Jun 11, 2017

Over the course of last year, we covered real estate performance across the various themes, including commercial office, residential, retail and hospitality. We saw that these sectors have over the last 5-years delivered high returns of over 25.0% p.a, driven by continued improvement of the Kenyan economic climate, improved infrastructure and the growth of the middle-class, leading to increased disposable income.  This week we turn our focus to land, the capital asset on which real estate is developed.

We carried out research on the land sector performance in Nairobi Metropolitan Area over the last 5-years, between 2011 and 2016. The research was carried out in 18 suburbs and 11 satellite towns in the Nairobi Metropolitan Area as classified below. The findings and analysis are presented in the analysis below. We start by an introduction to the sector, the factors driving the performance, the performance of the sector according to zones and locations, and concluding by identifying the investment opportunity in the sector in terms of areas with the potential future highest capital appreciation.

The land sector performance over the years has been driven by (i) high population growth, which is at 2.6%, (ii) urbanization rate at 4.4%, compared to a global average of 2.1%, (iii) improved infrastructure through the development of roads and rail links, (iv) limited development land, (v) GDP growth rate of consistently above 5.0%, and (vi) legal reforms in the Land Ministry.

The performance of the land sector is as summarized below:

Based on the zoning regulations and location, we classified the sub markets as follows, and analyzed their price change over the last 5-years between 2011 and 2016:

1. Commercial Zones: These are areas characterized with commercial buildings such as Nairobi CBD, Kilimani, Westlands, Upper Hill and Riverside;
2. High Rise Residential Areas: These are the areas characterized with high rise residential developments mainly apartments such as Kileleshwa, Kilimani, Dagoretti, Ridgeways, Githurai, Embakasi, Kasarani and Kahawa;
3. Low Rise Residential Areas: These are areas zoned for low rise residential developments, mainly villas, townhouses and Maisonettes. The areas considered under this category are Spring Valley, Kitisuru, Runda, Nyari, Karen and Old Muthaiga; and;
4. Satellite Towns: The land in this area was categorized into serviced (Site and Service Schemes) and unserviced land.

Land prices indicated a positive growth rate across all areas in the Nairobi Metropolitan Area, with an average 5-year Compounded Annual Growth Rate “CAGR” of 19.4%, which equates to an absolute price increase of 2.5x over the same period. Commercial zones recorded the highest 5-years growth, with a CAGR of 24.3%, followed by site and service schemes at a 5-year CAGR of 20.4%, while low rise residential areas recorded the lowest 5-year CAGR at 14.6%. This price change is attributable to the value add and the convenience attributed to the amenities provided in site and service schemes, while the commercial zones are attracting investors due to relaxed zoning regulations allowing for densification hence maximizing on the land usage compared to low rise residential areas.

From our survey and analysis on the land performance, we have the following takeaways based on capital appreciation by various classifications:

1. Commercial zones and site and service schemes have the highest 5-year CAGR of 24.3% and 20.4%, respectively, as shown below:

Source: Cytonn Research

2. Ongata Rongai and Athi River recorded the highest 5-year CAGR above 30.0% due to the speculative environment experienced in the area between 2011 and 2016.

Source: Cytonn Research

3. Areas likely to experience a CAGR above 25% in the next 5-years are Ruiru, Kikuyu, Kabete and Dagoretti among others due to planned infrastructure developments, as shown below;

Source: Cytonn Research

From our analysis, we expect increased investments and developments in satellite towns as investors and developers tap to earn the good returns of up to 20.4% CAGR.

Source: Cytonn Research

In conclusion, land prices indicated a positive growth rate across all areas in the metropolitan, with an average 5-year CAGR of 19.4%, with commercial zones outperforming other areas. This growth is mainly due to improved infrastructure, relaxed zoning regulations and legal reforms in the land ministry. The opportunity is still largely in Nairobi satellite towns, which are experiencing heavy investment in infrastructure. However, there is likely to be a slowdown in transaction volumes being witnessed in the 3rd quarter of 2017, just at the run up to the election date, but with relatively stable pricing. Nairobi Metropolitan Area Land Report 2017. 

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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.