The Munich-based electronics giant, Siemens, is working on the expansion of Kenya´s electricity network. Beiersdorf of Hamburg is successfully manufacturing its Nivea products in Kenya for the East African market. Even the Stuttgart-based sports car manufacturer Porsche has opened an office in Nairobi. And on the city´s supermarket shelves, consumers can find German wines.
A wealthy middle class is developing in Kenya. And this is attracting consumer goods manufacturers from all over the world to the country. Also many American, British, South African and Australian exploration companies are flooding into Kenya, in the hope of finding oil, natural gas and other resources in the Great Rift Valley.
Greater affluence is also leading to increased demand for quality living space. The middle classes aspire to the apartment blocks that are being built everywhere in the city. The standard is every bit as good as in Europe. Higher earners move into residential areas with single-family houses, such as are being built in Lavington, but also increasingly on the edge of the city, for example in Thika. UN Habitat estimates that by 2025 the population of Nairobi will have almost doubled, from 3.2 million currently to 6.1 million.
High demand is making real estate projects economically attractive. In existing buildings, the yield on residential property is around 6 percent per year, according to a survey of the Kenyan market by real estate consultants Knight Frank. For offices and industrial property, it is at 8 percent and for retail space as much as 10 percent. The monthly rental for office space is around 8 US dollars per square meter and therefore at a level that is paid in many European cities.
However, for many investors in real estate in Kenya, these yields are still too low. Christine can count on the fingers of one hand the number of office buildings that have been refurbished in recent years. “The Equity Bank has renovated its building, then there was another one, and another…” she says. “The investors are interested more in new project development.” Because it promises a much higher return.
Projects to develop new property can easily achieve returns of 50 percent and more. Around Nairobi, for example, the new projects include ambitious commercial parks such as Konza City, Tatu City and Ken Gen’s Industrial Park, as well as residential projects such as Garden City in the prosperous northern ring around Kenya´s capital. To the west of Nairobi there are plans to build Machakos City (video), an entirely new town. But there is doubt as to whether it will ever get off the ground. “For years the people behind Machakos have just been talking and producing lavish brochures,” reports real estate investor Peter. “But so far nothing has actually happened.”
For a long time the majority of the real estate investors in Kenya came from the country itself. They developed projects in a more or less professional way. Now, increasingly, institutional investors from abroad are becoming interested in the Kenyan property market. Many of them come from South Africa. The initiator of the private equity fund Actis, for example, has also discovered property. Traditionally private equity has tended to focus more on companies that promise fast returns, but now Actis has also taken out a stake in the development of Garden City. Evidently the expectations of returns on property are just as high as on companies.
Other fund companies such as MMI Holdings have set up property funds investing in African projects, both retail as well as office and commercial property. The eight-year MMI Momentum Africa Real Estate Fund has a target volume of 250 million dollars. The internal rate of return (IRR) is reported to be around 18 to 20 percent. Initial investments in the development of an office park in Ghana and office buildings in the Ruandan capital of Kigali are close to finalization. Now the sector is looking to see what the fund managers will come up with in the Kenyan property market.
Many investors are evidently already casting an eye over the large expanse of space between the international airport and the city, an area that combines a promising location with excellent transport connections. Clearly it won´t be long before Nairobi and the airport have grown together. In a preemptive move, an institution of the Catholic Church has put up a large sign on their generously sized plot by the highway leading to the airport. It reads: “This land belongs to the Church. It is not for sale.”
More about the emerging real estate market in Sub-Saharan Africa will be discussed on Tuesday from 14:00 to 18:18 in the Investment Locations Forum at EXPO REAL.