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. Most of these zones have been zones for low rise residential developments only and are characterized by palatial villas and bungalows on half acre parcels
• Upper Middle Income Segment – Consists of suburbs 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. They are zones for both high rise and low density houses.
• Lower Middle Income Segment – Consists of suburbs in Nairobi habited by middle class such as Donholm, Komarock and Imara Daima as well as Satellite Towns such as Ngong, Rongai and Juja

The submarket analysis is as presented below, in the zones above, we analysed detached units and apartments separately:

1. Detached Units - High End Segment

This consists of zones such as Karen, Runda and Kitisuru. Houses are mainly on half acre land parcels. The zone has the highest average price per square meter at Kshs 194,000 and recorded average rental yields of 4.9%. On average prices increased by 2.6% in this zone in 2017 with Lower Kabete recording the highest increase in price of 5.1%.

 Source: Cytonn Research

2. Detached Units - Upper Middle Segment

These zones consist of areas such as Langata, Runda Mumwe, Redhill and Loresho. Zoning regulations in these areas allow for development of both apartments and single dwelling units. The areas recorded on average a rental yield of 5.0% in 2017 and an average increase in prices of 6.1%, Langata had the highest price increment in the zone of 13.4% attributable to ease of access to the area due to its proximity to the CBD and other business nodes such as Upperhill.

Source: Cytonn Research

3. Detached - Lower Middle Segment

This zone consists mainly of Satellite Towns and Nairobi suburbs such as Donholm and Komarock. The area has an average price per square meter of 77,000 and the highest annualized sales rate in Nairobi Metropolitan Area of 28.4%. On average prices increased in these zones by 3.9%, with Juja having the highest increment of 11.0% attributable to high demand from middle classes as a result of lower prices, the area has a price per square meter of 71,000 against a market average of 77,000.

Source: Cytonn Research

4. Apartments - Upper Middle Segment

This zone consists of areas such as Ridgeways, Kilimani, Westlands and Parklands. They have an average price per square metre of Kshs 128,000 and in 2017, the zone recorded the highest yield in Nairobi Metropolitan Area of 6.2% against a market average of 5.5%. In the Zone, Ridgeways had the highest price increment of 12.2% attributed to high demand in the zone evidenced by the high average uptake of 32.9% recorded. 

Source: Cytonn Research

5. Apartments Lower Middle Income Satellite Towns

Apartments in the lower middle segment recorded an average rental yield of 5.7% with an average price increment of 3.5%. Like in the detached houses for the same Zone, Langata had the highest increase in price of 13.9% attributed to proximity to the CBD and other business nodes such as Upperhill.

Source: Cytonn Research

Nairobi’s Satellite Towns recorded an average rental yield of 6.3% with an average price increment of 3.2%. Thindigua had the highest price increment of 13.0% as a result of high by demand for houses in the area.  This is as it neighbours prime areas such as Runda and Ridgeways and is easily accessible from the Central Business District compared to other satellite towns.

Source: Cytonn Research

Investment Opportunity

Whereas the overall market performance has declined, there exists an opportunity in some sub-markets. Thus to identify the investment opportunity in the sector and single out the specific suburbs with the highest returns, we ranked the submarkets based on

• Weighted annual uptake – Refers to how fast developments sell on average per annum, the higher/ faster the sales rate, the higher the points allotted
• Average returns – This is the sum of the rental yield and price appreciation for each suburb. The higher the return the more points allotted
• Price to land multiple – This the number of times the price of a residential unit in a suburb sells above the price of land on which the unit sits, the higher the multiple the more points allotted
• Availability of development land – Areas with higher supply of development land have higher ranking and hence more points
• State of infrastructure – Ranked as poor, average or good, with poor referring to areas that are accessed by earth roads and are not sewered, average referring to areas that are accessed by tarmac but are not sewered and good referring to areas that are both tarmacked and sewered
• Distance from main business nodes- Areas closer to main business nodes such as the Nairobi Central Business District (CBD) have higher ranking due to the ease in commuting for majority of the working adult population

Based on the above metrics, we allotted points to the areas on a scale of 1 to 3 as shown below with 1 being low and 3 being high;

Based on the criteria above, for detached units, Juja and Runda Mumwe were the highest ranking due to high uptake, returns and the availability of development land.               

For apartments, Ridgeways and Kilimani were the highest ranked areas due to high uptake, returns and proximity to main business nodes.

Conclusion

In conclusion, the residential sector performance in 2017 has been constrained by negative political sentiments as investors’ preferred short term investments compared to long term investments such as real estate. In our view, however, the market is likely to recover given the opportunity in the residential segment with returns of up to 20% in the last 5-years. There still exists a huge opportunity in housing given the largest deficit in the market. The returns have remained attractive in some sub-markets and thus investors ought to carry out research to identify specific market niches.

For more on the residential sector market performance, see the full report here.