A Cytonn Investment report last year showed that real estate had contributed nine per cent to Kenya’s economy, posting the greatest growth compared to seasoned contributors like the financial and agricultural sectors.
According to the Kenya National Bureau of Statistics, over the last five years, the the real estate sector has consistently outperformed other asset classes, giving a return of between 25 per cent and 30 per cent.
Residential properties generated an average rental yield of five per cent while commercial ones had an average yield of over nine per cent. Despite this positive outlook, things were not so rosy for investors, including developers. If you plan to invest in real estate this year, here are a few tips that will help you avoid burning your fingers:
1. Invest in land, slow down on commercial office space
If you are planning to invest in real estate this year, buy land. According to the Hass Property Index, most landowners around Nairobi have been reaping big. Land prices in satellite towns rose by seven per cent in the third quarter of 2016 and 21.4 per cent over the year, the highest growth rate since 2014. The rates are expected to surge in coming years.
Commercial office space, on the other hand, experienced the least absorption, mainly because some multi-nationals have been downsizing. In 2016, land sellers smiled all the way to the bank, thanks to land prices in the 18 Nairobi suburbs increasing by 1.4 per cent in the third quarter of 2016.
“We have witnessed phenomenal increases in land values in some parts of the country and I dare say this trend will continue. But it is not guaranteed to happen everywhere – and it is not easy to predict where it will happen next,” says Ben Woodhams, the managing director of Knight Frank. Woodhams, however, says that in some cases, it can take years before land appreciates.
2. Do not ignore regulatory requirements
Real estate developers have often complained of stringent and lengthy approval processes. However, failure by some developers to follow them wasn’t taken lightly by the authorities. This year, those investing in real estate ought to follow requirements by regulators such as the National Environment Management Authority, the National Construction Authority and county governments. They should also be members of their professional associations.
“To bring a project from the initial planning stage through construction to completion, there are many obstacles that can pop up along the way. It can be worse if the investor has not followed a proper channel,” says Samson Kimathi, an engineer with Geomap Surveying and Engineering Company.
Last year, the construction of 39-storey Hazina Trading Centre tower in Nairobi’s Central Business District was halted for reportedly failing to meet construction standards amid court injunctions in favour of Nema, Nairobi County Government and some tenants.
The Sh6.7 billion building belongs to the National Social Security Fund and is expected to be the tallest in Kenya once complete. The Nairobi County authorities demanded that the developer obtain fresh environmental impact assessment report from Nema, detailing whether or not it would pose any danger to the surrounding businesses and motorists.
It is also important to register with associations such as the Kenya Property Developers Association, which may be of help in case of any development hiccup. “KPDA can help a real estate investor not to fall into the traps of rogue contractors who may lure them into taking shortcuts,” says Daniel Ojijo, a former KPDA chairman and the CEO of Universal Homes.
3. Watch out for marketing hoaxes
Last year, some investors were enticed into buying homes and land whose selling points turned out to be a hoax. Marketers enticed investors with messages that emphasised how some plots and properties on sale were close to a planned road and other infrastructural amenities.
“Investors should be aware of tricks by developers since when a new property is listed, agents plan on how to attract buyers and some of them use hype to market their products,” says James Otiende of Nairobi Securities Exchange. According to Otiende, investors should watch out for dubious marketing methods by closely identifying unique selling points and key messages to avoid falling into such traps.
“Real estate agents will also display “For Sale” signs with good-looking photographs and if you aren’t careful, you might be the next victim of hoax marketing in 2017,” says Otiende.
4. Invest in skilled labour
According to a NCA report released last year, only 30.3 per cent of construction workers in Kenya are skilled whereas 67.6 per cent are semi-skilled. Majority of of construction workers lack the relevant competencies. Some developers engaged unskilled labour force, leading to buildings collapsing around the country.
“Our buildings are collapsing as a result of poor quality of concrete, lack of proper foundation, use of substandard building stones and flouting of approval procedures,” says Mucai Kunyiha, KPDA chairman. The construction industry is in dire need of skilled workers at a time reports show that employment in the sector grew by 11.4 per cent to stand at 148,000 up from 132,900.
5. Focus on devolved urban centres
Reports by Knight Frank analysing Kenya’s property market in the last quarter of 2016 indicated that owing to oversupply of office space in Nairobi, investors in commercial properties are focusing invest on secondary towns.
“The greatest challenge has been increase in supply of office space and scaling down of the office space especially in Nairobi. Thus investors should turn to secondary towns for new opportunities in the property industry,” says Woodhams of Knight Frank. Last year also saw an oversupply in retail space.
6. Invest in low-cost housing
According to Sakina Hassanali of HassConsult, developers have been investing more in high-end housing because of high returns. Only a few developers are investing in low-cost housing where demand is greatest.
“Developers should shun the fear of high risks associated with low-cost house developments. Currently, they can take advantage of low interest rates and also use easy and accessible capital mobilisation strategies such as Reits (Real Estate Investment Trusts) to facilitate developments,” says Woodhams.
Kenya has enjoyed improved political stability, creating a suitable environment for local and foreign direct investment, making it possible for people to invest in risky segments in the real estate sector such as the low-cost housing.
7. Be on the right side of the law
Last year, some investors got involved in legal battles with government agencies after their developments were earmarked for demolition for standing on road reserves or wetlands. Others were also involved in compensation tussles with the government after their parcels of land were acquired for infrastructure development.
“Due diligence when buying land or a house is necessary to avoid standing in the way of infrastructural development,” advises Kimathi of Geomap.