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Kenya's real estate growth to stall in 2021 – survey

Commercial offices and listed real estate sectors set for negative performance.

In Summary

•Poor performance attributed to sluggish economy in the wake of the Covid-19 pandemic which has resulted in reduced disposable income.

•Land sub-sector however expected to record positive growth fueled by the growing demand for development land especially in satellite towns.

Cytonn Investment’s Amara Ridge in Karen /ENOS TECHE
Cytonn Investment’s Amara Ridge in Karen /ENOS TECHE

The country's real estate sector is projected to remain neutral this year with commercial offices and listed real estate sectors expected to record negative performance.

In a 2021 Real Estate Market Outlook released yesterday, Cytonn Real Estate, the development affiliate of Cytonn Investments, attributes the projected sluggish performance to a tough economic environment in the wake of the Covid-19 pandemic, which has resulted in reduced disposable income.

This has led to dwindling transaction volumes and scaling down of operations by some business affecting uptake of office and retail spaces.

“We expect the land sector to record positive performance during the year, the commercial office and listed real estate sectors to record negative performance, while the residential, retail, hospitality and infrastructure sectors remain neutral,” stated Beatrice Mwangi, a research analyst at Cytonn.

The positive outlook in the land sub-sector is expected to fueled by the growing demand for development land especially in satellite towns, improving infrastructure with implementation of select projects such as the expansion of Waiyaki Way and ongoing Nairobi expressway, and positive demographics.

“In 2021, we expect an annual capital appreciation of 1.7 per cent,” Cytonn notes.

Last year, the land sub-sector in the Nairobi Metropolitan Area remained resilient despite the tough economic environment, evidenced by a 2.3 per cent annual capital appreciation and 10.7 per cent nine-year CAGR( Compound annual growth rate), indicating that investors still consider land a good investment asset in the long term.

CAGR is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year of the investment's lifespan.

For 2021, the investment opportunity within the Nairobi Metropolitan Area land sector lies in satellite towns such as Limuru, Thika and Athi River; and suburbs such as Ridgeways and Kasarani supported by the relatively high annual capital appreciation of above 8.0 per cent.

Average rental yield in the Commercial Office Sector is however expected to decline to 6.8 per cent from 7.0 per cent in 2020, attributable to the oversupply, with the average occupancy rates expected to decline by 2.7 percentage points from 77.7 per cent to 75.0 per cent.

The subdued performance comes with reduced demand in the office spaces as businesses scale down due to financial constrains while others adopt the working from home strategy.

There are however investment opportunities in areas such as Karen, Gigiri and Westlands, which continue to have relatively high returns compared to the market averages.

Listed real estate is also expected continue performing poorly in 2021 with the Fahari I-Reit having opened the year at a relatively low trading price of Sh5.8 per share.

This is coupled with the expected negative performance of the office sector and lack of investor appetite in the instrument due to negative investor sentiments.

Residential, retail, hospitality and infrastructure sectors are expected to remain neutral.

This year, real estate in the expected to be shaped by the continued focus of the government's affordable housing initiative, improvement in the mortgage market, public-private partnerships in support of development and financing for the real estate sector, and the trend towards e-commerce.

“Despite the above, the sector is expected to face constrained financing for developers and ineffectiveness of Public-Private Partnerships (PPPs) for housing development.

There is also reduced disposable income among consumers and oversupply in select sectors which include; the middle - high end residential, the commercial office and retail sectors.

There is also reduced disposable income among consumers and oversupply in select sectors which include; the middle - high end residential, the commercial office and retail sectors.