High returns lure firms to real estate investments

High returns from Kenya’s property market is making companies from insurers to auto dealers and fund management firms to revise their investment plans to include real estate as they race to diversify their income streams.

Rapid urbanisation, population growth and expansion of the middle class have emerged as the main drivers of Kenya’s property market that has seen home prices more than double over the past five years, and market analysts say the prices and rising rent will continue to hold in coming years.

This outlook has seen companies scramble to get a piece of the market with the latest participant being CIC Insurance that yesterday announced it had bought a 200 acre land in Kiambu for Sh560 million targeting the cream of Kenya’s real estate buyers.

It follows in the footstep of Investment firm Centum Investments, auto dealer Simba Colt Motors and insurance peer Jubilee Insurance, Pan African Insurance, Real Insurance and ICEA Insurance.

Pension managers that have in the past six months committed billions of shillings into real estate include National Social Security Fund (NSSF), KCB Pension fund and Kenya Power and Lighting Company (KPLC) scheme.

“This move will boost our investment income as returns from bank deposits and government bonds have remained low in this low interest rate regime,” said Nelson Kuria, the CIC chief executive.

“Our good performance and the new capital we raised through the rights issue gives us adequate long-term funds to venture into the property market where demand is still high,” he said.

Returns from short-term government paper has dropped to 2.49 per cent from 8.4 per cent in 2009 while bank deposits have fallen to a five year low of 3.42 per cent in December
CIC Insurance has just concluded a Sh730 million rights issue and is seeking to deploy some of these funds into the property market.

The firm is seeking to construct manicured homes, office blocks and shopping malls for sale.

Location of the project in Kiambu County’s coffee plantations, which are close to the United Nations offices in Nairobi and the leafy suburbs of Runda and Muthaiga clearly signals the intention of its creators to target the cream of Kenya’s real estate buyers that includes international civil servants, top businessmen and civil servants whose numbers are expected to rise significantly in the next two decades.

It will sit next to the Tatu City project, which seeks to construct a whole new city of 62,000 residents, sparking a rally in land prices in parts of Kiambu County.

Property developers attribute the growing presence of institutional money into Kenya’s real estate market to the robust growth that has seen smaller investors reap outsized returns because of swelling incomes and large numbers of young people moving to urban centres.

At present, 32.2 per cent of Kenyans or 12.4 million live in urban residents, up from 23.6 per cent or 5.6 million in 1990—assuring property developers of demand that has seen the prices of apartments in Nairobi’s middle-income areas more than double in the five years.

This has underlined real estate as an asset class of premium returns relative to equities, bonds and bank deposits.

The rising activity in the real estate market made the construction sector the best performing sector in quarter three with an 15 per cent growth.

This market position is egging Centum Investments—which has been heavy in equities—is to spend Sh3 billion in the property market with homes targeted at the middle class its focus.

Pan Africa Life, which built and sold 20 houses in Runda Estate last year, is planning to build 60 more units while Jubilee has also announced plans to get a larger slice of real estate.

Simba Group, which runs the Mitsubishi and BMW brands, has announced five real estate projects with a focus on office blocks in partnership with unnamed foreign investors.