Focus of the Week: Nairobi Metropolitan Area Land Report 2017

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:

All values in Kshs per acre unless stated otherwise

Location

*Price in 2011

*Price in 2015

*Price in 2016

5 YR CAGR

Commercial Zones

       

Kilimani

114m

294m

360m

25.8%

Riverside

116m

343m

362m

25.6%

Westlands

150m

300m

453m

24.7%

CBD

200m

450m

600m

24.6%

Upper Hill

200m

450m

512m

20.7%

Average

 

 

 

24.3%

High Rise Residential Area

     

Dagoretti

28m

81m

95m

28.0%

Ridgeways

24m

51m

62m

21.0%

Kilimani Residential

114m

238m

280m

19.6%

Githurai

21m

37m

45m

16.8%

Embakasi

33m

61m

69m

16.2%

Kileleshwa

149m

227m

286m

13.9%

Kasarani

32m

51m

60m

13.3%

Kahawa

33m

51m

60m

12.7%

Average

 

 

 

17.7%

Low Rise Residential Area

     

Spring Valley

64m

131m

147m

18.0%

Kitisuru

32m

59m

70m

16.9%

Runda

33m

58m

67m

15.0%

Nyari

54m

93m

109m

14.9%

Karen

25m

40m

46m

13.0%

Old Muthaiga

125m

164m

197m

9.6%

Average

 

 

 

14.6%

Satellite Towns

       

Ongata Rongai

2m

10m

10m

33.20%

Limuru

4m

11m

13m

25.00%

Juja

3m

7m

9m

22.40%

Ngong

7m

12m

14m

16.00%

Ruaka

40m

58m

83m

15.70%

Athi River

2m

3m

4m

13.90%

Utawala

6m

9m

11m

13.70%

Average

 

 

 

20.0%

Site and service Schemes

     

Athi River

3m

11m

13m

34.00%

Syokimau-Mlolongo

3m

12m

12m

30.00%

Ruiru

7m

15m

19m

23.90%

Ongata Rongai

7m

16m

19m

21.80%

Ngong

11m

18m

19m

12.70%

Thika

5m

7m

8m

10.50%

Ruai

8m

12m

13m

10.20%

Average

 

 

 

20.4%

Nairobi metropolitan Area Average

 

 

 

19.4%

*Asking price per acre

·       Land in Nairobi Metropolitan Area grew with an average 5-year CAGR of 19.4% between 2011 and 2016

·       Serviced land in satellite towns recorded the highest capital appreciation with a 5 year CAGR of 20.4%, attributable to the value add associated to the services provided such as water, electricity roads among others

Source: Cytonn Research

  1. 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.

Un-serviced Land Capital Appreciation

5-YR CAGR

Location

>30%

Ongata Rongai

26 -30%

Dagoretti and Kilimani

20 - 25%

Nairobi CBD, Westlands, Ridgeways, Limuru and Juja, Riverside

16 -20%

Upper Hill, Embakasi, Githurai, Spring Valley, Kitisuru and Ngong, Kilimani Residential

11 - 15%

Kasarani, Kileleshwa, Kahawa, Karen, Nyari, Runda, Ruaka, Utawala and Athi River

6 - 10%

Old Muthaiga

Serviced Land Capital Appreciation

5-YR CAGR

Location

> 30%

Athi River

26 - 30%

Syokimau – Mlolongo

21 - 25%

Ruiru and Ongata Rongai

16 - 20%

N/A

11 - 15%

Ngong

6% - 10%

Thika and Ruai

·       Ongata Rongai and Athi River recorded the highest capital appreciation due to the speculative environment experienced in the area between 2011 and 2016 driven by infrastructural development in the area

Source: Cytonn Research

  1. 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;

Infrastructural Developments

Areas to Benefit

Western Bypass

Kikuyu, Kabete, Tigoni, Wangige and Dagorreti

Outer Ring Road Upgrade

Kasarani, Donholm, Embakasi and Buruburu

Relaxed Zoning Regulations

Spring Valley, Kilimani, Parklands & Ngara

Trunk Sewer Lines

Ruiru

·       The above areas are likely to experience a CAGR above 25% in the next 5-years due to planned infrastructure developments

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.

Land Sector Performance Conclusion and Outlook

Measure

Sentiment

Factors affecting Land Price

·       The key drivers for land sector are mainly population growth, urbanisation, improved infrastructure, land supply, economic growth with an average GDP growth rate of more than 5.0% over the last five years and legal reforms in the land administration

·       The key challenges such as corruption in the land ministry, high land costs, communal ownership of land hindering land transfer, difficult legal environment and physical challenges mainly in satellite towns

Land Sector Performance

·       Land in Nairobi Metropolitan Area grew with an average 5-years CAGR of 19.4% between 2011 and 2016

·       Serviced land in satellite towns recorded the highest capital appreciation with a 5-years CAGR of 20.4%, attributable to the value add associated to the services provided such as water, electricity roads among others

Land Price

·       Land in Nairobi Metropolitan recorded an overall 5-years price change of 2.50x due to increased developments in real estate and improved trunk infrastructure

·       Site and Service schemes in satellite towns attracted the highest 5-years land price change at 2.67x

Outlook

·       We expect increased investments and developments in satellite towns as investors and developers tap to earn the good returns of up to20.4%CAGR

Opportunity

·       Investors should tap into the sector through, Land banking mainly in satellite towns to enjoy the capital appreciation at 20.0% and invest in site and service with capital appreciation20.4%

·       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

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.