It’s no surprise contractors and builders are fixated on luxury apartments other than focusing on those that can actually benefit the common mwananchi. The demand for housing in the country is always outstripping supply. Developers over the years have filled the gap in the middle and upper reaches of the sector, which were seen to be more profitable. But the focus in these areas led to oversupply, with many developers now turning to the lower end of the market to survive.
Kenyan Real Estate has changed
The last decade of real estate boom in Kenya has changed our building landscape and inventory. Our starting point was a region that was short of every kind of building; from housing to shops, through offices, warehouses, hotels, and even student hostels. In all, we faced a real estate landscape that was cripplingly underinvested. And we invested.
Choosing which type of investment barely mattered. Every type of property sold fast. Developments got snatched up even before the building bricks were laid, simply because the market had little to offer. We are no longer in that situation.
However, confusing our sector’s move to maturity with the end of real estate investment opportunities is a mistake. For, in our first years of heavy real estate investment, we concentrated primarily in high-end assets. This is because we all believed they delivered higher margins and higher returns.
Then came the shift
That is no longer the case, and may never have been the case. But, nonetheless, when we were short of everything, we began with expensive buildings.
We built estates of detached houses and townhouses, high-end rental apartments, shopping malls, often huge ones, and towering office blocks.
Until in some areas, and for the high-end market, we began to reach market saturation. As a result, unless building for a specific unmet need, an investor now putting up Ksh100 million worth of penthouses would be lucky to fill it in four years.
Yet only a tiny proportion of Kenyans live in high-end neighbourhoods. When we look at the needs of the country’s working classes, market researchers have reported demand for two million units.
Of this, over two-thirds are for earners who can afford the rent of between Ksh18,000 to Ksh50,000 a month.
Today, we cannot easily pinpoint any stock that is coming to the market for this segment, certainly not to the scale that responds to this opportunity. Instead, investment in this type of property has been left to unsophisticated investors, in what is largely a landlord market delivering developments found in the more densely populated Nairobi estates.
A number of these buildings are unplanned and non-compliant with construction standards, as developers seek to lower construction costs and complete projects more quickly to increase returns.
What can be changed?
However, a huge opportunity exists for a better quality of real estate in this segment. Moreover, while the perception that rental yields in high- end areas are higher has driven investors and developers to areas such as Kilimani and Lavington, research has shown that yields are actually higher in the mid-market areas.
For instance, the average rental yields in 2016 in the mid-market were 6.5%, compared with 6.3% for high-end apartments. That premium in the mid-market has continued. In 2018, mid-market rental yields ran at 5.4%, compared to high-end yields at 5.3%.
Moreover, demand is abundant.
Thus, if the someone were to put up an estate such as the organized Nyayo Estate in Embakasi, it would not struggle with tenancy, as tenants look for a quality stock that is currently close to nonexistent.
Such estates offer almost the same amenities as homes in Kilimani, across modern, 24-hour security systems with professional security personnel, ample parking space, borehole water to cover for water shortages, and maintenance services, but at far lower rents.
Similarly, for developers building commercial properties such as stalls or retail centres, as opposed to large malls, occupancy will never be their biggest challenge as they attract SMEs and private businesses dealing with the routine needs of Kenyan consumers.
In conclusion, the investment opportunities in real estate remain enormous. But now it is the turn of the working classes. And the returns are just as high for investors. Hence, the Kenyan housing market should focus on the working class.