Jul 12, 2020

In June 2019, we published the Cytonn H1’2019 Market Review which highlighted the land sector’s performance in the Nairobi Metropolitan Area. According to the report, the land sector recorded a 0.5% y/y decline in asking prices, 4.3% points lower than the 3.8% growth rate in 2017/18, attributed to an overall slowdown in real estate investment during the year. Despite the rest of the zones recording a decline in asking prices, unserviced land in satellite towns such as Ruiru and Limuru registered a 3.9% annual capital appreciation on average during the year, attributed to the relatively high demand for land in these areas fueled by the affordable housing initiative which has been a key focus sector by both the government and private sector players.

This week, we update that report with 2019/2020 research data, highlighting the land sector’s performance in the Nairobi Metropolitan Area based on annual capital appreciation, identify market trends and the investment opportunity. In this topical, we shall cover:

1. Introduction to the land sector in the Nairobi Metropolitan Area,
2. Performance summary in 2020 based on zones and locations,
3. Summary and the investment opportunity in the sector, and
4. Conclusion and outlook for the sector.

 

1. Introduction to the land Sector in the Nairobi Metropolitan Area

The land sector within the Nairobi Metropolitan Area recorded several activities in 2019/2020 despite an overall slowdown in real estate development activities, attributed to a tough economic environment, and an existing oversupply of space within the commercial sector and the high end residential market. During the period under review, transactions in the land sector were driven by;

1. Increased focus on the affordable housing initiative by both the government and private sector developers. This has generated increased real estate activities especially in satellite towns where land is available in bulk and at affordable prices thus increasing demand for development class real estate,
2. Development of infrastructure which has opened up new areas for development leading to increased demand for development land,
3. Positive demographics with a relatively high population growth rate and urbanization rate of 2.5% and 4.3% respectively, against a global average of 1.2% and 2.0%, and a rising middle class with increasing purchasing power creating sustained demand for development land, and,
4. Reduced supply of development land at affordable prices in areas close to the Nairobi CBD resulting in demand for the same in satellite towns.

Despite the above drivers, the sector was constrained by;

1. Inadequate infrastructure leading to the growth of informal settlements such as slums, making land less preferred by investors especially in the urban areas in the wake of high urbanisation,
2. Inaccessibility to loans mainly due to low-income levels that cannot service the loans, the high interest rates and deposit requirements which lock out many borrowers. This has continued to cripple real estate development as it has resulted in low demand for property including land, and,
3. Reduced real estate development activities in the wake of the COVID-19 pandemic which has resulted in the disruption of construction materials supply chains and constrained development funding as investors adopt a wait and see attitude given the uncertainties in the market.

Some of the factors likely to shape the sector include;

1. Digitization of the Lands Ministry- In May 2020, the Ministry Of Lands and Physical Planning issued a notice to the public inviting them for public participation on the regulatory impact statement for the proposed Land Transactions (Electronic) Regulations 2020. If approved, the regulations will guide land processes in the country. We expect this to boost the real estate sector through faster land transactions thus reducing delays experienced by developers during the pre-construction period,
2. Government Land Repossession- In a bid to streamline the land sector in Kenya, the government is in the process of reclaiming all unclaimed and grabbed land in areas such as Kariobangi and Ngong , which is set to increase security in the fraud-ridden sector, and
3. Implementation of Land Management Reforms- Earlier this year, The National Land Commission (NLC) and the Institution of Surveyors of Kenya (ISK) agreed to form a joint team that will spearhead land reforms especially in the areas of research, land management, women land rights, compulsory land acquisition and compensation among others.

 

2. Performance Summary in 2019/20 Based on Zones and Locations

For our analysis, we classified the various nodes based on the zoning regulations and locations as below;

1. High Rise Residential Areas: These are areas characterized by high rise residential developments mainly apartments and include: Kileleshwa, Dagoretti, Githurai, Embakasi, and Kasarani,
2. Low Rise Residential Areas: These are areas zoned for low rise residential developments, mainly villas, townhouses and maisonettes and include; Kitisuru, Runda, Ridgeways, Karen and Spring Valley,
3. Commercial Zones: These are areas characterized by commercial office buildings in Kilimani, Westlands, Riverside and Upperhill,
4. Satellite Towns: Land in the area was categorized into serviced (site and service schemes) and unserviced land.

In 2019/2020, the land sector recorded an 8-year CAGR of 13.5% and an annual capital appreciation of 1.5%, compared to the (0.3%) recorded in 2018/2019, attributed to increased demand for land mainly in the low rise residential areas and satellite towns. Asking land prices in low rise residential areas recorded a 3.8% capital appreciation y/y, attributed to the availability of development land in these areas. Additionally, people are attracted to these areas as they are sparsely populated, thus offering exclusivity and privacy. Unserviced land in satellite towns such as Ruaka also recorded a capital appreciation of 3.8% y/y, attributable to the growing demand for land in these areas fueled by the demand for housing by the growing working population as the areas act as Nairobi’s dormitory, coupled by the improving infrastructure.

The summary of the performance is as shown below;

Source: Cytonn Research

All values in Kshs unless stated otherwise

SUMMARY OF THE LAND PERFORMANCE ACROSS ALL REGIONS
Location	*Price in 2011	*Price in 2015	*Price in 2016	*Price in 2017	*Price 2018/19	*Price 2019/20	8- Year CAGR	2018/19 Capital Appreciation	2019/20 Capital Appreciation	∆ in capital appreciation
Satellite Towns - Unserviced Land	9m	17m	22m	23m	24m	25m	15.8%	3.9%	3.8%	(0.1%)
Nairobi Suburbs - Low Rise Residential Areas	36m	68m	79m	82m	81m	84m	11.3%	(0.9%)	3.8%	4.8%
Satellite Towns - Site and Service Schemes	8m	15m	18m	15m	15m	15m	15.1%	(0.5%)	0.5%	1.0%
Nairobi Suburbs - High rise Residential Areas	52m	92m	111m	117m	117m	116m	11.0%	(1.6%)	0.0%	1.5%
Nairobi Suburbs - Commercial Areas	145m	359m	422m	433m	421m	419m	14.5%	(2.2%)	(0.7%)	1.5%
Average							13.5%	(0.3%)	1.5%	1.8%
*Asking land prices Land in the NMA  recorded an 8-year CAGR of 13.5% and  an overall annualized capital appreciation of 1.5%, compared to the 0.3% price correction recorded in 2018/2019, attributed to increased demand for land mainly in the low rise residential areas and satellite towns

Source: Cytonn Research

1. Satellite Towns-Unserviced Land

Asking land prices for unserviced land in satellite towns such as Ruiru, Limuru and Utawala, recorded a capital appreciation of 3.8% y/y, a marginal decline of 0.1% points from the 3.9% recorded in 2018/19. The relatively high capital appreciation is supported by the high demand for development land fuelled by; i) affordability in comparison to Nairobi’s suburbs, and ii) improving infrastructures such as sewerage systems and roads in areas such as Ruaka and Ruiru.

All values in Kshs unless stated otherwise

Land Price Performance- Unserviced Land in Satellite Towns in Nairobi Metropolitan Area 2019/20
Location	*Price in 2011	*Price in 2015	*Price in 2016	*Price in 2017	Price 2018/19*	*Price 2019/20	8- year CAGR	2018/19 Capital Appreciation	2019/20 Capital Appreciation	∆ in capital appreciation
Satellite Towns - Unserviced Land
Ruiru	7m	15m	19m	20m	21m	22m	16.5%	6.5%	6.2%	(0.3%)
Ruaka	40m	58m	74m	77m	80m	84m	9.8%	4.0%	5.2%	1.2%
Utawala	6m	9m	10m	11m	12m	12m	9.7%	5.6%	4.1%	(1.4%)
Athi River	2m	3m	4m	4m	4m	4m	10.1%	3.1%	3.4%	0.3%
Juja	3m	7m	9m	10m	10m	10m	15.3%	1.0%	3.4%	2.4%
Limuru	5m	13m	17m	20m	20m	21m	18.4%	4.5%	2.9%	(1.7%)
Ongata Rongai	2m	10m	18m	18m	18m	19m	31.2%	2.2%	1.6%	(0.7%)
Average	9m	17m	22m	23m	24m	25m	15.8%	3.9%	3.8%	(0.1%)
*Asking land prices Ruiru area recorded the highest annualized capital appreciation at 6.2%, attributed to the growing demand for land within the area as it acts as a key dormitory for Nairobi’s working population, supported by availability of amenities such as Spur Mall, industrial parks such as Tatu City and the incoming Northlands City, and improving infrastructure with plans in place for the construction of the Ruiru Sewerage Network. Key to note, Ruiru was named by Kiambu County as one of the towns in Kiambu to spearhead the county’s affordable housing rent-to-own scheme where 19,500 units are set to be put up by 2022, Asking land prices in Ongata Rongai recorded the lowest appreciation at 1.6%, attributed to the reduced demand as developers focus shift to towns such as Ruiru, Ruaka and Utawala which are undergoing increased real estate and infrastructural development.

Source: Cytonn Research

2. Nairobi Suburbs- Low Rise Residential Areas

Low-rise residential areas such as Karen and Runda recorded an average capital appreciation of 3.8% y/y, compared to the 0.9% y/y price correction recorded in 2018/19. The improved performance is attributed to a growing demand for development land supported by the resilience of the detached units residential market within the nodes evidenced by the 0.3% annual price appreciation in H1’2020, in addition to the relative affordability of land at approximately Kshs 84.2mn per acre as compared to the high-rise nodes, selling at Kshs 115.6 mn per acre on average. Additionally, family units are attracted to these areas as they are sparsely populated, thus offering exclusivity and privacy.

All values in Kshs unless stated otherwise

Land Price Performance- Low Rise Residential Areas in Nairobi Metropolitan Area 2019/20
Location	*Price in 2011		*Price in 2015	*Price in 2016		*Price in 2017	*Price 2018/19	*Price 2019/20	8- Year CAGR	2018/*19 Capital Appreciation	2019/20 Capital Appreciation	∆ in capital appreciation
Low Rise Residential Areas
Karen		25m	40m		46m	52m	53m	56m	10.7%	3.4%	5.6%	2.2%
Spring Valley		64m	131m		147m	154m	148m	156m	11.7%	(4.1%)	5.4%	9.5%
Runda		33m	58m		67m	68m	68m	70m	9.8%	0.2%	3.3%	3.1%
Kitisuru		32m	59m		70m	70m	71m	73m	10.8%	0.8%	3.0%	2.2%
Ridgeways		24m	51m		62m	68m	65m	66m	13.5%	(4.9%)	1.8%	6.7%
Average		36m	68m		79m	82m	81m	84m	11.3%	(0.9%)	3.8%	4.8%
*Asking land prices Karen was the best performing sub-market with a capital appreciation of 5.6%, attributed to relatively high demand for land in the area supported by the availability of good infrastructure, proximity to amenities and the relatively low asking land prices at Kshs 56.4 mn as compared to the market average of 84.2 mn per acre, Spring Valley recorded a 9.5% points increase  in capital appreciation, attributed to a growing demand for development land in the area boosted by the growth potential of the area, ease of accessibility and proximity to business nodes such as Westlands

Source: Cytonn Research

3. Satellite Towns- Site and Service Schemes

Site and service schemes recorded a 0.5% annualized capital appreciation, compared to the 0.5% y/y price correction in 2018/19. The capital appreciation is attributed to increased demand driven by the relatively affordable land at approximately Kshs 15 mn asking land price per acre and provision of infrastructure by the developers. Compared to unserviced land in the same areas, the asking price of serviced land recorded a slower appreciation due to decreased demand as buyers are not willing to pay a premium for the services provided, thus opt for unserviced land.

All values in Kshs unless stated otherwise

Land Price Performance- Serviced Land -Satellite Towns in Nairobi Metropolitan Area 2019/20
Location	*Price in 2011	*Price in 2015	*Price in 2016	*Price in 2017	*Price 2018/19	*Price 2019/20	8- Year CAGR	2018/19 Capital Appreciation	2019/20 Capital Appreciation	∆ in capital appreciation
Site and service schemes
Ruiru	8m	18m	19m	21m	23m	24m	17.5%	8.1%	5.8%	(2.2%)
Athi River	2m	11m	13m	13m	12m	12m	25.6%	(7.3%)	3.5%	10.8%
Ruai	8m	12m	13m	15m	14m	14m	7.4%	(9.4%)	1.0%	10.4%
Thika	5m	7m	8m	10m	10m	10m	9.0%	1.7%	0.5%	(1.2%)
Syokimau-Mlolongo	3m	12m	12m	12m	12m	12m	18.0%	3.5%	(3.8%)	(7.3%)
Ongata Rongai	7m	16m	19m	19m	19m	18m	12.9%	0.4%	(3.8%)	(4.3%)
Average	8m	15m	18m	15m	15m	15m	15.1%	(0.5%)	0.5%	(2.2%)
*Asking land prices Ruiru recorded the highest appreciation rate at 5.8% attributable to the increased demand for land in the area from developers looking to cater for the mid-income and student population housing as a result of the push for individuals to move to satellite towns where housing is relatively affordable, in addition to the mushrooming tertiary institutions Ongata Rongai and Syokimau recorded a 3.8% price correction each attributable to decreased demand of development land due to unavailability of trunk infrastructure thus making it less appealing to developers Asking land prices in Athi River recorded a 10.8% points growth in the capital appreciation, attributed to growing demand for land fuelled by the relatively affordable land prices at Kshs 12mn per acre compared to the node’s average of Kshs 15 mn per acre, a growing focus by developers looking to venture into affordable housing as the area has an expanding industrial and manufacturing base driving demand for housing, and the  opening up of the area following its administrative role as the headquarter of Mavoko Division in Machakos County.

4. Nairobi Suburbs- High Rise Residential Areas

Asking land prices in high-rise residential areas stagnated, compared to a 1.6% price correction in 2018/19. The stagnation in asking land prices is attributed to reduced demand for development land given the reduced development activities due to the relatively high land prices averaging at approximately Kshs 116 mn per acre, compared to low rise residential areas and unserviced land in satellite towns averaging at Kshs 84 mn and Kshs 25 mn, respectively, in the wake of an economic slowdown in addition to the existing oversupply of residential units in the high-end market segment.

All values in Kshs unless stated otherwise

Land Price Performance- High Rise Residential Areas in Nairobi Metropolitan Area 2019/20
Location	*Price in 2011	*Price in 2015	*Price in 2016	*Price in 2017	*Price 2018/19	*Price 2019/20	8- Year CAGR	2018/19 Capital Appreciation	2019/20 Capital Appreciation	∆ in capital appreciation
High Rise Residential Areas
Kasarani	32m	51m	60m	64m	61m	65m	9.2%	(3.6%)	5.7%	9.3%
Dagoretti	28m	81m	95m	99m	100m	103m	17.8%	1.5%	2.5%	1.0%
Githurai	21m	37m	45m	46m	45m	44m	10.2%	(0.9%)	(1.4%)	(0.5%)
Kileleshwa	149m	227m	286m	306m	311m	303m	9.3%	1.8%	(2.6%)	(4.4%)
Embakasi	33m	61m	69m	70m	66m	63m	8.5%	(6.7%)	(4.4%)	2.3%
Average	52m	92m	111m	117m	117m	116m	11.0%	(1.6%)	0.0%	1.6%
*Asking land prices Kasarani recorded an annualized capital appreciation at 5.7%, attributed to increased demand for land fuelled by affordability with the asking land prices averaging at Kshs 64.8 mn compared to the node’s average of Kshs 115.6 mn, in addition to developers looking to cater for the expanding middle-income population Embakasi recorded a correction of 4.4%, attributable to reduced demand for land given the  high densification of the area making it unattractive to investors

Source: Cytonn Research

5. Nairobi Suburbs- Commercial Zones

Commercial zones recorded a 0.7% y/y correction in asking land prices, 1.5% points lower than the 2.2% correction recorded in 2018/19. We attribute this to the decreased demand for development land in the sub-markets given the relatively high asking land prices of Kshs 419 mn per acre on average thus developers are not able to achieve favorable returns from the investments, in addition to the existing oversupply of commercial office and retail spaces which stand at 5.2 mn SQFT and 2.8 mn SQFT, respectively, as at 2019.

All values in Kshs unless stated otherwise

Land Price Performance- Commercial Zones in Nairobi Metropolitan Area 2019/20
Location	*Price in 2011	*Price in 2015	*Price in 2016	*Price in 2017	*Price 2018/19	*Price 2019/20	8- Year CAGR	2018/*19 Capital Appreciation	2019/20 Capital Appreciation	∆ in capital appreciation
Commercial Zones
Upper Hill	200m	450m	512m	510m	488m	506m	12.3%	(4.4%)	3.8%	8.1%
Kilimani	114m	294m	360m	387m	403m	398m	16.9%	4.1%	(1.2%)	(5.3%)
Westlands	150m	350m	453m	474m	430m	421m	13.8%	(9.3%)	(1.9%)	7.4%
Riverside	116m	343m	362m	361m	363m	351m	14.8%	0.7%	(3.3%)	(4.0%)
Average	145m	359m	422m	433m	421m	419m	14.5%	(2.2%)	(0.7%)	1.5%
*Asking land price *Key to note the Nairobi CBD was exempted from the list of submarkets within the commercial zones, due to unavailability of undeveloped land for sale  Despite the overall correction in asking land prices within the commercial zones, Upperhill recorded a 3.8% annualized capital appreciation with an average asking land price of Kshs 506 mn per acre, attributed the continued demand for land in the wake of improving infrastructure such as the ongoing Upperhill-Mbagathi way link road aimed at easing traffic congestion into the area. In addition, the area is witnessing a growing demand by developers looking to venture into differentiated concepts such as serviced apartments and offices, which thrive in the area given that it hosts expatriates, coupled by the ease of accessibility and proximity to facilities such as the Jomo Kenyatta International Airport Riverside recorded a price correction of 3.3% attributed to reduced demand for development land due to the  reduced development activities on the commercial space front.

Source: Cytonn Research

 

3. Summary and Investment Opportunity in the Sector

Ruiru, Kasarani, Karen, Spring Valley and Ruaka are among the best performing submarkets in terms of capital appreciation, recording annual rates of more than 5.0% in 2019/20, while Ruiru offers site and service investors the highest expected returns averaging 5.8%.

The table below summarizes the performance of the various areas:

Summary and Conclusions- y/y Capital Appreciation Nairobi Metropolitan Area
Land Appreciation
2019-2020	Areas
>5.0%	Ruiru, Kasarani, Karen, Spring Valley, Ruaka
1.0%- 4.9%	Dagoretti, Runda, Kitisuru, Ridgeways, Utawala, Athi River, Juja, Limuru, Ongata Rongai, Upper Hill
<1.0%	Githurai, Embakasi, Kileleshwa, Kilimani, Westlands, Riverside
Site and Service Capital Appreciation
2019-2020	Areas
>5.0%	Ruiru
1.0%- 4.9%	Athi River, Ruai
<1.0%	Thika, Syokimau- Mlolongo, Ongata Rongai

Source: Cytonn Research

Investment Opportunity

Given the above performance of the various areas, the investment opportunity in the land sector lies in sub-markets such as Karen, Spring Valley and Kasarani which recorded relatively high annualized capital appreciation of 5.6%, 5.4% and 5.7%, respectively, and satellite towns such as Ruiru and Ruaka for unserviced land, and Ruiru for site and service schemes which were the best performing sub-markets with average annualized capital appreciation of 6.2%, 5.2%, and 5.8%, respectively, supported by a growing demand for development land by the growing middle class and improving infrastructure.

 

4. Conclusion and Outlook for the Sector

Indicator	2019 Projections	2020 Projections	2019 Outlook	2020 Outlook
Infrastructure Development	It was expected that the continued infrastructural development supported by the 2018/2019 national budget allocation of Kshs 418.8 bn, would open up areas for development and translate to an increase in land value.	Despite the reduced allocation on development expenditure, we expect continued commitment by the government to its infrastructure developmental agenda, thus opening up areas for development thus boosting land value. For the 2020/2021 budget, the infrastructure sector budget allocation stands at Kshs 172.4 bn 58.8% lower than the previous allocation and we expect this to slowdown infrastructural development works.	Positive	Neutral
Legal Reforms	The digitization of the land ministry was expected to enhance transparency and efficiency of land transactions hence reduced transaction cost	We expect reforms such as the recent amendment of the Business Laws Act  to allow for online assessment, payment, and franking of stamp duty; allowance for the use of electronic signatures in the execution of land documents such as title deeds,  lease agreements, land rates clearance and transfer, and the general digitalization of the lands ministry will enhance the ease of doing business within the land sector	Positive	Positive
Credit Supply	It was expected that the low credit supply given the interest rate cap would continue hindering access to funds reducing both development and off take of real estate.	We expect constrained credit supply to cripple real estate development activities, as financiers such as banks aim to limit exposure amidst increasing loan deferrals and defaults, in the wake of an economic slowdown attributed to the ongoing COVID-19 pandemic.	Negative	Negative
Real Estate Activities	We expected decreased real estate development activities attributed to the existing space supply in the commercial office and retail sectors and the unmatched demand and supply in the residential sector. However, we expected continued focus on the affordable housing initiative by both the government and private developers.	We expect the real estate sector to record a slowdown in development activities attributed to the current global and local economy slowdown and the existing oversupply of space in select sectors namely commercial office, retail and high-end residential markets. However, we expect the sector to improve significantly towards the end of 2020 once economic activity regains momentum.	Neutral	Neutral
Performance	We expected the growth of asking land prices to be  fuelled by the demand for development land, improving infrastructure and demographics despite the reduced real estate activities in the NMA	Despite the current slowdown in real estate development activities, we expect the performance of the land sector to be cushioned by; (i) the growing demand for development land, especially in the satellite towns as developers, strive to drive the government’s Big Four government agenda on the provision of affordable housing, (ii) improving infrastructure such as the ongoing construction of the Western bypass,  and (iii) increased demand for development land by the growing middle income population.	Neutral	Neutral

With 1 positive, 1 negative, and 3 neutral factors from our analysis, we have a neutral outlook for the land sector, with a bias to positive supported by the high demand for development land boosted by affordability in satellite towns, availability of development land and the improving infrastructure. However, we expect the COVID-19 pandemic to continue impacting on real estate development activities thus a resultant sluggish growth in land value going forward.

 

Disclaimer: The views expressed in this publication are those of the writers where particulars are not warranted. This publication 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.