorded in FY’2021/22. The performance was attributable to a 0.2%-points increase in rental yield to 4.7% in FY’2022/23, from the 4.5% recorded in FY’2021/22, majorly driven by increase in selling and rental prices to Kshs 137,970 and Kshs 549, respectively, from Kshs 136,031 and Kshs 505, respectively in FY’2021/22. The best performing segment was the lower-middle segment offering an average total return of 6.0%, attributable to relatively high rental yields of 5.0%, which is driven by returns from well-performing nodes such as Ruiru, Juja, and Ngong. Overall, Ruiru was the best performing node, offering the highest returns at 7.8% attributable to relatively high rental yield of 6.2% and price y/y appreciation of 1.6%. This is driven by increased popularity by investors due to presence of key infrastructure developments, such as the Eastern Bypass and Thika Superhighway which grants easy access from Ruiru to the Nairobi CBD. In addition, the node enjoys high demand in property due to affordability of apartments, with rents averaging Kshs 345 against the overall detached units’ average of Kshs 549. The table below shows the NMA residential sector detached units’ performance during FY’2022/23;

All values in Kshs unless stated otherwise

Cytonn Report: Residential Detached Units Summary FY’2022/23
Area	Average of Occupancy FY’2022/23	Average of Annual Uptake FY’2022/23	Average of Rental Yield FY’2022/23	Average of Price Appreciation FY’2022/23	Average of Total Returns FY’2022/23	Average of Rental Yield FY’2021/22	Average of Price Appreciation FY’2021/22	Average of Total Returns FY’2021/22	Change in Rental Yield (% Points)	Change in Price Appreciation (% Points)	Change in Total Returns (% Points)
												High-End
Rosslyn	90.0%	15.0%	5.0%	1.5%	6.5%	4.7%	2.8%	7.5%	0.3%	(1.3%)	(1.0%)
Kitisuru	96.0%	11.8%	4.8%	1.6%	6.4%	4.2%	1.2%	5.4%	0.6%	0.4%	1.0%
Karen	83.3%	12.7%	3.8%	1.7%	5.5%	3.7%	2.0%	5.7%	0.1%	(0.3%)	(0.2%)
Runda	96.8%	10.1%	4.6%	0.7%	5.3%	4.1%	0.3%	4.4%	0.5%	0.4%	0.9%
Lower Kabete	95.3%	13.1%	3.9%	1.1%	5.0%	3.6%	1.2%	4.8%	0.3%	(0.1%)	0.2%
Average	92.3%	12.5%	4.4%	1.3%	5.7%	4.1%	1.5%	5.6%	0.4%	(0.2%)	0.2%
Upper-Middle
Redhill & Sigona	84.6%	14.4%	4.9%	1.5%	6.4%	4.7%	1.7%	6.4%	0.2%	(0.2%)	0.0%
Ridgeways	76.1%	12.8%	4.7%	1.6%	6.3%	5.0%	1.1%	6.1%	(0.3%)	0.5%	0.2%
Runda Mumwe	90.8%	13.6%	5.2%	0.8%	6.0%	5.1%	0.6%	5.7%	0.1%	0.2%	0.3%
Loresho	80.7%	14.2%	4.8%	1.1%	5.9%	4.9%	0.3%	5.2%	(0.1%)	0.8%	0.7%
South B/C	88.5%	12.6%	4.3%	1.3%	5.6%	4.2%	1.1%	5.3%	0.1%	0.2%	0.3%
Lavington	87.0%	12.7%	4.0%	0.6%	4.6%	4.0%	0.5%	4.5%	0.0%	0.1%	0.1%
Langata	88.8%	10.7%	3.8%	0.7%	4.5%	3.8%	1.0%	4.8%	0.0%	(0.3%)	(0.3%)
Average	85.2%	13.0%	4.5%	1.1%	5.6%	4.5%	0.9%	5.4%	0.0%	0.2%	0.2%
Lower-Middle
Ruiru	87.3%	18.2%	6.2%	1.6%	7.8%	5.9%	1.9%	7.8%	0.3%	(0.3%)	0.0%
Juja	81.4%	18.2%	5.7%	1.2%	6.9%	5.5%	1.2%	6.7%	0.2%	0.0%	0.2%
Ngong	93.6%	12.4%	6.2%	0.4%	6.6%	6.5%	(0.2%)	6.3%	(0.3%)	0.6%	0.3%
Kitengela	76.7%	13.7%	4.9%	1.4%	6.3%	4.9%	1.4%	6.3%	0.0%	0.0%	0.0%
Syokimau/ Mlolongo	91.3%	18.3%	4.4%	1.5%	5.9%	4.5%	1.5%	6.0%	(0.1%)	0.0%	(0.1%)
Athi River	86.2%	13.4%	4.3%	1.1%	5.4%	4.3%	1.6%	5.9%	0.0%	(0.5%)	(0.5%)
Rongai	98.8%	16.7%	4.1%	1.2%	5.3%	4.0%	1.1%	5.1%	0.1%	0.1%	0.2%
Thika	83.3%	13.7%	5.0%	0.2%	5.2%	5.3%	(0.5%)	4.8%	(0.3%)	0.7%	0.4%
Donholm & Komarock	85.0%	13.1%	4.5%	0.3%	4.8%	4.3%	(1.0%)	3.3%	0.2%	1.3%	1.5%
Average	87.1%	15.3%	5.0%	1.0%	6.0%	5.0%	0.8%	5.8%	0.0%	0.2%	0.2%
Detached Units Average	88.2%	13.6%	4.7%	1.1%	5.8%	4.5%	1.1%	5.6%	0.2%	0.0%	0.2%

Source: Cytonn Research

1. Apartments

Apartments recorded improved performance with average returns to investors coming in at 6.5% in FY’2022/23, a 0.5%-points increase from 6.0% recorded in FY’2021/22. The average y/y price appreciation registered a 0.3% points increase to 1.0% in FY’2022/23, up from the price appreciation of 0.7% in FY’2021/22. The rental yields increased by 0.2% to 5.5% in FY’2022/23, from the 5.3% recorded in FY’2021/22. The best performing segment was the lower mid-end satellite towns with average total return of 6.9%, attributed to average rental yield of 5.5% and relatively high price appreciation of 1.4%. The performance of the segment is boosted by the presence of rapidly developing nodes such as Ruaka and Ruiru. Overall, the best performing node was Ruaka with average rental yield of 7.5% attributable to a relatively high y/y price appreciation of 2.3%, while Waiyaki Way closely followed with 7.4% average total return. The proximity of Ruaka and Waiyaki Way to more well-off neighborhoods has driven up property prices, making them prime locations for the development of high-density residential apartment complexes which garner high preference among low to middle-income earners. The table below shows the NMA residential sector apartments’ performance during FY’2022/23;

All values in Kshs unless stated otherwise

Cytonn Report: Residential Apartments Summary FY’2022/23
Area	Average of Occupancy FY’2022/23	Average of Annual Uptake FY’2022/23	Average of Rental Yield FY’2022/23	Average of Price Appreciation FY’2022/23	Average of Total Returns FY’2022/23	Average of Rental Yield FY’2021/22	Average of Price Appreciation FY’2021/22	Average of Total Returns FY’2021/22	Change in Rental Yield (% Points)	Change in Price Appreciation (% Points)	Change in Total Returns (% Points)
												Upper Mid-End
Westlands	83.1%	24.5%	5.9%	0.5%	6.4%	5.9%	0.1%	6.0%	0.0%	0.4%	0.4%
Kilimani	84.4%	21.1%	5.8%	0.2%	6.0%	5.5%	0.4%	5.9%	0.3%	(0.2%)	0.1%
Kileleshwa	85.0%	14.8%	5.5%	0.3%	5.8%	5.5%	0.4%	5.9%	0.0%	(0.1%)	(0.1%)
Loresho	88.0%	10.4%	4.7%	1.1%	5.8%	4.7%	1.2%	5.9%	0.0%	(0.1%)	(0.1%)
Upperhill	81.5%	10.6%	5.0%	0.7%	5.7%	5.1%	(1.1%)	4.0%	(0.1%)	1.8%	1.7%
Parklands	83.8%	13.6%	5.2%	0.4%	5.6%	4.8%	1.0%	5.8%	0.4%	(0.6%)	(0.2%)
Average	84.3%	15.8%	5.4%	0.5%	5.9%	5.3%	0.3%	5.6%	0.1%	0.2%	0.3%
Lower Mid-End Suburbs
Waiyaki Way	83.8%	21.2%	6.3%	1.1%	7.4%	6.2%	1.1%	7.3%	0.1%	0.0%	0.1%
South C	83.8%	17.0%	6.2%	0.9%	7.1%	6.1%	0.4%	6.5%	0.1%	0.5%	0.6%
Imara Daima	86.1%	11.7%	5.3%	1.5%	6.8%	5.2%	1.2%	6.4%	0.1%	0.3%	0.4%
Dagoretti	88.6%	14.9%	5.8%	0.8%	6.6%	5.9%	0.1%	6.0%	(0.1%)	0.7%	0.6%
Donholm & Komarock	92.1%	12.9%	5.7%	0.6%	6.3%	5.8%	0.1%	5.9%	(0.1%)	0.5%	0.4%
Kahawa West	89.0%	9.8%	5.0%	1.2%	6.2%	5.2%	0.6%	5.8%	(0.2%)	0.6%	0.4%
Race Course/Lenana	81.4%	19.1%	5.5%	0.4%	5.9%	5.9%	(0.1%)	5.8%	(0.4%)	0.5%	0.1%
Langata	82.0%	12.4%	4.4%	1.5%	5.9%	4.5%	(0.6%)	3.9%	(0.1%)	2.1%	2.0%
South B	85.9%	15.4%	4.4%	1.3%	5.7%	4.2%	0.2%	4.4%	0.2%	1.1%	1.3%
Average	85.9%	14.9%	5.4%	1.0%	6.4%	5.4%	0.4%	5.8%	0.0%	0.6%	0.6%
Lower Mid-End Satellite Towns
Ruaka	78.6%	22.3%	5.2%	2.3%	7.5%	5.2%	2.2%	7.4%	0.0%	0.1%	0.1%
Ruiru	87.0%	17.1%	5.8%	1.6%	7.4%	5.6%	1.4%	7.0%	0.2%	0.2%	0.4%
Ngong	83.1%	14.0%	5.5%	1.7%	7.2%	5.6%	1.6%	7.2%	(0.1%)	0.1%	0.0%
Kikuyu	82.8%	17.6%	5.0%	2.0%	7.0%	5.2%	2.1%	7.3%	(0.2%)	(0.1%)	(0.3%)
Athi River	86.8%	16.0%	5.6%	1.3%	6.9%	5.5%	1.2%	6.7%	0.1%	0.1%	0.2%
Syokimau	85.5%	12.0%	5.3%	1.4%	6.7%	5.0%	1.6%	6.6%	0.3%	(0.2%)	0.1%
Thindigua	90.0%	21.1%	5.4%	1.1%	6.5%	5.4%	2.2%	7.6%	0.0%	(1.1%)	(1.1%)
Rongai	89.2%	16.8%	6.0%	0.3%	6.3%	5.8%	(0.1%)	5.7%	0.2%	0.4%	0.6%
Kitengela	85.9%	10.3%	5.3%	0.7%	6.0%	4.9%	0.1%	5.0%	0.4%	0.6%	1.0%
Average	85.4%	16.4%	5.5%	1.4%	6.8%	5.4%	1.3%	6.7%	0.1%	0.1%	0.1%
Apartments Average	85.2%	15.7%	5.5%	1.0%	6.5%	5.3%	0.7%	6.0%	0.2%	0.3%	0.5%

Source: Cytonn Research

Section IV: Conclusion, Market Outlook and Investment Opportunity

We incorporated demand, infrastructure, purchasing power, access to credit, and performance, as the key metrics to gauge our sentiment for the sector going forward.

Key: Green – POSITIVE, Grey – NEUTRAL, Red – NEGATIVE

Cytonn Report: Residential Market Outlook
Metric	FY’2022/23 Experience and Outlook Going Forward	2022 Outlook	2023 Outlook
Demand	Kenya has relatively high urbanization and population growth rates averaging 3.7% and 1.9% compared to the global averages of 1.6% and 0.9%, respectively, according to the World Bank as of 2021. This will continue to provide sustained demand for more housing units in the country The Centre for Affordable Housing Finance Africa (CAHF) estimates that Kenya has an 80.0% annual housing deficit, as only about 50,000 new houses are delivered each year against a demand for 250,000 units per year hence the demand outstripping supply at an average of 200,000 houses supplied every year	Positive	Positive
Infrastructure	In 2023, the government is prioritizing the completion of previously stalled projects and avoiding initiation of new expensive projects amid the current regime’s promised spending cuts. Consequently, we expect the sourcing of funding for infrastructure projects in the country to further shift to alternative financing strategies such as; Public-Private Partnerships (PPPs), issuing of infrastructure bonds, joint ventures, and, grants and concessional loans from more foreign organizations, in order for the government to fast-track the infrastructural development that is critical in growing the Kenyan economy	Positive	Neutral
Purchasing Power	The reduced purchasing power among buyers amid the tough economic environment brought about by inflationary pressures on the back of a weakened shilling against the dollar is expected to further hamper the purchasing power of buyers. This is as prices of essential items continue to soar, thereby leading to slow uptakes of residential units consequently affecting the residential performance. However, we expect the growing middle class to pivot demand for residential units	Negative	Negative
Access to Credit	The provision of affordable mortgage loans through Kenya Mortgage Refinance Company (KMRC), is expected to gradually grow the local mortgage market and increase home ownership Currently, KMRC is the sole institution licensed to carry out Mortgage Liquidity Facility (MLF) activities in Kenya, which include provision of long-term funds to Primary Mortgage Lenders (PMLs) such as banks, microfinance institutions and SACCOs In 2022, KMRC refinanced 1,948 mortgage loans valued at Kshs 6.8 bn, which was a 278.0% increase from 574 home loans disbursed in 2021 valued at Kshs 1.3 bn. Despite the increase, the numbers remain low at 7.3% of the total number of mortgage loans which stood at 26,723 accounts valued at Kshs 245.1 bn as at 2021. The graph below shows the number of mortgage loan accounts in Kenya	Negative	Neutral
Performance	The residential sector recorded an improvement in investor returns to 6.2% in FY’2022/23, from 5.8% in FY’2021/22 owing to increased selling prices and rents which came in at Kshs 119,609 and Kshs 540, respectively, from Kshs 118,652 and Kshs 535, respectively, recorded in FY’2021/22 We expect investors to focus on lower satellite towns which offer relatively affordable land and relatively high total returns for detached houses, which came in at 6.0% in FY’2022/23, 0.2% points higher than the detached market average of 5.8%. Apartments in satellite towns recorded an average return of 6.9%, 0.7% points higher than the apartments market average of 6.2%	Neutral	Neutral

Given the positive outlook on demand, a negative outlook on purchasing power, and neutral outlook on infrastructure, access to credit, and performance, our general market outlook for the residential sector in 2023 is NEUTRAL. This is supported by the continued development of infrastructure serving to open up areas for development and easy access for residency. This is as demand for housing is expected to continue growing on the back of Kenya’s attractive demographic profile. Additionally, the ongoing focus by the government and private sector to provide housing will serve to improve the sector's performance and in turn curb the existing housing deficit in the country. However, we expect the prevailing inflationary pressure coupled with a weakened shilling, high construction costs, and the low penetration of mortgages in the country to continue impeding the performance of the sector. For detached units, investment opportunity lies in areas such as Ruiru, Juja, and Ngong, while for apartments, investment opportunity lies in Ruaka, Waiyaki Way, and Ruiru driven by the current performance in terms of returns to investors. For more information, see the full report.

Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication, which is in compliance with Section 2 of the Capital Markets Authority Act Cap 485A, is meant for general information only and is not a warranty, representation, advice or solicitation of any nature. Readers are advised in all circumstances to seek the advice of a registered investment advisor.