Land in Nairobi records high return on investment

    A view of Nairobi from Uhuru Park

    Land in Nairobi Metropolitan Area recorded a high growth averaging at 19.4 per cent for the last five years according to new research.

    The 2017 Cytonn Investments report themed “Investment Grade Real Estate and Land Remain The Best Investment Bet” focused on the performance of land in the Nairobi Metropolitan Area between 2011 and 2016 where investment grade real estate and investment grade land refers to the investment in real estate and land based on market research and market fundamentals, as opposed to speculative investments.

    The research was conducted in 18 suburbs and 11 satellite towns in the Nairobi Metropolitan Area. It comes after the release of real estate development reports early in the year.

    It further revealed that commercial zones such as Kilimani, Upperhill and Westlands recorded the highest capital appreciation, increasing with a 5 year CAGR of 24.3 per cent with satellites towns such as Ongata Rongai, Ruaka and Athi River recording a 5-year CAGR of 2.0 per cent. High rise residential areas such as Kileleshwa and Kilimani recorded a 5 year CAGR OF 17.7 per cent with low rise residential areas such as Spring Valley and Kitisuru recording a 5-year CAGR of 14.6 per cent.

    Speaking during the release, Head of Private Equity Real Estate, Shiv Arora, noted that “the key drivers for the increments in land prices have mainly been population growth, rapid urbanisation, improved infrastructure opening up areas for development, legal reforms easing land transactions and economic growth increasing disposable income.”

    Based on individual market performance, Athi River, Ongata Rongai, Syokimau-Mlolongo, Limuru and Dagoretti recorded the highest growth rates with 5-years CAGR above 25 per cent, characterized by higher infrastructure provision than in the other satellite towns and relaxed zoning regulations.

    The high growth rates in commercial zones was driven by increased demand for land for commercial real estate, given its high returns with rental yields on average of more than 9 per cent as compared to an average rental yield of 5 per cent for residential developments. Satellite towns’ high growth rates were mainly driven by improved trunk infrastructure opening up the areas for development. Low rise residential areas had the lowest growth rates mainly due to restricting plot ratios on the land hence limiting the return on investment.”

    The report was quick to note sectorial challenges such as inadequate infrastructure in specific areas, multiple land tenure systems, high land costs and a difficult legal environment characterized by opacity in the issuance of title deeds, and challenges in land registration and transfer. The most common trends in the sector over the last five-years have been: increased speculation, land banking, and value addition through agri-business.

    The report also noted that the market is vibrant and investors can tap into the sector by land banking mainly in satellite towns to enjoy capital appreciation rates of on average 20.0 per cent per annum, and by investing in site and service schemes with capital appreciation 20.4 per cent per annum.

    The areas most likely to experience the highest capital appreciation over the next-five years according to the report are Ruiru, Kikuyu, Kabete and Dagoretti, among others, due to planned infrastructure developments. The report forecasts a relatively stable land market with sustainable price increments in 2017.