PROPERTY MARKET

Covid-19: Real estate requires innovative financiers

Overall, the city accounts for 43.1 per cent of the country’s total student enrolment.

In Summary

• As the pandemic rages on, the chance to capitalise on the growing student demographics to provide high quality accommodation in the right location at affordable costs remains a real opportunity for residential investors in Kenya.

• To reach fruition, real estate projects require advanced financial acumen and support as illustrated by Kenya’s innovative venture into the student housing market earlier on in the year.

Prioritise student housing investments
Prioritise student housing investments
Image: OZONE

The Covid-19 pandemic has put into sharp focus the expanded skill set necessary for real estate success.

To reach fruition, real estate projects require advanced financial acumen and support as illustrated by Kenya’s innovative venture into the student housing market earlier on in the year.

Student housing has emerged as one of the strongest investment cases in East African real estate over the last two years. According to Kenya’s Ministry of Education, 919,400 students were last year enrolled into the country’s 67 universities and vocational colleges. Yet, student housing provided by universities stands at approximately 200,000 units countrywide, serving just 22.6 per cent of the student population, while 10 per cent commute from their homes.

 

The underserved gap in student housing is most severe in Nairobi, which hosts the majority of the country’s major universities. These include Kenyatta University, the University of Nairobi and Jomo Kenyatta University of Agriculture and Technology (JKUAT), private universities such as United States International University- Africa and Strathmore University.

Overall, the city accounts for 43.1 per cent of the country’s total student enrolment.

For developers moving to serve this market, the yields are among the strongest currently available, with student accommodation normally offering individual rooms around shared facilities, and generating multiple rental streams. The result is a yield of around seven per cent a year, compared with around five per cent for normal residential accommodation.

This has seen multiple private investors entry into the market, among them Acorn Group, Questworks, Century Developments Ltd/Kuramo and the Kenya Defence Forces Old Comrades Association (Defoca), who cumulatively plan to deliver 60,800 student units in the Nairobi Metropolitan Area over the next five years.

With most of these accommodations still in the pre-development phase, the timing of closure of universities is, relatively fortuitous for developers, coming early in the revenue curve.

However, for the more than 2,000 completed units, the annual return is expected to take a hit as universities closed abruptly in March and scheduled to reopen in January 2021. Developments have also slowed due to the supply chain disruptions and public transport restrictions.

As the sector’s most attractive segment, student housing has attracted some of its most modern and agile investors such as Acorn Group, the country’s largest student housing developer that currently dominates the sector’s investment plans by market share.  

 

The group was the first in Kenya to raise funds with a certified green bond, raising Sh4.3 billion to build up to six green-certified student properties to ensure lower operating costs, more efficient use of resources such as power, water, and a low-carbon impact for 5,000 students in Nairobi.

The bond subscription provided Acorn with a buffer, where its rapid expansion and the consequent financial stretch saw its profitability of Sh77.9 million in 2017 turned to losses in 2018, prompting the suspension of its dividend payments.

It has also raised additional financial support from its shareholders, Acorn Investments Limited and Accord Holdco through the private equity firm Helios.

Of course, student numbers may be suppressed by the fallout from the current pandemic, as newly jobless or income-impaired parents lack fees, government’s funds for HELB loans may become cramped, as the universities, too, make changes to cope with the dropped income.

Resilience in student housing investments has required real financial cushions and financial agility that holds true throughout the entire real estate industry. Since real estate investments require large amounts of capital investment upfront against sales or rental yields later, and those sales and rentals rest on multiple elements of market conditions.

Moving forward, it will be critical for developers and operators to identify and prioritise the elements in student housing that are most important to learners beyond physical school attendance, while factoring in affordability as developers aim to provide the highest quality accommodation possible.

This is a challenge we welcome and aim discuss at 2020 annual regional investor conference, the East Africa Property Investment summit.

The writer is a Researcher for Africa, Knight Frank.