Aug 30, 2015

 Kenya has grown through the years to become East and Central Africa’s business and financial centre. Houses for sale in upcoming areas of Nairobi and its metropolis, where growth is centred, are highly sought after. The diverse population lends itself to providing a truly cosmopolitan city serving as the regional headquarters for some of the world’s largest corporations such as General Electric, Hewlett-Packard, Google, & Coca-Cola.

Growth in the economy has had a profound positive effect on the middle class, who have benefitted greatly on the back of improved economic conditions, which has resulted in increased demand of residential housing outpacing market supply. Kenya’s residential property market in middle income category has seen a price surge resulting in the market outperforming most other asset classes in Kenya over the last 10 years.

As can be seen below, the real estate sector has outperformed public markets investments in fixed income and equities, while our development in Ruaka, “The Alma”, is delivering above market returns of 28% and 41% for completed units and developer equity, respectively.

As highlighted in our Cytonn report #33 last week, there is a huge opportunity in providing housing for the low to middle income bracket in Kenya, especially along the bypasses, which have opened up development opportunities.

Development opportunity in satellite towns is driven by:

1. Relative affordability of land in satellite towns,
2. Huge demand from the middle class, who in our view is anyone who has Kshs 100,000 per month in disposable income,
3. The current market inability to cater for the housing shortage, and even existing housing does not provide adequate amenities such as back up power, reliable water, sewer and drainage, security and comprehensive lifestyle amenities such as clubhouse and gym,
4. Major infrastructure developments that have opened up the satellite towns for development.

The chart below shows the appreciation of land prices in satellite towns across Nairobi and its metropolis:

Nairobi Satellite Towns*	Change from 2007	Average Annual Return	Price per Acre (Kshs)
Athi River	864%	31%	11,100,000
Juja	783%	29%	6,800,000
Limuru	755%	29%	14,300,000
Tigoni	708%	28%	17,600,000
Thika	700%	28%	14,300,000
Ongata Rongai	658%	27%	15,500,000
Ruiru	625%	26%	14,700,000
Kiambu	587%	25%	33,700,000
Mlolongo	585%	25%	28,200,000
Ngong	560%	24%	17,200,000
Syokimau	554%	24%	16,900,000
Kiserian	547%	24%	5,420,000
Ruaka	509%	23%	56,600,000
Kitengela	505%	22%	7,700,000

*Satellite market data sourced from HassConsult report.

We have picked Ruaka as one of our key areas of focus for developments because it is one of the few areas in the Nairobi metropolis that provides a secure, accessible, and convenient location with significant potential for attractive financial returns. Ruaka is situated 20 minutes drive away from the Westlands district, and a few minutes from Gigiri, which is where the UN headquarters are located. Essentially, it offers an opportunity to not only own and enjoy a home, but also a location that provides an attractive real estate investment opportunity, driven by 6 main factors:

1. Nairobi northern bypass: Ruaka has a good transport network system connecting it to the Nairobi City Center via Limuru Road, and Thika using the northern bypass route, thereby attracting businesses and property developments;
2. Prospective infrastructure improvements: The road from Ruaka towards Limuru is expected to be expanded into a dual carriage and the largest vacant land around Ruaka belonging to the Aga Khan foundation is expected to be home to an education centre;
3. Hotels, malls and recreational facilities: Large commercial mixed-use developments such as Two Rivers, Riviera mall and the Village Market surround Ruaka. This is in addition to hotels such as Tribe at the Village Market. The large retail and commercial footprint creates an opportunity for employment, thus favouring property development to house this increase in personnel;
4. Security: Due to county measures on security and a general increase in security personnel in the country, Ruaka has seen an improvement in security;
5. International Organisations: United Nation Environmental Program in Gigiri (8 Minutes from Ruaka) attracts foreign visitors who improve the appeal of the area further adding to the areas value;
6. Zoning: The on-going relaxation of zoning restrictions allowing for more comprehensive and higher density development, which increases real estate values.

The above unique factors have seen land prices in Ruaka increase 5 times over the last 7 years, and Ruaka is now the most expensive satellite town in Kenya to purchase land. The skyline of Ruaka, once a small rural centre better known for its security challenges, has changed more rapidly than adjacent satellite towns in the last five years, which has led to the increase in land prices. The appreciation of land prices in satellite towns could be attributed to increased development potential due to factors such as:

1. Investment class development land is scarce in this market, especially within a radius of 2km from the Ruaka town Centre, with possibilities of getting an intact one acre parcel of land for development is near to nil;
2. Infrastructural developments such as the northern bypass, which have opened up the area for development;
3. Upcoming major retail and commercial developments within the area.

However, despite the attractiveness of Ruaka, it faces two key challenges:

1. Rapid development to cater for the growing middle class has outpaced the provision of infrastructure. As a result, most residential developments in the area do not have reliable water, sewer and power;
2. Lack of adequate lifestyle facilities in real estate developments. The population in Ruaka is very diverse, ranging from foreigners to both wealthy and middle class locals, both of whom desire for lifestyle facilities where they stay e.g. clubhouse’s & gyms:
3. Unplanned haphazard developments that have outpaced urban planning

When taking into account the development potential in the area i.e. (i) relaxed zoning, (ii) access to amenities, (iii) proximity to international organisations, and (iv) improved security, as well as the challenges of infrastructure and lifestyle, the most appropriate residential concept is a high-density mixed-use residential development, with a commercial centre and lifestyle facility in the development. This would be combined with market leading facilities management to offer services to those who wish to purchase units for investment, as well as to cater for those investors in the diaspora who cannot actively manage their development units.

Residential communities are comprehensive developments, which encompass a comprehensive clubhouse, restaurant and light retail and commercial conveniences.

Having chosen Ruaka as one of the locations where Cytonn Real Estate will focus on, we undertook market research to quantify the return potential for residential community developments in the area.

1. Market Research on Residential Communities:

 We carried out market research, targeting at finding four key assumptions for residential community developments in Ruaka:

1. Plinth area: Research on the size of the units in the market allows us to gauge the current offering, and to be sensitive to home buyers preferences for sizes of houses
2. Sale price: This allows us to position our real estate development in the market so as to attract our target market, and gauge the return potential from the sales of “The Alma”
3. Rental income: This allows us to inform prospective investors of the rental yield opportunity available when purchasing an apartment in “The Alma”, as well as inform prospective tenants of the current market rental rates
4. Construction cost: Research on construction costs allows us to be more efficient and accurate on the return potential we are speaking to our investors about. The higher the cost of construction, the lower the return to the investor

Summary of research findings:

all values in Kshs unless stated
Project Name	Location	Year of Commencement	No. of Bedrooms	No. of Units	% Sales Achieved	Current Selling Price	Size per unit (SQM)	Price/SQM
Lyne Apartments	Off Limuru Road	2014	2	10	40%	7,500,000	71	105,634
Mulberry	Along Limuru Road	2012	2	18	72%	7,500,000	90	83,333
Runda View	Off Limuru Road	2010	2	50	78%	7,500,000	86	87,209
Ruaka Ridge	Off Limuru Road	2015	2	50	80%	7,000,000	92	76,087
Pearl Court	Off Limuru Road	2014	2	20	100%	8,500,000	108	78,704
2-Bedroom Mean				30	74%	7,600,000	89	86,193
Pearl Court	Off Limuru Road	2013	3	14	36%	9,900,000	131	75,573
Pearl Court	Off Limuru Road	2014	3	30	47%	9,300,000	123	75,610
Haven Park	Along Limuru Road	2012	3	103	58%	10,000,000	115	86,957
Runda View	Off Limuru Road	2010	3	40	82%	8,500,000	104	81,731
Mulberry	Along Limuru Road	2012	3	18	100%	9,000,000	110	81,818
3-Bedroom Mean				41	65%	9,340,000	117	80,338
OVERALL MEAN				35	69%	8,470,000	103	83,265

 

1. Plinth Area:
   1. Research indicates that the mean plinth area for 2-bedroom apartments is 89 square metres. It is also worthy to note that there are many developments which have 2-bedroom apartments of 90 to 100 square metres, offering a high-end development feel and providing a sense of openness in the houses. For Ruaka, we recommend developments in the range of 80 to 90 square metres for 2-bedroom apartments
   2. Research indicates that the mean plinth area for 3-bedroom apartments is 117 square metres. It is also of note that there are no developments that have less than 100 square metres. For Ruaka, we recommend developments in the range of 110 to 120 square metres for 3-bedroom apartments
2. Sale Price:
   1. Our research indicates that 2-bedroom units in Ruaka have sold for an average of Kshs 86,000 per square metre, while achieving sales of 74% during construction. The price of a unit ranges between Kshs 7.0 mn to Kshs 8.5 mn, with the average price at Kshs 7.6 million. For Ruaka, we recommend 2-bedroom unit sales prices in the range of 85,000 to 90,000 per square meter
   2. As per research, 3-bedroom units in Ruaka have sold for an average of Kshs 80,000 per square metre, while achieving sales of 65% during construction. The price of a unit ranges between Kshs 8.5 mn to Kshs 10.0 mn, with the average price at Kshs 9.3 million. For Ruaka, we recommend 3-bedroom unit sales prices in the range of 80,000 to 85,000 per square meter
3. Rental Income:
   Our research showed us that 2-bedroom units in Ruaka have average rental rates of Kshs 30,000 per month, while 3-bedroom units have a rental rate of 40,000 per month, exclusive of service charge. Another interesting aspect is that the rental rate is not very dependent on the size of the units; rather we see the location of Ruaka sells itself as a prime location for rental accommodation due to the conveniences and amenities that are in the area 

all values in Kshs unless stated
Project Name	Location	Year of Commencement	No. of Bedrooms	Size per Unit (SQM)	Rental per Month	Rental per SQM
Lyne Apartments	Off Limuru Road	2014	2	71	30,000	423
Mulberry	Along Limuru Road	2012	2	90	30,000	333
Runda View	Off Limuru Road	2010	2	86	30,000	349
2-Bedroom Mean				82	30,000	368
Haven Park	Along Limuru Road	2012	3	115	40,000	348
Runda View	Off Limuru Road	2010	3	104	45,000	433
Mulberry	Along Limuru Road	2012	3	110	35,000	318
3-Bedroom Mean				110	40,000	366
OVERALL MEAN				96	35,000	367

4. Land and constructions costs:

Based on our consultations with quantity surveyors, a well-finished unit in Ruaka should cost between Kshs 35,000 to Kshs 40,000 per square metre in constructions costs, giving a mid point of Kshs 37,500 per square metre. Given the average plinth area of about 103 square metres, then the average construction cost per unit, excluding land, is about Kshs 3,860,000, using a mid range Kshs 37,500 per SQM of construction costs multiplied by 103 SQM.

It is important to note that our research analysts did not come across any 1-bedroom development in Ruaka, however 1-bedroom apartments are present in Cytonn Real Estate’s development, “The Alma”. Research and sentiment in the Ruaka market showed there was appetite for 1 bedroom housing for (i) professionals who have just begun working and are looking for rental accommodation, and (ii) diaspora investors who wish to invest in real estate in the region.

2. Analysing the investment opportunity:

Rental Yield: Given a monthly rent of about Kshs 35,000 per month, that works out to be Kshs 420,000 per year. Given that house prices are about Kshs 8,470,000, it means that the gross rental yield for Ruaka should be about 5% p.a., consistent with residential property yield expectations.

Total Return: Rental Yield + Projected Capital Appreciation. Over the last 7 years, the annualized total capital appreciation has been 23% per annum. Given (i) the on-going infrastructure developments, (ii) upcoming retail and commercial facilities, (iii) close proximity to the bypass, and (iv) zoning changes going on in Ruaka, the next 5 years should show equal capital appreciation, so we estimate projected capital appreciation of at least 23% p.a.

The aforementioned rental yield of 5% p.a., combined with a 23% projected appreciation brings a total return of 28% per annum for completed units over the next 5 years.

Development Return: Developer return on investment, including financing costs, for those willing to invest equity into the Ruaka development gives a 41% IRR, which works out to an annualized return of 15% above the completed units return of 28%, which is very attractive for investors given that listed markets returns over the last 5 years have been about 13% per annum.

Cytonn’s upcoming development in Ruaka, “The Alma”, is a comprehensive residential development. The development encompasses 284 residential units, with 1, 2 and 3 bedroom options set across a 3-acre parcel of land. It will also encompass (i) a commercial facility to provide basic necessities to the residents, (ii) a lifestyle clubhouse for residents, (iii) high levels of security, (iv) a borehole and sewer treatment facility, and (iv) round the clock security. The development will be located on the main Limuru road, 100 meters from the junction of the northern bypass, and a 5-minute commute from retail and commercial facilities such as Two Rivers mall, Village Market, and the Rosslyn mall development. To ensure that the quality of the development is maintained, Cytonn Real Estate shall undertake the facilities management of the development during the development, and after completion.

In conclusion, a 5% p.a. rental cash yield, a 28% p.a. total return, and 41% annualized development return makes Ruaka one of the most attractive real estate investment locations in Kenya.

For more information, and an early bird discount on the units, please fill in a reservation form at reservation form. To attend the launch of Ruaka scheduled for October 5^th at the Kempinski hotel, Nairobi, please email sales@cytonn.com.